Three possible futures for digital assets trading – which one wins?
Where do we trade tomorrow? Exchanges, peer-to-peer, and the quest for a safe and fair digital assets market.
The world of digital assets feels like it is constantly pulling in two directions. On one side, we have established players, the centralised exchanges who we think of as the familiar gateways where people first dip their toes into crypto. They offer slick interfaces, deep pools of liquidity and often the crucial bridge back into fiat currencies. However, using them means handing over control, trusting them with your assets and data, operating within their operational controls, and of course, navigating an increasing web of regulations.
On the other side, we see the promise of decentralised exchanges and direct peer-to-peer (P2P) trading. Here you hold your own keys, interact directly or via smart contracts, and enjoy greater privacy and freedom of trading counter parties. Transactions are often transparently recorded on the public blockchain. Yet, this side can be complex, with limited liquidity, and fraught with risks from smart contract bugs and scams to sophisticated manipulation tactics like frontrunning.
In the future, will one win over the other? The answer lies in the regulatory approach.
Regulators, understandably, are trying to get a handle on this rapidly-changing space. Their role is clear: protect investors, ensure markets are fair and transparent, maintain financial stability and curb illicit activities.
So, can exchanges continue to operate in their current form in a fully digital future, or is there a middle ground? Can exchanges and decentralised platforms exist in harmony, or do exchanges become defunct as more users get access to P2P technology for asset transfers?
There are three key scenarios which can be quite simply assessed with a key metric that drives regulation of markets: The Fairness and Transparency Challenge.
01
Peaceful but separate coexistence
It seems quite possible that we will see a future where regulated exchanges solidify their role as the go to venues for big institutions, complex financial products and essential links to traditional banking systems. Much like today, they will offer compliance and deep liquidity. Meanwhile, P2P platforms and the broader world of decentralised finance will thrive as a space for retail traders, those prioritising privacy, niche assets and cutting-edge technology, such as experimenting with certain financial instruments
The Fairness and Transparency Challenge:
Regulating the exchanges is straightforward using existing tool kits mandating disclosures, surveillance, best execution rules and asset safety with regulated custodians (typically banks). But ensuring fairness in a P2P and decentralised realm is a much harder task. The effort mostly relies on the design of protocols, user awareness, and indirect regulatory pressure like policing the on and off ramps.
While P2P transactions are often visible on chain, this does not guarantee fair treatment to protect users from hidden risks or manipulation. We could end up with a two-tier system where regulatory oversight is significantly higher on the exchanges as compared to the P2P platforms.
02
The decentralised dream – or nightmare
Imagine a future where P2P protocols, especially sophisticated decentralised platforms, become the norm for digital asset trading. Centralised exchanges fade into the background, just acting as regulated gateways for getting traditional money in and out. Most financing activity i.e. lending and borrowing also therefore moves onto decentralised platforms and self-custody of assets becomes mainstream.
The Fairness and Transparency Challenge:
This scenario presents a significant problem for regulators aiming for fairness. How do you stop manipulation on infrastructure that is not centrally controlled where there is no central party to hold accountable? Enforcement would heavily depend on the robustness of the code, the effectiveness of the community governance, and advanced monitoring tools like blockchain analytics which have their own limitations in terms of accuracy and dealing with anonymity.
While transparency remains high, the complexity could obscure risks, and tracing bad actors would remain extremely difficult. We might see the rise of regulation-driven protocols – building compliance features simply because they become necessary to interact with the regulated world to gain institutional trust.
But the fundamental ability of regulators to directly ensure fair play would be significantly diminished compared to an exchange-centric world. Self-custody would become a major bottleneck and a security threat to asset holders, eliminating the protections offered by regulated bank custodians with capabilities that mitigate operational and cyber risks, and back the assets with significant balance sheet.
03
Hybrid model – bridging the gap
The most pragmatic future involves the rise of hybrid model platforms trying to blend the best of both worlds. For example, exchanges that use fast centralised systems for matching orders but settle trades transparently on chain. Alternatively, platforms where assets are kept with a regulated custodian to keep control of the keys but benefit from pooled liquidity and large-scale operational savings.
The Fairness and Transparency Challenge:
A hybrid set up offers regulatory anchor points. The centralised components could be subject to rules on fair execution or market manipulation. On-chain settlements add a layer of a verifiable transparency and a regulated custodian that is prudentially-regulated provides asset protection and safe settlement.
However, these models also create complexity. Where does responsibility lie if something goes wrong? How do you effectively monitor activity both on systems and changes? Regulators would need serious technical capability to understand and oversee these models effectively. Yet if done right, hybrid models could potentially offer a richer data set for ensuring market integrity than either pure opaque centralised exchanges or purely synonymous decentralised exchanges.
Which path will prevail?
The road forward likely involves elements of all the scenarios. It seems improbable that either centralised exchanges or P2P will completely vanquish the other.
Regulating centralised entities is a far more familiar territory, allowing for direct rules and enforcement. Trying to achieve the same level of guaranteed fairness in a decentralised P2P world requires a different, more indirect, and less certain approach.
It might be that we must accept different levels of regulatory assurance depending on where users choose to operate. The big questions remain: will regulation find effective ways to oversee the decentralised world, or will the decentralised world itself evolve through hybrid models or embedded compliance to meet the markets’ need for trust and legitimacy? Does self-custody scale? Do banks approach custody differently to interact with un-hosted wallets?
The answer to these questions will continue to evolve, but may be quite simple if one focuses on risk appetite for trust, accountability and asset safety.
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