Detailed explanation of the new EDX compliance framework: How to avoid the regulatory minefield encountered by Binance and Coinbase?
Original Author: Leo, LeftOfCenter, BlockBeats
On the morning of June 21st, BTC surged, one of the most critical reasons being that Wall Street entered Crypto, and the United States is launching its own cryptocurrency trading platform EDX Markets. In the past few weeks, the SEC has frequently taken action to put regulatory pressure on Binance and Coinbase. The industry is full of all kinds of FUD, and encryption has plummeted. Many people think that encryption will become sluggish under the blow of the US SEC, but is this really the case, SEC The purpose seems to have other plans.
Just last night, a very "new" cryptocurrency trading platform EDX Markets announced its entry, which attracted a lot of attention. Compared with the previous encryption trading platform, this time EDX is completely part of the US national team's admission, and behind it is Citadel Securities , Fidelity, and Charles Schwab, and other Wall Street forces, and as of this writing, the platform has provided services to industry giants such as Charles Schwab, Citadel Securities, Fidelity Digital Assets, Paradigm, Sequoia Capital, and Virtu Financial. And this encrypted trading platform represents a "compliant" traditional financial entry Crypto platform. So how does EDX achieve compliance?
1. Unmanaged
Unlike mainstream cryptocurrency exchanges, EDX is a non-custodial exchange, which means that it does not directly deal with customers' digital assets, but only provides a trading platform for institutional users to perform cryptocurrency and fiat currency transactions, and conduct transactions externally. settlement.
LumidaWealth CEO Ram Ahluwalia (@ramahluwalia) believes that EDX may hope to develop into a regulated ATS and eventually become a "national stock exchange" (think Nasdaq or NYSE), which is beneficial to the crypto market. EDX is applying federal securities laws to cryptocurrencies, by utilizing 3rd party banks and crypto custodians for asset custody, EDX minimizes conflicts of interest and prevents asset misuse like we did in FTX, Celsius and DCG/Genesis issues As you can see.
So-called non-custodial transactions refer to the settlement process. Unlike mainstream crypto exchanges that require customers to deposit crypto assets into wallets controlled by the exchange, EDX plans to use third-party banks and cryptocurrency custodians to hold customer assets. The actual asset transactions happen directly between these third-party companies.
During the two-party settlement phase, EDX Markets will act as an agent, calculate the settlement obligations between the parties, and notify each member and the authorized custodian which counterparty the member has traded with and for what amount. Members will independently have their own transaction data to verify the settlement data performed by EDX Markets. EDX Markets is not involved in any transfer of fiat pairs (cash) or tokens - this is done only through authorized custodians. Likewise, EDX Markets does not participate in the movement of funds. Settlement will be carried out in accordance with the legal agreement between the member and its authorized custodian without recourse to EDX Markets. In the event of a dispute, EDX Markets will recalculate, but the resolution of any dispute will be subject to the terms of the agreement between the member and its authorized custodian.
Additionally, EDX plans to launch its own clearing house later this year to simplify the settlement process.
2. Non-securities tokens and their trading rules
According to the information given on the official website of EDX, currently the trading platform only supports 4 kinds of token transactions, which are spot transactions of BTC, ETH, LTC and BCH. These four types of assets are not listed as securities assets by the SEC. For EDX , this conservative tradable currency can avoid conflicts between the trading platform and the SEC, and is also part of the EDX compliance framework. In the future, with the introduction of securities and encrypted token definitions, EDX may add more encrypted token classes. And currently only supports institutional transactions. Institutions who want to join the EDX trading list need to pass a "membership screening" before they can trade. Retail investors cannot trade through this trading platform.
In terms of trading rules, some of the rules of EDX are different from traditional encrypted trading platforms. BlockBeats sorted out the trading rules currently disclosed by EDX according to its official website information, as follows:
- The trading platform is open for trading 24/7, 365 days a year, unless otherwise notified by the trading platform, for example, maintenance or system upgrades or others, and information will be sent to the institutional users of the platform in advance;
-The trading platform has the right to stop or suspend any or all token transactions on this trading platform to maintain market fairness, protect the interests of investors, or take other actions, such as canceling all unprocessed and open positions (unexecuted) An order instruction, or an instruction to limit an order to certain types of orders (such as a limit order). The trading platform has the right to determine the duration of such "suspension, suspension, closure" and other actions, and notify institutional members that the system will reject all orders for suspended trading tokens.
In terms of the rules for the new token to go online, it is quite different from the traditional encryption platform, as follows:
-If the trading platform will list new token transactions, the trading platform will suspend all orders for the new token, and then start a quotation period for the token, and the trading platform will decide the length of the quotation period by itself. During the quotation period, members may submit orders to the system, but such orders will not be executed;
- After the quotation period ends, the trading platform will start a limit order trading period, during which the system only accepts limit orders. The trading platform decides the length of the current price order trading period by itself. Token limit orders submitted during the current order period will be accepted, but ordinary token market orders will be rejected by the system;
- After the limit order ends, the trading platform will transition to the formal trading period, and the trading platform will open the system for trading, and all eligible orders will be accepted by the system.
- The system shall be available for entry and execution of orders by members who have access to the system. All members screened by EDX Markets can use the system in a fair, transparent, fair and non-discriminatory manner.
It can be seen that compared with other trading platforms, EDX is very cautious in token trading and has more processes, trying its best to avoid falling into the "non-compliance" queue.
3. Do not directly serve retail investors
Following the precedents of Coinbase and Binance, EDX Markets does not directly provide services to individual investors in order not to fight against regulation. Instead, EDX will have order routing services provided by retail brokers, sending retail investors' buy and sell orders to the trading platform.
Simply put, EDX Markets is a non-custodial trading platform that does not directly handle customers' digital assets or serve individual investors directly. It will provide API-based access to transactions, rather than a traditional front-end user interface. At the same time, EDX Markets will not directly host customer funds, but will manage customer funds through third-party banks and professional custodian service providers. The transfer of funds will not "handle" EDX Markets, but only between relevant service providers. Finish.
This is similar to how traditional stock markets work, in that instead of going directly to the NYSE or Nasdaq, investors submit orders through brokerages such as Fidelity and Schwab.
4. The market maker must be a third party
One of the 13 charges brought by the U.S. Securities and Exchange Commission against Binance, the world's largest cryptocurrency exchange, is a "conflict of interest" based on the fact that a trading firm owned by Binance CEO Changpeng Zhao engaged in "artificially boosting the platform." trade volume and manipulate trades”.
In most traditional financial markets, exchanges generally match buyers and sellers at the most competitive and transparent prices, and market-making work is usually operated by independent private companies, so there is no "conflict of interest."
Although this internal market-making model has always been a common operation of centralized exchanges, it is clear that this model does not meet the ideal compliance conditions in the eyes of the SEC. One of the evidence listed at the time.
According to SEC Chairman Gary Gensler, “These crypto trading platforms, calling themselves exchanges, are mixing functions that, in traditional finance, we don’t see NYSE running hedge funds and market making.” In other words, he does not approve of the current encryption exchange model that integrates trading, market making, and custody.
The Financial Times reported, citing anonymous sources familiar with the matter.According to the statement, Crypto.com has always had its own market-making team, and privately prohibited employees from disclosing the existence of internal market makers. Coincidentally, shortly after the SEC filed its lawsuit against Binance, Crypto.com shut down its US-facing institutional trading services.
This time, the new compliance trading platform created by EDX Markets seems to be to separate market making from custody, and it exists only as a pure trading platform. By introducing third-party banks and cryptocurrency custody institutions, EDX maximizes Minimize conflicts of interest and prevent misuse of assets.
It is worth mentioning that two of the consortia supporting EDX Markets (Citadel and Virtu) are themselves professional market makers on Wall Street, so we have reason to speculate that the future market making services of EDX Markets may be provided by Citadel and Virtu. Provided by leading market makers on Wall Street.
5. Strong support from traditional financial institutions
Similarly, the supporters behind EDX are also the traditional financial giants of Wall Street, which is also a point that the platform has attracted much attention. The supporters behind the institution include Charles Schwab, Citadel Securities, Fidelity Investments, Sequoia Capital, Paradigm.
EDX Markets has a luxurious founding team, bringing together former executives from major financial institutions. Jamil Nazarali, the founder of EDX Markets, was a long-term head of global business development at Citadel Securities before joining EDX. EDX Markets CTO Tony Acua-Rohter previously served as ErisX Technical Director. General Counsel is held by David Forman, who previously served as Chief Legal Officer of Fidelity Brokerage Services and General Counsel of Fidelity Digital Assets.
