By Javier Paz, Director of Data & Analytics
Editorial contributors: Nina Bambysheva, Michael del Castillo, Steven Ehrlich, Matt Schifrin
While blockchain technology is being embraced by corporations around the world (see Forbes Blockchain 50) there has likewise been a boom in outfits that allow investors to buy, sell and store cryptocurrencies. Despite the sector being little more than a decade old, CoinGecko.com reports that there are no fewer than 580 independent crypto exchanges allowing investors to trade virtual currencies. In fact, in the last quarter of 2021, websites of dedicated crypto exchanges received 1.7 billion visits according to SimilarWeb data collected by Forbes.
For uninitiated crypto investors, distinguishing quality providers from those that appear to be reputable because of a slick website or famous spokesperson, is nearly impossible. Even exchanges with heavy trading volume in a particular cryptocurrency or pair of cryptos, is a faulty indicator of quality, because in an environment teeming with unregulated providers, it is relatively easy for exchanges to simply report fake numbers.
To help investors navigate the world of buying and selling bitcoin, ethereum and other cryptocurrencies, Forbes Digital Assets analyzed 60 of the largest crypto exchanges ranking them according to ten different criteria (see Ranking Methodology below) ranging from cyber-security provisions and trading fees to institutional backing and regulatory compliance, which we weighted more heavily. At the start of January, the 60 exchanges on our list were generating more than $100 billion in trading volume per day, representing the majority of crypto trading volume globally.
Ten of the exchanges on our list, names like Coinbase, Gemini, Kraken and FTX.US, are most compliant from a regulatory standpoint and thus considered “Class A” according to our survey. Fourteen of the firms we analyzed— companies like PayPal, Robinhood and Block— offer crypto trading, but it isn’t their main business. We dubbed these firms Class B firms. Class C firms are regulated at the national or regional level like Korea’s Coinone, Singapore’s Luno and Mexico’s Bitso. Two larger firms that fall into Class C are FTX and Binance because they are not yet as well regulated as Class A exchanges. Class D exchanges, according to our survey, have websites with legal agreements and registrations in places like the Seychelles and Hong Kong that convey to visitors the sense that these firms are regulated, but business registration is not the same as regulatory compliance. We consider Class D firms like Bitfinex, Kucoin and Gate.io to be largely unregulated.
Unlike traditional financial services, the crypto exchange industry generally lacks standards to certify a new entity before or after they start soliciting client funds. In the United States there is no member organization like FINRA to self-regulate crypto-exchanges despite the fact that from a customer standpoint these exchanges function very similarly to broker-dealers like E-Trade or Schwab. To our knowledge, only Japan has a self-regulating industry group that checks a firm’s basic governance, operational competence, and ensures exchange officials or owners are not individuals with a history of misdeeds or even criminal records. For this reason, our new global ranking puts a heavy weighting on regulatory compliance.
One reason that there are more than 600 crypto exchanges has to do with the industry’s low barriers to entry. There are numerous white-label technology firms around the world like Cyprus-based B2Broker, New York City’s Alphapoint, and London’s GCEX that offer aspiring entrepreneurs the software and data needed to get started with a cryptocurrency exchange. Sometimes the cost for such software is no more than $5,000 a month. The administrative part of any new crypto exchange launch – the website, the legal set up, and the financial connections tend to be a minor cost. Sometimes companies need to do little more than register the business in a small island country such as Saint Kitts or Samoa, and hope that they manage to steer clear of regulators like the SEC and the CFTC.
Another potential trap for investors is relying on the “trust scores” or “exchange scores” on popular price and data sites like CoinMarketCap and CoinGecko.com. These websites are often compensated for the customers they generate via links to crypto exchanges, so these so-called rankings often involve minimal vetting from a quality and safety standpoint.
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Forbes Crypto Exchange Global Rankings – Top 10 Providers
Forbes Crypto Exchange Global Rankings – 11 to 20
Forbes Crypto Exchange Global Rankings – 21 to 30
Forbes Crypto Exchange Global Rankings – 31 to 40
Forbes Crypto Exchange Global Rankings – 41 to 50
Forbes Crypto Exchange Global Rankings – 51 to 60
Our ranking methodology employs 10-categories each with a maximum of 3 points and a minimum of zero. Two categories, regulation and popularity, received double-weighting – i.e., a maximum of 6 points each. The regulatory boost is a way to normalize the scale because regulated entities bear additional costs for the sake of being more accountable to the investing public, something that they don’t get sufficient credit for in most cases. Our ‘popularity’ boost is simply an acknowledgement that firms with a certain scale have established a strong track record attracting and onboarding a larger segment of the investing public than their peers.
The ranking process was as quantitatively driven as possible, drawing data from multiple reliable sources. We summarize below key metrics about each firm that our readers may find useful to inform their crypto provider choice.
I. Provider Classification
One of the key objectives of our study was to divide crypto exchanges into cohorts to conduct more refined analysis. We ended up splitting the 60 companies into four groups. Class A consists of the most global, regulated, and well capitalized firms, while Class B firms are non-crypto-native financial institutions, Class C are regulated crypto exchanges in particular countries or regions, and class D firms tend to be unregulated or lightly regulated crypto exchanges.
It stands to reason that firms required to meet regulations tend to grow at a slower rate than those that don’t make those kinds of investments.
Before Class A firms list a new token, they have to hire costly experts to assess pros and cons of listing a new asset in the current uncertain regulatory climate. Class A firms also rent office space in expensive financial districts, hire qualified personnel for compliance, retain transaction monitoring software like those of Chainalysis and Elliptic and run up a considerable professional services bill. Their sites have lots of risk disclosures and have prudent marketing. Having no such requirements, Class D firms can allocate more resources at marketing and customer acquisition. That extra share of budget not dedicated to compliance can help Class D firms offer an attractive compensation to a small army of affiliate partners – think of these as independent contractors who can create many web pages and promises of high returns – who drive more traffic to Class D websites.
The lion’s share (41.6%) of all trading volume done in our group of 60 firms is reportedly executed by Binance, a class C exchange. This kind of concentration is unusual but it is reflective of the popularity of crypto derivatives – almost half of all Binance trading volume comes from five such contracts, called perpetual futures. The trading volume of Class D exchanges – approximately 34% of the group’s total – was also high and this was true even after we discounted by 25% all volume from firms domiciled in tax haven locations. From conversations with the CEO of a large crypto data aggregator, our study confirmed that little impedes any crypto exchange from overstating its trading volume to boost their importance at places like CoinMarketCap.com and coingecko.com. To help address the widespread fake volume in the industry, specialist entities like CoinMetrics and others publish reports that illustrate the problem.
Another important observation from our classification study is that Class A exchanges published prices for about 215 markets – a market is the name given to trading pairs like bitcoin/tether (BTC/USDT) or ethereum/bitcoin (ETH/BTC) – compared to 299 markets published by Class C exchanges and 487 markets by Class D exchanges. The same is true for the average number of coins offered. This phenomenon may be due to lack of regulatory oversight and rampant marketing of new, unproven assets by Class D exchanges while Class A exchanges tend to consult with attorneys and regulators before (responsibly) listing new assets. Class B firms only operate with one to 20 cryptocurrencies, with few exceptions.
Not including Binance, Class C exchanges get only a 7% share of global visits to websites of retail crypto investment providers and they capture a 10% share of estimated trading volume. With Binance, this class gets 47% of all traffic to crypto exchanges and 52% of all volume. Meanwhile, Class B firms have hundreds of millions of clients that may not have entered the crypto market, and this class could be the one that stands to gain handsomely from that introduction when prices start to rise again from the current crypto winter.
Estimating the size of a market that is fast growing and thrives in opacity is more art than science. Forbes estimates that the unduplicated number of unique visitors coming monthly to crypto exchanges (Classes A, C, and D) stood at 100 million as of January 2022, while the total visitors to Class B sites was 208 million. We should note that for our analysis we only counted what we believe are 17 large Class D firms. There are several hundred Class D firms globally – usually very small though one usually can’t tell by looking at a website. In fact, many Class D exchange websites may be out of business but remain up to dupe new investors who don’t know the signs of a zombie crypto exchange.
II. Geography of Crypto Providers
Our study was able to ascertain that there are millions of crypto traders in various countries globally, including but not limited to the United States, South Korea, Japan, Russia, Brazil, Indonesia, Turkey, Mexico, India, and Germany. The sixty firms offering crypto investing to retail audiences in our study received a total of 3.92 billion visits during the last quarter of 2021. The location of where the crypto firm registered as its headquarters (or what domicile the firm listed within its Terms of Service document) is what we used to create the tables below and answer questions such as: “What are the geographic areas that crypto exchanges use as base of operations?” and “how significant is the crypto business that originates from firms located in these geographic areas?”
The geographic distribution of crypto activity globally showed that about a third of these firms made the United States its home or its main area of business, compared to 38% that made tax haven locations their home. Tax haven-based exchanges captured 34% of visits to crypto service provider sites, and approximately 86% of global trading volume.
South Korean regulators issued challenging crypto rules that went in effect in 2021 and led to a consolidation from almost 100 exchanges based there to only four with active licenses presently – see below. These regulations required exchanges to pass stringent technology licensing by expert firms in that field and also get one bank sponsorship where the crypto exchange was shown to have suitable methods to track individuals’ identities and tax commitments.
Japan’s approach to crypto regulation since the hack of two prominent crypto exchanges in 2018 – Coincheck and Zaif – has been to encourage the creation of a self-regulating entity, which now has 40 members and sets membership criterion on matters such as safety of hot wallets. The following list of crypto providers in Japan is set to grow as more of these providers are added.
Various European regulators have passed rules governing crypto as a virtual currency service which focuses on anti-money laundering (AML) provisions, following the adoption of the 5th AML Directive on January 2020 which required crypto exchanges and custodian wallet providers to be licensed or registered by every single national authority in the European Union.
Germany’s Bafin is seeking public comment on its intention to ban futures contracts that leave investors owing more money than what they invested initially. Considering that much of crypto trading volume occurs in perpetual futures, which in theory can leave investors on the hook for losses beyond what they initially invested, Forbes reached out to Bafin to clarify its position whether these types of contracts would likely be banned. Bafin clarified that both the crypto exchange provider and crypto contract have to go through tests to determine whether they are exempt from these proposed regulations and need to comply with them.
The U.S. crypto regulatory scene is evolving, with regulators taking on different and sometimes overlapping responsibilities.
The SEC plans to regulate digital assets will considerably increase the cost to remain a U.S.-regulated firm operating under money transmitter entity (MTE) licenses. Some of them will choose to exit the U.S. market, and consolidation will start to take place. Firms that are already accustomed to regulation, such as SEC-regulated broker dealers, will hold an edge over the small and midsize crypto exchanges.
III. “How To” Of Crypto Provider Due Diligence
We close our report with a few actionable tips for prudent investors new to crypto to help them identify warning signs and the right service provider.