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Crypto Exchanges Embrace Controversial Practices to Win Market Share

Cryptocurrency Sep 11, 2018 12:40AM ET
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(Bloomberg) -- With digital-currency trading volume having plunged, some of the biggest crypto exchanges are turning to unorthodox practices to boost activity and win market share.

Bitfinex, FCoin and OKex are encouraging startups to drive depositors to their online-trading platforms to get coins listed. Other exchanges, such as Binance and KuCoin, are embracing listing fees that can differ by project. Many exchanges are also rolling out their own "native coins," which traders then use to vote on potential listings.

The practices are in contrast to those at traditional exchanges, which charge lower flat rates and don’t require issuers to direct trading traffic to the exchange. Other bourses don’t poll existing users on which securities get to trade.

The embrace of the unusual comes as crypto exchanges feel the pain that’s swept through the digital currency market after coin prices collapsed 50 percent on average. Trading volume has plummeted 80 percent since a January peak, according to data. And new types of coins and exchanges, which are billed as cheaper and easier to use, threaten to eat deeper into fee revenue.

"The market downturn has certainly contributed to an increase in unorthodox strategies by token issuers and exchanges," Lucas Nuzzi, director of technology research at Digital Asset Research, said in an email.

For coin issuers looking to get exposure to investors, the practices can be confounding. Christopher Franco, co-founder of Washington, North Carolina-based blockchain startup Expanse, said KuCoin quoted him a listing fee of 50 Bitcoins -- roughly $315,000 at current prices. Expanse didn’t go through with a listing.

“We can pay for it, but it doesn’t justify the means,” Franco said in a phone interview. Many startups prefer to invest such sums into research and development and marketing.

KuCoin spokesman disputed the 50 Bitcoin listing fee, and said its listing prices vary by startup. The exchange doesn’t disclose them. “The listing fee is not the key factor for listing a project, the project itself is,” spokesman Miles Wu said.

Crytpo exchange fees can be difficult to determine ahead of time, and two startups of the same size applying to list to the same exchange may be charged different rates. In contrast, Nasdaq Inc. charges $50,000 to list a company with up to 15 million shares, and $225,000 to list a company with more than 100 million shares.

The motivation behind the unusual moves is clear enough. Fees have contributed about $1 billion to the exchanges’ revenue to date, according to Lex Sokolin of Autonomous Research. Listing prices at some exchanges in Asia have reached as much as $1 million, according to Michael Jackson, partner at Mangrove Capital Partners.

But such practices raise red flags for industry watchers, especially as many crypto exchanges function as marketplace, broker, custodian and even holder of assets -- roles that are generally split in traditional financial market structure.

That “leads to the inherent risk of conflict of interest,” according to the Asia Securities Industry & Financial Markets Association. Its best-practices recommendations suggest charging a flat fee to all applicants “to avoid giving the impression that the exchange’s listing decisions are determined or influenced by the amount of money an issuer is willing to pay.”

The second-largest exchange, OKex, says on its website that a candidate that brings in 50,000 new registered users, with 20,000 of them active with at least one Ether coin in their account, will have a better shot at consideration.

“We are still receiving a lot of applications," Jesper Cheng, an OKex spokesman, said in an email. He said companies seeking a coin listing still have to meet listing standards and that simply delivering new users isn’t enough. The exchange doesn’t charge a fee. Another exchange, FCoin, tells users to deposit their coins to earn a listing.

Bitfinex is enticing users to trade on its Ethfinex exchange more by awarding tokens in proportion to their account activity. These so-called native tokens can then be used to vote on whether to allow new listings.

Kasper Rasmussen, who heads corporate communications, said the practice gives the exchange’s most loyal traders a say on what coins are listed. In the last six months, Bitfinex tripled its listings to 270 tokens in an effort to offset declines in trading volume.

“We are having a lot of support from new projects,” Rasmussen said. “We are exploring different ways in how the ecosystem might evolve.”

The largest exchange by trading volume, Binance, says startups that incorporate its coin into their ecosystem have a better chance of getting listed. The exchange, which lists 380 coins, doesn’t have a standard fee but invites startups to make offers, the company said in a blog post.

“All of these will definitely increase your priority of review and chance of listing,” Binance CEO Changpeng Zhao wrote. “We remember people who help us.”

Driving depositors to exchanges can be warranted.

“That’s a perfectly reasonable practice,” Emin Gun Sirer, co-director of the Initiative for Cryptocurrencies and Smart Contracts at Cornell University, said in an email. “There are too many coins, most of them of questionable value, and the exchanges are in a position to pick and choose. It’s not surprising that they would make demands for the coins to bring in something tangible to the exchange.”

Gil Luria, director of institutional equity research at DA Davidson & Co., said investors should be wary of investing in native tokens.

“The goal of a crypto exchange is to serve as an on-ramp into crypto from government currency, or between different crypto assets,” she said. “Adding an exchange token layer may be adding an unnecessary step, which should raise investor concerns.”

Crypto Exchanges Embrace Controversial Practices to Win Market Share

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