Virtual currency brokers: cryptocurrency platform supervision -Part 6

2. Mt.Gox case

Mt.Gox is one of the largest bitcoin exchanges, handling approximately 80% of bitcoin transactions in its heyday. In February 2014, Mt.Gox closed down, announcing that it had lost more than 750,000 bitcoins and lost hundreds of millions of dollars. It is said that Mt.Gox uses the customer's bitcoin to fund its activities. Drawing on the experience of Mt.Gox, many cryptocurrency platforms claim that they do not use customer deposits to fund their activities. However, in the absence of adequate supervision, customers who choose to invest in cryptocurrency still believe that this is only a verbal commitment by the cryptocurrency platform.

3. State regulations

Some states have begun to regulate cryptocurrency platforms, and some states even involve the issue of protecting customer assets and part of the reserve fund. However, state regulations are not sufficient because they are easy to circumvent. In 2015, New York established BitLicense, a framework for regulating cryptocurrency platforms. In addition to anti-money laundering and network security provisions, BitLicense also solves the problem of protecting customer assets. However, Hawaii has adopted a contradictory approach in protecting customer assets. Faced with a costly regulatory dilemma, Coinbase (Bitcoin Company) simply decided to stop operations in Hawaii.

4. Platform bankruptcy risk

So far, hackers have been the most common reason for the failure of cryptocurrency platform operations. However, in addition to hacker attacks, cryptocurrency platforms may also fail due to insufficient risk management or excessive risk-taking. Like any broker-dealer holding risky assets, the operation of cryptocurrency platforms carries a risk of bankruptcy. Any cryptocurrency platform that trades or holds cryptocurrency on its own behalf is subject to the unpredictability of the cryptocurrency market. Just as the market downturn in the late 1960s led to general bankruptcies of securities companies, unforeseen market downturns may lead to the insolvency of some cryptocurrency platforms.