Rumours suggest that some cryptocurrency exchanges are charging millions just to get listed. With the number of ICOs still accelerating, it certainly seems they’re holding a lot of power…
Ideologies have a habit of coming back to haunt technology, and technology companies.
Remember Google, with its ‘Don’t Be Evil’ mantra, a three-word mission statement that’s been thoroughly tested over the past 20 years? The emergence of cryptocurrencies didn’t come with a pre-packaged code of ethics, but there was nonetheless an unwritten rule: that by decentralising currencies from central banks, they could – and should – be fairer, scrupulous and open.
In reality, this hasn’t gone quite to plan. Not all currencies are created equal, and the land rush for new ones brings with it some examples that feel less savoury than others. What’s more, every new coin that’s now being launched is finding that the barrier to entry, in some ways, has never been lower. However, the barrier to getting noticed has never been higher. Getting profile and exposure is the biggest challenge, one that’s not being helped by a subset of crypto exchanges. Those exchanges – where crypto funds are being traded, as well as converted to and from traditional cash – are becoming proverbial firewalls. Sometimes for the better, sometimes for worse.
To give you a flavour of just how powerful and important some of them are becoming, we’ll use Binance as an example. It is one of the biggest exchanges in the world, and a report back in January suggested that it was struggling to buy enough server hosting bandwidth to keep on top of its traffic growth. As its CEO Zhao Changpeng told Bloomberg, “we have a guy whose full-time job is just requesting servers”. It was said to be growing at a rate of millions of users weekly, and on February 26th, to pick one random day, it recorded over $2bn in trades. This isn’t untypical.
Competition for listings at popular exchanges is inevitably intense, not least with a good dozen or so ICOs of various flavours being launched weekly. It’d be impractical for a popular exchange to list every one of them, and with that, crypto assets begin to face obstacles. From the exchange side, how do you choose what to list? From the ICO side, how do you find a way to grease the wheels?
In some respects, it is similar to the competition for shelf space in a supermarket, with the most high-profile and topical brands (and the ones with the deepest pockets for marketing spending) getting the best chance of access.
To give a non-crypto financial example, for a company to get listed on a traditional stock exchange is a hugely time-consuming process. An IPO is offered, that requires bank support, usually an underwriter and – to get listed on bigger exchanges – minimum asset or revenue requirements. It takes time, and necessarily so.
For ICOs, the process – given that the crypto market is far less regulated, and still in its relative infancy – is less formal. Sometimes, that manifests itself in less traditional ways, that remain overt. Going back to Binance, it runs a community coin vote, whereby its members can vote for one new coin to join the exchange on a roughly monthly basis.
The slightly troubling bit about this though is it isn’t free. To place a vote costs 0.1BNB (Binance Coin, its own currency), that equates to roughly one US dollar. The vote for February’s choice closed on 25th February, and immediately, a three-day process began to solicit reports of vote manipulation.
The competition was intense, though, as the prize was worth having. As the Binance team noted in their congratulations to January’s winner, XRB, it was “awarded with a free listing placement on Binance”. How much the usual cost to be listed is unclear, but for February’s vote, concerns about voting irregularities were being reported as the ballot entered its final weekend. By this stage, some $150,000 had been spent on votes. While it’s not uncommon for a brand to pay for a prime placement on a supermarket shelf, that ‘payment’ is at least usually indirect, in the form of discounted stock or matched marketing investment.
Binance at least is clear about what it’s doing. There are other exchanges for whom there are anecdotal reports – unsurprisingly, names aren’t being mentioned on the record – where the main criteria for getting listed is handing over a seven-figure sum for the privilege. Given how transformative getting listed on a big exchange can be to an ICO, it seems some are stumping up too.
Kevin Murcko is the founder and CEO at crypto exchange CoinMetro, and he has no shrift with those charging a listings fee. “I guess the word that comes to mind when I hear that is ‘extortion’”, he told me.
“From my own business, we will never charge anyone to get listed. In a regulated marketplace, I don’t know the exact charges, but I guarantee you that you wouldn’t be charged a million pounds to get listed. Just like that, it cannot and does not happen”.
Wild Wild West
Murcko feels, as many others do, that it does little to dispel the ‘wild west’ perception around ICOs and the cryptocurrency sector. “I would counter that by saying when the first stock market opened in the world, the first equities market, there was no difference between that and the current ICO craze. Every new market that comes in and creates hype, creates unrealistic demand, and creates bubbles. That creates volatility. When it comes to finance, everything’s cyclical. We’ve gone through this cycle dozens of times before, it’s just a different type of asset”.
But still, “there’s a lot of immaturity, a lot of inexperience”. That there’s a swell of ICOs being backed by people with little knowledge of finance, and the financial sector, who are happy to hand over huge sums to exchanges that arguably should know better. “If they’re able to charge a million, two million, three million or whatever”, Murcko says of such exchanges, “and someone is paying this, and they have really no basis or experience in regulated markets, they’re going to take it”.
Perhaps the only bright side to this is that it’s likely to be a short-term problem. “It’s not something that can last forever. It cannot. It’ll probably lead to massive litigation, more than likely jail time for multiple players, within a relatively short space of time”.
Longer term, regulation is coming, although it looks like the race is on to see whether it comes from within the industry itself, or legislative bodies around the world. The problem, of course, is that it’s only coming now because it had to. Were cryptocurrency to be an entirely brave new world, there was an opportunity to establish a framework, rather than just an ethos, right from the start that could have headed some of the problem the industry is experiencing off.
For now, the power of exchanges, and the effective stranglehold they have on exposure for ICOs, is but one of a myriad of issues that need tidying up. Until they are, it still feels like a world where a million or two passed under the proverbial counter to a less than scrupulous exchange will get you further than having a business plan, a structure and viable assets. It’s a perception, at the very least, that needs to be addressed and resolved.