Inter-exchange transfers account for a huge proportion of BTC flows, but the origin and direction is beginning to shift.
UK entrepreneurs have taken the lead to register the largest number of cryptocurrency exchanges in the world, according to global research developed by BitFury.
The Dutch blockchain industry analyst reviewed nearly 300 exchanges from 63 countries between 2013 and 2019, focusing on G20 countries and the Asia Pacific region.
Since 2013 the financial centre of Europe, with London at its heart, has consistently dominated both the number of operating cryptocurrency exchanges and the amount of Bitcoin that is transferred between exchanges.
43 registered exchanges are running in the UK, compared to 27 in the US, 22 in Singapore and 19 in Hong Kong.
This suggests two things: that the cryptocurrency space is maturing, and that it is following the example set by equity stock markets. These countries boast the largest stock exchanges by market cap in the world, with the New York Stock Exchange ($22.9trn), and the NASDAQ ($10.8trn) in first and second position, and both the London Stock Exchange ($3.76trn) and the Hong Kong Stock Exchange ($3.93trn) in the top seven globally.
BitFury discovered that UK exchanges sent the most Bitcoin to three main destinations across the first six months of 2019: the US ($543m), Singapore ($512m) and Hong Kong ($108m).
This suggests that Bitcoin flows are beginning to mimic fiat currency flows internationally.
The report also discovered that Bitcoin is being sent back and forth between cryptocurrency exchanges at record rates. In 2018, the total volume of Bitcoin directly transferred between exchanges was over $92.5 billion.
UK-based platforms like Bitstamp, LakeBTC and Shapeshift contributed to the bulk of cryptocurrency transfers between exchanges between 2013 and 2018, with US venues like Coinbase, Bittrex and Kraken also instrumental.
But the rise of exchanges in south east Asia’s financial hubs is changing the power base of the industry. “The share of transferred funds sent by G20 countries is reducing as exchanges
become more evenly distributed around the world,” the report notes.
In 2019 Singapore knocked the USA off the top of the charts by produced the highest amount of international Bitcoin flows sent between exchanges — $3.3bn, the research found. Upbit, Luno and Binance — the latter of which has since shifted its headquarters to the EU island of Malta — made up the largest Singaporean exchanges by volume. This is a marked departure from previous years.
The proportion of Bitcoin sent from exchanges in G20 countries is also decreasing year on year. In 2013 the amount was 95.9%, dropping to 52.9% in 2019.
This suggests a democratisation across the world as more countries invest heavily in blockchain technology and financial regulators give this nascent industry the clarity it needs to succeed.
The research also speaks to wider trends in the cryptoasset and blockchain industry. BitFury’s researchers flagged a statistically significant number of cryptocurrency exchanges as having an ‘unknown’ country of origin.
The decentralised and cross-border nature of cryptocurrencies, along with the rise of remote working teams of programmers and support staff perhaps contributes to this.
But the report predicts the number of exchanges operating without a home registration country will fall “as under FATF guidelines they will need both an official registration as well as a license to operate.”
The FATF (Financial Action Task Force) is a global organisation with immense power. Its guidelines, which arrived to much furore in June 2019, effectively mandate that cryptocurrency exchanges fall in lockstep with anti money-laundering and counter-terrorism laws in the wider financial sector by recording and transmitting customer ID details whenever transactions over $1,000 are completed.
After teasing a simple solution to the so-called ‘travel rule’, blockchain forensics firm CipherTrace unveiled TRISA in October 2019.
CipherTrace CMO John Jeffries told Coindesk it was perfectly possible to adhere to the travel rule by using this open-source validation software, in direct opposition to the outcry from some corners that cryptocurrency exchanges would be non-compliant by design.
On 5 November 2019 Binance announced that both BinanceChain — the public blockchain that underpins the company’s new decentralised exchange — and its in-house exchange token BNB would use the CipherTrace solution.
BitFury’s report authors conclude: “While the ‘travel rule’ will add more complexity to exchange compliance, it could significantly reduce the threat of global criminal misuse of virtual assets.
“The overall percentage of Bitcoin transactions sent from ‘unknown’ exchanges has no stable trend, but we estimate that, after the adoption of the FATF guidelines, the share of exchanges that have unknown countries of registration will significantly reduce.”
In the last six years, the US has consistently topped the tables as the country receiving the largest amount of dollar transfers each year.
“This is notable,” say the researchers, “because while the UK has more registered exchanges, it is apparent that US-registered exchanges are larger and manage more funds.”
It makes sense that the supremacy of US exchanges like Coinbase is directly related to their investment in regulatory compliance.
In October the San Francisco exchange reported it had generated $2 billion in transaction fees since 2012, with 8 million of its 30 million regular customers joining the platform in the last 12 months.
The rate at which US exchanges received Bitcoin has exploded over the last three years. In 2014, exchanges took in $401.1m, dipping to $295m in 2015. A year later, that figure hit $777.3m. As the price of Bitcoin rocketed across 2017 and 2018, American exchanges received $20.3bn and $21.1bn respectively.
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