The Panorama and Future of Blockchain Economy: Exchange Compliance

This article was first published on October 30, 2019, in the BlockVC WeChat public account, by the BlockVC Industry Research Team

I. Industry Background

In the entire production (or issuance) and circulation of the cryptocurrency asset field, mining machine manufacturers and exchanges are undoubtedly the core service providers. The former captures substantial profits in the early circulation of mined coins by providing miners with "production" tools or even personally participating in mining activities, with Bitmain being a typical representative; the latter has become the main venue for trading and circulating both mined and non-mined coins, obtaining excess profits through monopolistic control of the trading market, with major cryptocurrency exchanges as typical representatives. In comparison, the technical threshold for mining machine manufacturing is high, the participation threshold is high, and it cannot cover all types of cryptocurrency assets. Therefore, its importance, popularity, and recognition in the cryptocurrency asset field are far less than that of exchanges.

The prevalence of exchanges in the cryptocurrency asset field can be glimpsed from the following data. As of now, according to incomplete statistics from the well-known cryptocurrency stock data website Coinmarketcap, the total market capitalization of the cryptocurrency market is approximately $220 billion, with 296 global digital asset exchanges recorded, providing 20,791 trading markets for 3,021 types of cryptocurrency assets, resulting in a ratio of exchanges to cryptocurrency types close to 1:10. In contrast, in the traditional stock market, China's A-share market has a market capitalization exceeding 55 trillion RMB, with three securities exchanges on the mainland: the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and the National Equities Exchange and Quotations ("New Third Board"). The Shanghai Stock Exchange has 1,570 listed stocks, the Shenzhen Stock Exchange has 2,221 stocks, and the "New Third Board" has 9,201 listed companies, resulting in an average ratio of exchanges to stocks of 1:4,330. Excluding the New Third Board, the ratio of exchanges to stocks is approximately 1:1,895. According to data from Tiger Brokers on the US stock market, as the world's largest stock market, its total market capitalization is approximately $30 trillion, with 5,744 stocks, and trading volume is mainly concentrated in the three major exchanges: NYSE, Nasdaq, and AMEX, with a rough estimate of the average ratio of exchanges to stocks being 1:1,914.

Clearly, the density of exchanges in the cryptocurrency asset field is much greater than that in traditional financial markets. The dense distribution of exchanges in the cryptocurrency asset field indicates, on one hand, that the business profits of these exchanges are considerable or that profit expectations are sufficiently high, and on the other hand, it also indicates that the entry barriers for exchanges in the cryptocurrency asset industry are relatively low, one important reason being the generally low level of compliance. According to an inaccurate statistical report within the industry, the proportion of compliant exchanges in the entire cryptocurrency asset industry is extremely low, with compliant exchanges accounting for only 14% (out of a total of 216 surveyed). This article will conduct an in-depth study of the compliance legal regulations and related ecology of cryptocurrency exchanges worldwide, aiming to provide important guidance for the compliance process of exchanges.

Top 10 Global Exchanges by Real Trading Volume and Their Country Distribution, Data Source: Blockchain Transparency Institute, where OKEx has moved to Malta

II. Future Trends of Exchanges: Compliance

Since the birth of Bitcoin in 2008, the variety and scope of cryptocurrency assets have greatly increased. As of now, according to Coinmarketcap data, there are at least over 3,000 types of digital assets globally, and the entire cryptocurrency asset industry has spread to all countries and regions covered by the internet. At the same time, the global regulatory framework for the cryptocurrency asset industry is becoming clearer. In order not to stifle financial innovation, although the regulatory policies of various countries differ, a dynamic comprehensive regulatory system has basically formed, including traditional licensing regulatory systems, sandbox regulations, and industry self-regulation.

On October 24, 2019, central leaders emphasized in a meeting that "blockchain should be regarded as an important breakthrough for independent innovation in core technologies." On the 26th, the overseas edition of the People's Daily published a front-page article titled "Taking Blockchain as an Important Breakthrough for Independent Innovation in Core Technologies," sounding the clarion call for a new era in the blockchain industry.

Partial Screenshot of the Overseas Edition of the People's Daily

In various aspects of cryptocurrency assets, due to the severe lack of identity information in most on-chain transaction data, but with these assets' trading, circulation, and custody occurring in centralized exchanges, it is undoubtedly the most effective and reasonable regulatory approach to focus on compliance supervision of centralized exchanges. Clearly, as the cryptocurrency asset industry develops and its influence continues to expand, compliance supervision of exchanges will become the core aspect of the entire industry regulation.

Compliance has become an inevitable trend for cryptocurrency exchanges. Currently, global cryptocurrency exchanges are actively laying out compliance, which mainly includes the following forces:

• Traditional financial background exchanges. These exchanges originate from traditional financial institutions and often have unique advantages and resources in terms of compliance. Typical representatives include the Bakkt futures exchange initiated by the parent company of the New York Stock Exchange, ICE Group (approved by the US CFTC), and the futures exchange ErisX, which is funded by Nasdaq. Additionally, the Swiss Stock Exchange SIX and Germany's second-largest stock exchange Stuttgart have announced plans to launch regulated digital asset trading platforms.
• Native blockchain exchanges. Native blockchain enterprises are also seeking to embrace regulation and actively pursue compliance, generally by directly applying for licenses or obtaining compliance licenses through financing and mergers. Coinbase holds the New York digital asset license Bitlicense, allowing it to provide compliant services to users; Binance is promoting the establishment of compliant fiat trading exchanges around the world, having launched Binance Uganda (supporting the Ugandan shilling) and Binance Jersey (supporting euros and pounds); the OK Group has signed an agreement with the Malta Stock Exchange to promote the establishment of a securities token platform, and its US entity OKCoin has also obtained an MSB license; Huobi Group has established local stations in Japan, South Korea, and other places to provide compliant services, with Japan achieving compliance through the acquisition of the licensed exchange BitTrade, and it has also entered the US market through its partner HBUS and applied for a DLT license in Gibraltar, enabling it to provide cryptocurrency trading services in Europe.

III. Compliance Basics for Exchanges: KYC and AML

In the compliance process of exchanges, KYC (Know Your Customer) and AML (Anti-Money Laundering) will become one of the most fundamental and important requirements among various compliance and risk control policies. Both AML and KYC are common measures in risk control, where anti-money laundering (AML) refers to a series of measures to ensure that the funds of exchanges are legal and to isolate black or gray illegal funds; KYC refers to fully understanding customers to strengthen the review and identity verification of account holders to achieve risk control. KYC is usually an effective supporting measure for AML and anti-corruption, but it can also partially prevent risks from outside the exchange, such as identifying hackers.

There are various methods for KYC and AML. KYC alone includes advanced technical means such as real-name authentication, video verification, and live detection, while AML often requires support from public security and anti-money laundering teams. In practice, during the operation of exchanges, KYC and AML often raise the operational costs of exchanges while reducing user experience. Therefore, how to formulate reasonable risk management policies that ensure compliance, legality, and convenience for exchange users while maximizing user experience has become one of the primary considerations for exchanges. From this perspective, if it can be ensured that the funds entering the exchange come with a certain degree of KYC and anti-money laundering preprocessing, the operational costs of the exchange in these two aspects will be greatly reduced, and user experience can also be improved.

Central bank digital currencies may be one of the effective ways to resolve the above contradictions. Taking the DCEP that the People's Bank of China has been researching as an example, since DCEP is a cryptocurrency system based on blockchain technology, characterized by 100% central bank reserves, legal tender status, and controllable anonymity, its information transparency is higher than that of cash. It can achieve real-time collection of data such as currency creation, accounting, and liquidity, making the funds themselves possess certain verifiability, low reconciliation costs, and self-verification characteristics. Through the targeted issuance function of DCEP (such as freezing or restricting transfers of illegal funds), a "self-proving" or even a certain degree of certified/restricted information encrypted digital currency will undoubtedly greatly reduce the cost pressure on exchanges in accounting, KYC, and AML, further playing a significant role in anti-terrorism and anti-corruption.

Differences between DCEP and Other Currency Forms, Data Source: Guotai Junan Securities Research Institute, Libra White Paper

IV. Overview of Global Exchange Compliance Regulation

As of now, although there has not yet been a unified international standard and consensus on cryptocurrency asset regulation globally, countries around the world attach great importance to this new form of finance. So far, countries such as China, the United States, Japan, South Korea, and Singapore have all issued their own management regulations for cryptocurrency assets.

The compliance regulation of cryptocurrency exchanges in some countries is as follows:

Global Cryptocurrency Regulation Map, Data Source: ComplyAdvantage

1. United States

In the United States, the regulation of cryptocurrency digital assets and exchanges presents a clear "multi-head regulatory" pattern, with regulation divided into two levels: federal government and state government. The regulatory bodies involved include the Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC), and the Department of Financial Services (DFS) of various states. The definitions of cryptocurrency assets by relevant regulatory bodies differ, thus being incorporated into different regulatory systems. Some examples are as follows:

Federal Level Compliance Regulatory Requirements

• Taking FinCEN as an example, although cryptocurrency assets are not considered legal tender, since 2013, FinCEN has included cryptocurrency exchanges under the management system of money transfer service providers: any cryptocurrency exchange and service provider must register as an MSB and establish an anti-money laundering mechanism, complying with AML and CFT regulations. Additionally, exchanges must also obtain the corresponding state money transfer license (MTL).
• For the SEC, it views cryptocurrency assets as securities and has comprehensively applied securities laws to the regulation of digital wallets and exchanges since 2018. On March 7, 2018, the SEC issued a public statement requiring cryptocurrency platforms that meet the definition of securities under the Exchange Act Rule 3a1-1(a) to register with the SEC as a National Securities Exchange (NSE). Currently, there are 37 exchanges registered with the SEC as NSEs.

Additionally, some cryptocurrency trading platforms, under exemption conditions, must register with the SEC as Alternative Trading Systems (ATS) and comply with ATS regulations (Rules 300-303 of Regulation ATS), while also needing to register with the SEC as broker-dealers and become members of self-regulatory organizations (SROs). The broker-dealer qualification here means that individuals and institutions can register as broker-dealers with the SEC and enter the Financial Industry Regulatory Authority (FINRA) system. As of now, there are 91 approved ATS.

• The Commodity Futures Trading Commission (CFTC) is the regulatory body for the US futures and options markets, which has enacted the Commodity Exchange Act (CEA), categorizing cryptocurrency assets as "commodities." For market participants dealing with cryptocurrency assets, whether selling or providing related services, they must register with the CFTC and meet different registration requirements based on their activities according to the CEA.
• The Internal Revenue Service (IRS) views cryptocurrency assets as property and has established relevant tax guidelines accordingly. This tax guideline states that the IRS applies the same regulations that apply to stock and futures trading to cryptocurrency assets, and cryptocurrency investors must fulfill corresponding tax obligations, such as capital gains tax, and it states that when Bitcoin is paid as wages or service fees, the recipient must pay personal income tax. In 2016 and 2017, the IRS requested Coinbase to submit complete transaction records of US users, but Coinbase refused to provide user information on the grounds of protecting user privacy.

Additionally, the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau, and the Office of Foreign Assets Control have all issued statements and guidance documents regarding cryptocurrency assets, emphasizing the risks associated with them and calling for compliance with relevant laws and regulations in activities related to cryptocurrency assets. Currently, the US Department of Justice is cooperating with the SEC and CFTC to ensure that future cryptocurrency asset regulations can effectively protect consumers and achieve more streamlined regulation. Meanwhile, the US Treasury urgently needs to formulate corresponding regulatory regulations to combat criminal activities both globally and within the US. In January 2018, the US Treasury Secretary announced the establishment of a new FSOC working group to explore the rapidly growing cryptocurrency asset market.

State Level Compliance Regulatory Requirements

Map of US States' Regulatory Attitudes Toward Cryptocurrency Assets, Data Source: Finance Magnates

The New York State Department of Financial Services (NYDFS) officially implemented a series of regulatory regulations involving cryptocurrency activities in New York State on June 24, 2015. The regulations stipulate that any institution engaged in cryptocurrency-related activities (transmission, custody, storage, control, management, issuance, trading, and exchange) in New York State must hold a BitLicense, including institutions located outside New York State but providing services to New York residents. Applying for a license requires submitting detailed activity descriptions and background information of operators and institutions to New York State.

As of July 1, 2018, New York State had issued licenses to seven companies: Coinbase, Circle, Ripple, Bitflyer USA, Square, Xapo, and Genesis; and two charters: Gemini Trust and Paxos Trust.

Additionally, depending on the specific circumstances of the company, some companies engaged in cryptocurrency-related activities in New York must hold both a BitLicense and an MTL (Money Transmitter License/Charters).

Apart from New York State, Washington State, North Carolina, and other states have explicitly stated that the transfer of cryptocurrency assets falls under money transfer activities, subject to corresponding money transfer regulations. If one needs to engage in cryptocurrency-related businesses in the US, they must also apply for various operating qualifications and licenses under state laws.

2. Japan

In 2014, the then-largest cryptocurrency exchange Mt. Gox was hacked for 850,000 Bitcoins (located in Japan). Subsequently, the Japanese government began regulating cryptocurrency assets. The Financial Services Agency (FSA) established a research group and published a report recommending the establishment of an exchange registration system to prevent money laundering and protect users. In June 2016, the Japanese Diet passed the amended Payment Services Act (effective April 1, 2017), which imposed a series of regulatory requirements on the operation and management of cryptocurrency exchanges. Additionally, businesses managing cryptocurrency assets rather than exchanging them, such as cryptocurrency wallets, were also included in the scope of cryptocurrency exchange business and are subject to the amended Payment Services Act. Some contents of the act include:

Strict Exchange Registration System

Based on international requests for anti-terrorist financing and anti-money laundering, Japan introduced a registration system for exchange operators, protecting users from aspects such as privacy protection, asset security management, and anti-money laundering. This system was implemented in April 2017.

Under the amended Payment Services Act, only operators registered with local financial authorities are allowed to operate cryptocurrency exchange-related businesses. Operators must be joint-stock companies or represent "foreign cryptocurrency exchange businesses" residing in Japan or having offices in Japan. Approval will be conducted by the FSA, and approval indicates obtaining a license.

As of December 2017, the FSA had issued licenses to 16 exchanges. Coincheck lost $400 million worth of NEM on January 26, 2018, prompting the FSA to investigate Coincheck and issue rectification orders to seven exchanges. Subsequently, Zaif experienced a serious hacking incident, and the issuance of new licenses was suspended.

In 2018, the FSA also established a new research group to study exchange businesses/ICOs and laid the groundwork for new regulatory policies in 2019. In March 2019, three new licenses were approved, granted to Coincheck, Rakuten Wallet, and IIJ. The year 2019 is widely regarded as a year of regulatory warming in Japan, with expectations for more exchange licenses to be approved.

New Regulations for Exchange Operations

The amended Payment Services Act requires exchanges to establish strict security systems to protect information. If business outsourcing is necessary, measures must be taken to ensure proper execution of the business. The act also requires cryptocurrency exchange businesses to provide their customers with information about fees and other contract terms. Furthermore, cryptocurrency exchanges must separately manage users' funds or cryptocurrency assets and must be audited by registered accountants or accounting firms.

Exchanges must strictly implement KYC, maintain transaction records, report suspicious transactions, and submit annual reports to the FSA.

If an exchange no longer meets the requirements or violates the amended Payment Services Act, it will face strict inquiries from the FSA, and those that do not pass will have their business operations suspended or even have their licenses revoked.

Token Listing Review System

In March 2018, the FSA approved the establishment of the Japan Virtual Currency Exchange Association (JVCEA) as a self-regulatory organization for the cryptocurrency business. All licensed exchanges are members of this organization. The association aims to ensure that exchanges operate within the scope of the amended Payment Services Act, protect user rights, and promote the healthy development of the cryptocurrency exchange industry. Currently, the FSA has instructed JVCEA to be responsible for token listing reviews, with major exchanges as sponsoring entities, qualifying for recommendations. Only through JVCEA's review can tokens be traded on Japanese exchanges.

Additionally, in Japan, income from trading cryptocurrency assets is considered "various income" rather than "capital income," falling under the tax scope.

3. South Korea

The South Korean public is highly enthusiastic about cryptocurrency trading, with trading volumes second only to the US and Japan, and even creating a phenomenon known as "kimchi premium," where prices exceed the international average due to speculation by South Koreans. According to reports, South Korea has a population of about 50 million, with the number of cryptocurrency investors reaching 3.5 to 4 million, accounting for about 8% of the national population, making it the third-largest market after the US and Japan. Based on the frenzied investment and trading phenomena in South Korea, the government has implemented strict regulatory measures against money laundering and fraud.

In January 2018, the South Korean government announced that all cryptocurrency trading must be conducted under a real-name bank account system, which exchanges must strictly enforce. The real-name bank account system means that cryptocurrency retailers must sign contracts with banks, which must inspect the management and network systems of retailers before signing. Users must have real-name bank accounts with the same bank as the cryptocurrency retailer to deposit trading funds. Banks and retailers need to verify users' bank account and personal information. Anonymous users can withdraw cryptocurrency assets but cannot deposit trading funds.

Regarding anti-money laundering, the Korean Financial Intelligence Unit (KFIU) has proposed guidelines for monitoring money laundering activities through cryptocurrency assets, stipulating that further anti-money laundering reviews are required under the following conditions:

(1) When a trader deposits or withdraws 10 million won (approximately $9,400) or more daily, or 20 million won or more weekly;

(2) When a trader conducts five or more financial (bank) transactions daily or seven or more weekly;

(3) When the trader is a company or organization;

(4) When a trader without deposit records in cryptocurrency exchange accounts withdraws a large portion of funds in cash from cryptocurrency trading accounts;

(5) When there are reasonable grounds to suspect that a trader is dispersing transaction amounts or quantities to avoid being reported by financial institutions.

South Korea aims to ensure normal trading and the healthy development of cryptocurrency trading through anti-money laundering measures and plans to establish a tax system for cryptocurrency assets.

4. Singapore

Singapore has adopted a proactive regulatory attitude toward cryptocurrency assets. In 2017, the Monetary Authority of Singapore (MAS) issued the "Guide to Digital Token Offerings," which was updated the following year to include regulatory norms for digital asset exchanges and securities-type financing. In 2019, MAS submitted the "Payment Services Bill" (PSB) to Parliament, requiring anyone engaged in cryptocurrency trading or exchange services to obtain a license and establish anti-money laundering/anti-terrorism risk avoidance measures, thereby establishing a comprehensive "licensing regulatory" system.

5. Malta

Malta has adopted a proactive and embracing attitude toward cryptocurrency assets and blockchain, passing three bills at the Malta Conference in 2018, becoming the world's first country to establish national laws in the fields of blockchain, cryptocurrency assets, and distributed ledger technology. The laws include the "Malta Digital Innovation Authority Bill" (MDIA Bill), the "Innovative Technology Arrangement and Services Act" (ITAS Bill), and the "Virtual Financial Assets Bill" (VFA Bill). Among them, cryptocurrency exchanges and decentralized platforms fall under the regulatory scope of the ITAS Bill.

V. Compliance of ST and STO Exchanges

ST, short for Security Token, refers to tokenized securities. As the name suggests, ST is a token that has the attributes of securities, supported by traditional assets and rights. Its broad meaning refers to any value system represented by blockchain technology and subject to securities law regulation. STO refers to the issuance and fundraising activities conducted using ST as a carrier, combining the token carrier of ICO and the securities issuance attributes of IPO, existing as a transitional form between ICO and IPO. The platform that provides trading and circulation for ST (Security Token) is the STO exchange. However, globally, there are no specific regulatory provisions targeting ST issuance and STO exchanges. In regulation, tokens are generally distinguished as functional tokens and tokenized securities. Once classified as tokenized securities, they will fall under the regulatory scope of securities law.

Taking US regulation as an example, there are no explicit provisions or opinions regarding "registered securities issuance" and "exempt securities issuance" specifically targeting STO issuance in US securities law. The identification of ST and STO relies on established testing methods such as the Howey Test. Currently, the main compliance direction for STO issuance in the market is exempt securities issuance, meeting RegA+, RegD, RegCF, and RegS for token issuance and fundraising. Among them, RegA+, RegD, and RegCF target exempt securities issuance and trading within the US, with RegA+ being for small IPO compliance, RegD mainly for private financing, and RegS for securities issuance and sales outside the US. The characteristics of the above exemption regulations are summarized in the table below:

Currently, most STOs in the market adopt the RegD (506c) method, which has no financing limit, allows public solicitation for fundraising, but can only be sold to accredited investors, and the issued securities cannot be traded in the market within 12 months. For STO exchanges serving tokenized securities ST (such as OpenFinance, tZERO, Sharespost, and Coinbase), most need to register with the SEC as Alternative Trading Systems (ATS) and comply with ATS regulations.

VI. Compliance: The "Only Way" for the Digital Asset Industry

With the rapid development of the industry and the increasing maturity of the market, the pursuit of compliance is not limited to the giants in the trading platform ecosystem. Whether regulatory agencies or innovative enterprises, there have been more and more compliance attempts and explorations in areas such as stablecoins, asset custody, clearing and settlement, and compliant tokenized securities issuance. From a market perspective, the prices of digital assets experienced dramatic fluctuations akin to roller coasters between 2017 and 2019, but cryptocurrencies led by Bitcoin are still far from mainstream societal recognition. For instance, the Bitcoin ETF, widely regarded as the trigger for the next bull market, saw US regulators reject several Bitcoin ETF applications again in October, citing evident and violent price manipulation in the Bitcoin trading market. Undeniably, the rapid drop of Bitcoin on September 25, reaching a maximum decline of 20% within minutes, serves as the best illustration of price manipulation. As the path for ETF approval remains fraught with challenges and personalized derivatives like Bakkt continue to emerge, we cannot help but ponder what compliance truly means for the digital asset industry, especially for exchanges. Is it merely about "institutional entry" and "national submission"? Compared to the historical development of traditional securities markets, what historical stage is the current digital asset trading ecosystem in?

Mature securities markets in various countries have undergone a process from a wild era of no regulation and compliance to gradually establishing regulatory compliance standards, ultimately forming a complete regulatory compliance system. Taking the US stock market as an example, the US securities market began to sprout in the late 18th century, when several exchanges, including the New York Stock Exchange, had similar market shares. However, unlike other exchanges, the New York Stock Exchange prohibited Ponzi scheme-style financing, which helped it succeed in competition with other exchanges. The invention of the telegraph around 1850 strengthened the New York Stock Exchange's influence over other regional exchanges, leading to the rapid marginalization of other exchanges, with Wall Street becoming the center of US stock and securities trading. This can be seen as a future prophecy for digital asset exchanges; the current coexistence of multiple platform giants may undergo structural changes in the future due to technological advancements. During this period, stocks gradually surpassed government bonds, becoming the most active variety on exchanges. Similar to the current digital currency market, the US stock market at that time was almost purely speculative, and the corruption of the US government also fueled manipulation and plunder in the stock market.

One of the founders of the New York Stock Exchange, then-Assistant Secretary of the Treasury William Duer, was keen on using his position as a government official to manipulate stocks, becoming a pioneer among future financial market manipulators, highlighting the frequent occurrence of government officials profiting from the market using their power. Financial history books state: "In nearly a century of stock exchange history, stock prices were not regularly published, while articles about listed companies were rampant, and generally, they were false reports. The stock manipulators' specialty was creating rumors… To avoid risks, some investors only invested in other safer areas." Like the digital currency market, "cornering" and matched sales were very common in the early New York market, where "the early New York market could only provide a gambling venue for traders with sufficient capital and leisure time to speculate on stocks." At that time, Wall Street had many so-called "robber barons," such as Daniel Drew, Vanderbilt, and Jay Gould, who openly profited by monopolizing listed company stocks, manipulating stock trading prices, and even bribing judges to change rules.

Marked by the victory in the Spanish-American War in 1898 and World War I, benefiting from the Second Industrial Revolution, the international status and comprehensive national strength of the US rapidly developed over several decades, and the US stock market also soared. However, market manipulation and insider trading remained severe. The development of the stock market was accompanied by frequent stock market panics, prompting the government to consider regulating the stock market. During this period, Congress legislated to approve the Federal Reserve, and the Clayton Act was passed in 1916, gradually curbing the improper behaviors of financial oligarchs. The prosperity built on market manipulation and disorder finally faced a major crash in 1929. In August 1929, the US Dow Jones Industrial Average exceeded 380 points, while by 1932, the index had plummeted to 42 points, a decline of nearly 90%; as the US stock market fell, a large number of bonds were defaulted, and about 40% of banks in the US failed.

After the Great Depression, the US stock market entered an important period of regulation and recovery. Although facing strong opposition from Wall Street's interest groups, President Roosevelt resolutely pushed forward the New Deal, reconstructing the regulatory framework of the US securities market. Richard Whitney, then president of the New York Stock Exchange, was a pioneer in opposing regulatory compliance. During the golden age of the US stock market in the 1920s, Whitney amassed a large fortune, but when the top-down regulatory pressure from the government combined with overwhelming public opinion, he ultimately yielded and initiated self-regulatory actions, leading the exchange committee to pass decrees prohibiting collusion and cornering, as well as prohibiting specialized brokers from disclosing insider information to friends and from purchasing options on stocks they were making a market in. Financial manipulation was gradually legislated against, and the transparency of information for listed companies and investor protection became the focus of Wall Street regulation. In 1933, Congress enacted the first national securities regulation, the Securities Act of 1933, after the US stock market had been operating for over 100 years, mainly regulating the information disclosure of securities issuers. The Banking Act of 1933 separated commercial banking from investment banking, further strengthening the position of the Federal Reserve, and establishing a deposit insurance system. The Securities Exchange Act of 1934 was enacted, defining securities manipulation and fraud, establishing the burden of proof for defendants in securities litigation, greatly regulating securities trading behavior, and facilitating the establishment of the US Securities and Exchange Commission (SEC).

Thus, through comprehensive and rigorous legislation by the government, the establishment of regulatory agencies, and the industry's own clearing and self-discipline, the US stock market flourished during the economic recovery period after World War II. Its favorable trading environment gradually made institutional investors, such as pension funds, the main force in the market, and the value investment philosophy led by Graham gained widespread attention in the regulated market. These two factors ultimately became the solid foundation for decades of bull markets in the US stock market. Today, the US stock market has formed a compliance ecosystem with a complete legal and regulatory framework combining exchanges, brokerages, dealers, the SEC, and federal to state levels. From savage growth to rational prosperity, the US stock market has created the most prosperous secondary financial market in human history over 200 years, with regulation, compliance, and institutionalization being its steadfast main themes.

Although Bitcoin originated from the cypherpunk mailing list and Ethereum from genius programming youth, cryptocurrency assets inherently possess characteristics of decentralization and anonymity against censorship. However, as the positioning of the Bitcoin electronic payment system gradually shifts to value storage and emerging alternative asset allocation projects, the compliance of the digital asset market and the gradual entry of traditional financial institutions have become an irreversible trend. The bridge of communication between the native crypto world and the traditional financial world is significant; it will serve as a mechanism for the injection and migration of funds and resources from the traditional world. The four engines driving the industry's compliance process are compliant exchanges, compliant custodians, compliant issuance of securities-type digital assets, and compliant stablecoins, each corresponding to the four links of trading, custody, asset issuance, and clearing in the ecosystem.

The emerging digital asset market faces various risks in aspects such as asset issuance, asset custody, liquidity issues, and asset clearing and settlement from the perspective of the underlying assets of investment targets. Currently, regardless of asset issuance endorsement or subsequent custody, liquidity, and clearing aspects, there are certain deficiencies that hinder the further expansion of market scale. This is also a significant reason why new entrants like Bakkt, ErisX, and LedgerX have launched "asset custody + trading + clearing" solutions. We have reason to believe that the current situation where exchanges play multiple roles in custody, transaction facilitation, asset clearing, and asset selection will inevitably evolve in the future. Whether from traditional financial institutions formulating regulatory rules for the digital asset industry from the top down or from leading industry platforms seeking compliance and business evolution, this will be an "ordinary path" that the industry must take. In possible business separation and restructuring, multiple new tracks will emerge within the industry, bringing new value and growth points to the industry and users. This year, the brokerage track represented by TroyTrade has become a new investment hotspot in the market, and in the more distant future, with further technological maturity, the emergence of a cross-exchange central clearing network will also become inevitable.

From the tumultuous history of Wall Street, we can glimpse that when the wave of compliance arrives, the industry will inevitably undergo profound and intense pain. When new order rules and industry standards are established, the native crypto world and the traditional financial world will "write the same script and run on the same track," allowing blockchain technology and token economies to truly bring about a transformation in production relations. Only then can cryptocurrencies like Bitcoin welcome a massive influx of institutional audiences, and blockchain can truly become mainstream.

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