No matter how hyped or enticing.
As precisely summarised by the ‘Financial Times’, “Technology that not many understand can also allow for obfuscation, for style over substance, and for a fear of missing out to grip even seasoned investors (including Rupert Murdoch and Larry Ellison). Combined with an era of low interest rates and easy money — now well and truly over — it is the ideal habitat for swindlers.”
DGCX’s rock-solid track-record
This month, I distinction the institution and improvement of the Dubai Gold & Commodities Exchange (DGCX) with FTX’s meteoric rise and fall and talk about the way forward for monetary exchanges and the way investor confidence in crypto may be restored.
Established in November 2005, DGCX launched below the Dubai Multi Commodities Centre (DMCC) because the MENA area’s first digital, regulated derivatives trade. Establishing a brand new pricing benchmark for gold within the UAE – particularly via the one kilobar gold futures contract – the trade adopted up with the world’s first offshore Indian Rupee Futures contract, a product that has grown from strength-to-strength to turn out to be its prime performer when it comes to quantity.
Unlike FTX’s merchandise, DGCX geared toward assembly investor demand via sensible, confirmed merchandise that had been related to the area’s market and progress – a components which grew to become the premise for its future merchandise such because the MENA area’s first Copper Futures contract in 2012, and the area’s first WTI and Brent Oil Futures contracts thereafter.
Additionally, DGCX’s strategic location and buying and selling hours of 07:00am – 11:55pm (GMT+4) present a significant place within the international derivatives panorama, connecting Asia and Europe with US buying and selling hours.
Expanding gold-linked merchandise
Working in tandem with the UAE’s nationwide agenda, DGCX additionally innovated new merchandise primarily based on the socio-economic circumstances of the market, maybe most notably via the launch of its Israeli Shekel Futures on June 17, 2022. Not solely a prime performing rising markets forex for the reason that impression of the pandemic, the product additionally supported the improved cooperation and enterprise between Israel and the UAE, solid via the signing of the Abraham Accords in 2020.
DGCX has labored via the years in bringing out a number of monetary merchandise for its group. And all of which include regulatory oversight.
Image Credit: Supplied
Further merchandise to launch up to now six months embrace new bodily gold futures and spot gold contracts, which is able to present merchants and monetary establishments the choice to make use of bodily gold as collateral to entry reasonably priced sources of short-term lending, whereas its partnerships with Sam Precious Metals and FinMet will once more present bourse members with entry to an ever rising vary of high-quality merchandise.
FTX’s non-business mannequin
Conversely, FTX’s enterprise and product improvement remained closely weighted within the unregulated waters of crypto, NFTs, and allegedly unregistered securities; leading to a extremely unstable portfolio, the place even the bookkeeping was managed by small-business accounting software QuickBooks, regardless of its one-time $32 billion valuation.
And this all earlier than SBF’s alleged use of buyer cash to make philanthropic donations, property investments and prop up FTX’s accomplice companies, Alameda Research’s buying and selling exercise.
While technically right, to name FTX an trade can be a misnomer. Unlike bourses corresponding to DGCX, NYSE or NASDAQ, cryptocurrency exchanges, notably these in offshore jurisdictions usually are not required to stick to the identical ranges of regulation as their long-standing counterparts.
FTX chief Sam Bankman-Fried’s subsequent arrest for excesses dedicated has additional mired the crypto commerce.
Image Credit: Bloomberg
As acknowledged by Joe Rennison within the New York Times, “The implosion of FTX exhibits simply how completely different crypto exchanges are from their extra well-known, and extremely regulated, counterparts. They don’t should disclose how buyer cash is dealt with, both to traders or to a regulatory physique. Internal monetary controls may be scant.
“The absence of oversight contributed to what prosecutors said was a years-long, widespread fraud at FTX, once the crypto world’s second largest exchange. By contrast, LedgerX, a crypto derivatives exchange owned by FTX, was based in the United States, and was more strictly regulated. It is still standing.”
Commenting on how buyer funds are afforded better protections on a regulated trade, Michael Blaugrund, COO of the NYSE summarised, “Investor protections, such as the segregation of roles between trading venues, market makers and asset custodians, are a hallmark of regulated exchanges like the NYSE.”
Clear regulatory controls
Regulated by the Securities and Commodities Authority (UAE) of the UAE, a member of the International Organization of Securities Commissions (IOSCO), DGCX just isn’t solely a extremely regulated trade, however additional enhanced by its wholly owned clearing home, the Dubai Commodities Clearing Corporation (DCCC), which lately acquired its renewed recognition as a Third Country CCP (TC-CCP) by the European Securities and Markets Authority (ESMA).
Not solely a mirrored image of DCCC’s dedication to worldwide regulatory requirements, and alignment with stringent threat administration and governance frameworks, the power additionally permits all European banks to clear trades settled via DCCC with out incurring extra capital necessities as imposed by EU rules.
While many have seen the collapse of FTX as a major setback to the crypto and blockchain motion, I imagine it ought to function a reminder that regulation and oversight are vital constants in any monetary ecosystem. The reality is that FTX was only a centralised, unregulated entity that traded primarily in cryptocurrencies below a extremely inexperienced, poorly administered administration.
Whether their motives had been naïvely rooted in efficient altruism, of which an estimated $40 million was pumped into ‘campaign committees and other groups, mostly aligned with Democrats’, or as a part of a rigorously calculated fraud, the failure of the system ought to solely encourage exchanges to rigorously consider their choices to maneuver in the direction of regulated, decentralised fashions.
In the identical manner that centralised energy has already proven its indicators of misuse and abuse, notably via the censorship leveraged by the large tech giants in both influencing the movement of knowledge or closing the accounts of people that don’t share their social or political narratives, the identical has additionally been exhibited in a monetary context.
Overreach on controls?
When governments are unable to adequately regulate or shield their nationwide currencies from failure, usually to the detriment of their inhabitants, as seen in international locations starting from Argentina to Zimbabwe, via to gross overreaches of energy, corresponding to Justin Trudeau’s authorities freezing ‘accounts connected to people whom police say have been involved in illegal protests’, the chance posed by centralised management is finally systemic and can’t be ignored.
While rigorously regulated, centralised exchanges have proven to be efficient below the correct governance, the one true path to impartial, monetary freedom is to make sure a community-led strategy that hedges towards the chance of malevolent management and or authoritarianism.
Dennis Jarvis, CEO at Bitcoin.com commented, “I don’t suppose it’s productive for me to make predictions in regards to the regulatory strategy the US will finally take – whether or not it is going to be heavy-handed, or passive, or what it is going to be. But what I do suppose occurs is that centralized crypto exchanges like FTX, BlockFi, and Celsius might be regulated otherwise from decentralized networks like Bitcoin or decentralized functions like Uniswap or Aave.
“A whole lot of regulation is about forcing disclosures and getting transparency for traders — and that’s an excellent factor. The transparency that’s baked into decentralized protocols makes them inherently much less in want of regulation. On prime of that, I believe authorities companies will finally notice that it’s not really potential to control decentralized protocols in the identical manner as centralized entities.
“If this summer’s LUNA coin/Celsius contagion didn’t already convince investors, then the FTX implosion should make it clear to everyone in crypto now that centralized entities need to be regulated. Everything that’s happening outside of crypto makes me certain about the long-term prospects for Bitcoin, DeFi, and crypto assets that embody crypto’s value propositions.”
Blockchain as enabler
Certainly, the concept of utilising blockchain know-how to facilitate trust-less supply versus cost settlement with none middleman isn’t a brand new one. Acknowledged as a extra environment friendly solution to handle settlements by reducing the related transaction prices and concerned dangers, it wasn’t till August 2022 that the primary clearinghouse for the US inventory market switched on a settlement system constructed on blockchain.
Known as ‘Project Ion’, the Depository Trust & Clearing Corp stated that its ‘platform is now processing around 100,000 bilateral equity transactions a day in parallel with its existing settlement systems, which remain the authoritative record. At peak level, the platform can reach about 10 per cent of the bilateral equity volumes handled by the firm’s traditional settlement methods’.
While no formal timeline has been acknowledged, it’s anticipated that the Project Ion platform will finally exchange the present system, nonetheless, the choice will rely upon its efficiency, shopper suggestions and regulatory approval.
Where DGCX is worried, it should proceed to rigorously analysis and consider new merchandise and partnerships that add worth to its members and the markets whereas remaining as threat averse as potential. In partnering with Nasdaq Technology AB, it should quickly profit from a full suite of built-in market options, together with multi-asset buying and selling and real-time clearing functionality, pre-trade threat administration, in addition to market intelligence, market surveillance and high quality assurance functions required to safeguard the integrity of the market.
A Nasdaq alliance
While nonetheless pending regulatory approval, the deliberate migration might be to Nasdaq’s NFF system and happen in Q2-2023.
Beyond this, the trade achieved 16 per cent y-o-y progress in 2022, with 8.2 million heaps traded amounting to $162 billion in notational greenback worth.
Ultimately, it’s essential to do not forget that the function of an trade is to facilitate commerce safely and securely and whereas the temptation to maneuver shortly in keeping with the tempo of know-how to make a fast buck will solely doubtless enhance.
All the extra motive for exchanges and regulators to double down on evaluating and understanding new merchandise and methods till such a time after we are higher capable of regulate our exchanges as a decentralized group.
Ahmed Bin Sulayem
The author is Chairman and CEO of DGCX (Dubai Gold & Commodities Exchange)