Learn more about why and how market surveillance is being added to the crypto exchanges to demonstrate transparency

1. Crypto Exchanges;
Volume, Surveillance,
and Transparency
The challenges of providing market surveillance to the growing crypto
exchange market to demonstrate transparency

2. Panelists
► Matt Hougan, Director of Research, Bitwise Investments
(@Matt_Hougan)
► Franklin Fitch, Marketing Lead, Beaxy (@beaxyexchange)
► Dermot Harriss, Head of Regulatory Solutions, OneMarketData
(@OneMarketData)
► Moderator, Justin Fry

3. Flow & Themes
1. Intro
2. Current state of the industry/landscape
3. Impacts of mistrust
4. Trust issues/what destroys trust
5. Addressing the trust issues
6. Moving forward/best practices
7. Q&A

4. Three pieces of the puzzle
Market Integrity
Regulatory
Engagement
Market
Transparency
TRUST!

5. The Current State of
the Landscape

6. The Good (adoption, liquidity, products)
• JP Morgan, Facebook launching cryptocurrencies
• ETFs from Bitwise, VanEck/SolidX on the table
• Microsoft and Starbucks invest; AT&T accepts Bitcoin payment
• State laws increasingly favorable to crypto, regulatory clarity on horizon
• New exchanges, coins, tokens, fiat more easily convertible

7. The Bad (thefts, hacks, bankruptcies,
liquidity failures)
• Binance hacked for 40 million
• Cryptopia hacked forcing liquidation
• QuadrigaCX CEO ‘dies’ under mysterious circumstances, funds
lost
• Liqui exchange closes citing lack of liquidity
• Scandal around stablecoin Tether and Bitfinex
• Maplechange 5 million dollar hack
• Widely reported fake volume across exchange landscape

8. CoinMarketCap Top
Exchanges
Data Source: Coinmarketcap. March 4-8,
2019
Exchange
Breakdown
Reported: ~$6 Billion in Avg. 24hr Daily Volume*
* Only counting trading volumes where BTC trades against fiat currencies or
stablecoins.
Top Bitcoin Exchanges by Reported Volume
Reported volume adds to roughly $6 billion/day*, but under the hood the exchanges that report the highest volumes are
unrecognizable. The vast majority of this reported volume is fake and/or non-economic wash trading.
Screenshot: Coinmarketcap on March 9,
2019

9. Only Ten Exchanges Have Actual Volume
Just 10 of the 81 top exchanges are revealed to have actual volume**
** Korean exchanges were excluded from this analysis because they are an isolated market that trades at different prices due to capital restrictions.
One other exchange we examined—CEX.IO—passed our tests and appears to be reporting real volume, but it was too small (less than $1M ADV) to
include in this group.
$110M* $38M* $31M* $31M* $27M*
$14M* $8M* $6M* $5M* $1.4M*
* Average Daily Volume. Data Source: Kaiko. March 4-8,
2019

10. Where Would You Look To Trade Or List?
Volume inflation is familiar to any self-reported league table (dark pools, etc.). But in crypto, the
incentive to inflate volume is pernicious and strong: Exchanges that appear at the top of the lists used
by leading media organizations can attract listing fees (often millions of dollars) from ICOs and alt
coins.
Why Would Exchanges Exaggerate Volume?
“Cryptocurrency Exchanges Are Making Millions from
Just Listing Coins”
- Bitcoin.com, March 12, 2018
“The market price to list a crypto token on an
exchange is $1 million for a reasonably regarded
token, to $3 million for an opportunity to get quick
liquidity.”
- Autonomous Next, April 3, 2018
Screenshot Source: CoinMarketCap.com. March 9., 2019
Bitcoin.com: “Cryptocurrency Exchanges Are Making Millions From Just Listing Coins,” March 12, 2018
Autonomous Next:: “CRYPTO: Token and Coin Exchange Listing Fees,” April 3, 2018.

11. Exchanges in Generations
From artisanal to scalable markets
► Early and Kept Developing: Coinbase, Kraken, Gemini
► Early and Didn’t Keep Developing: KuCoin, Binance

12. Impacts of Mistrust

13. New financial products are stalled

14. New traders
hesitant to
move in

15. Exchange Selection Considerations:
traders and investors discriminate!
► Reputation
► Fees
► Payment
► Verification
► Custody solutions
► Geo
► Integrated post-trade services
► Real volume
► Market performance
► SECURITY AND SURVEILLANCE!

16. What Destroys Trust?

17. Lack of Transparency
► Access to high-quality quote and transactions data
► Transparent standards needed for de-listing coins
► Crypto exchanges needed for conversion … BUT single points of failure
► Valuation techniques are still emerging and evolving
► Hacks are a BIG concern … harms anonymity and dis-intermediation
► “Name” venues (CME, ICE, Nasdaq) viewed as most transparent
► “Wash” trading (Illegal in US) accounts much of volume for the top 25 bitcoin
trading pairs – creates difficulty in valuation and mistrust
► Little regulation where most of the volume is

18. ► High risk due to exposure to anonymity (Coin Firm 2019 study reports low
implementation of KYC and AML procedures)
► Exchanges with licenses and established policies, surveillance technology
significantly lower risk
► Less than 15% of crypto exchanges are licensed by regulators
► Licensed venues have majority of volume share, as it does exist
► Lack of regulatory clarity is prevalent – the push for oversight is driven by
trading and participation demand
Lack of Regulation

19. Reported Volume:
~$6B
Actual Volume:
$273M
4.5
%
Source: Coinmarketcap. March 4-8,
2019.
Source: Kaiko. March 4-8,
2019.
Total Volume Is Considerably Less Than Reported

20. What should be an extremely tight
market is far from it
Public perception holds that the bitcoin
market is in fact uniquely disorderly and
inefficient.
This is a rational response to the
information most people have at their
disposal.
For example, leading data aggregators
show prices on different exchanges
separated by hundreds of dollars.

21. Only a few crypto exchanges have effective
surveillance or best-in-class security
New crypto exchange Beaxy thwarts
sim-swap hack

22. Addressing the Trust
Issues

23. Four qualities to compare exchanges
► Volume & Trade Data
Analysis
► Licensure and
Regulatory Status
► Development of
Platform & Markets
► Transparency and
Surveillance

24. The Good: Coinbase, Gemini
Volumes are strong (top 50 adjusted
on CoinMarketCap) but have been
surpassed by unknown exchanges
faking volume.
Gemini and Coinbase are two of the
7 exchanges to possess a bitlicense,
and are otherwise comprehensively
licensed. Each maintains close
communication with regulators.
Each of these exchanges caters to
customers globally, not just in local
markets, and has expanded their
product offering. An example of this
is Coinbase opening Coinbase Pro.
Both exchanges are widely regarded
as leaders in transparency. Gemini
recently made waves, announcing
itself as one of 7 markets using
NASDAQ surveillance tools.

25. Trade Size Histograms For Well-Known
Exchanges Show Natural Patterns
These histograms show the percentage of volume that is captured within each trade size bucket (0-0.1 BTC, 0.1-0.2 BTC,
etc). They reveal consistent, intuitive patterns: Percentage weight in each bucket declines as trade size increases, and there
are noticeable peaks at whole bitcoin sizes (1, 2, 3, etc.). X-axis is from 0 to 10 BTC.
Poloniex ($1.4M*)
Coinbase ($27M*) Kraken ($31M*) Bitstamp ($31M*)
Bittrex ($5M*) bitFlyer ($13M*)
*Average Daily Volume. Source: Kaiko. March 4-8,
2019.
Graph Source: Bitwise. March 4-8, 2019.

26. Trade Size Histograms For Well-Known
Exchanges Show Natural Patterns
These histograms show the percentage of volume that is captured within each trade size bucket (0-0.1 BTC, 0.1-0.2 BTC, etc).
They reveal consistent, intuitive patterns: Percentage weight in each bucket declines as trade size increases, and there are
noticeable peaks at whole bitcoin sizes (1, 2, 3, etc). X-axis is from 0 to 10 BTC.
Coinbase ($27M*)

27. The Bad: CoinBene, EXX
Trade histograms and volume
analysis reveal suspect patterns
Markets are localized overseas and
exist without relevant licensure
Trading platforms offer no
noteworthy features or tools that
would explain such high volumes
Each of these exchanges comes with
a bad reputation or no recognition,
and employs no market surveillance

28. Trade Size Histograms For Suspect Exchanges
Trade Size Histograms for exchanges with suspicious volume look completely different, and showcase patterns that are both
idiosyncratic and highly suspicious.
LBank ($127M*)CoinBene ($480M*) IDAX ($163M*)
OKEx ($152M*)BitForex ($241M*) Exrates ($35M*)
*Average Daily Volume. Source: CoinMarketCap. March 4-8,
2019.
Graph Source: Bitwise. March 4-8, 2019.

29. Trade Size Histograms For Suspect Exchanges
Trade Size Histograms for exchanges with suspicious volume look completely different, and showcase patterns that are both
idiosyncratic and highly suspicious.
CoinBene ($480M*)
*Average Daily Volume. Source: CoinMarketCap. March 4-8,
2019.
Graph Source: Bitwise. March 4-8, 2019.

30. Examining Multiple Data Points: CoinBene
Now that we know three ways we can spot exchanges with fake volume, let’s look at a few of the top exchanges holistically.
CoinBene claims the highest ADV ($480M) of any bitcoin spot exchange.
Trade Size Histogram shows an odd bell curve-
like distribution. It also has no peaks at whole
bitcoin quantities.
There aren’t any notable volume spikes
and the peaks do not align with any other
market. Hourly volume also rarely falls
meaningfully close to zero, unlike the
pattern exhibited by well-known
exchanges.
CoinBene's average and peak spreads are
unreasonably high, upwards of $100. This is only
plausible in a thin market, which contradicts
CoinBene’s claim of high volume.
CoinBene fails all three data analyses. We believe its volume is fabricated.
*Average Daily Volume. Source: CoinMarketCap. March 4-8,
2019.
Graph Source: Bitwise. March 4-8, 2019.

31. Applying All Three Analyses: EXX
Let’s look at another exchange. EXX has a reported ADV of $247M.
Trade Size Histogram shows highly concentrated
volume on 0-0.1 BTC (over 50%) and does not
show any spikes of volume on round numbers.
Volume spikes do not align with any other
market. There’s also an odd U-shaped
valley of volume mid-week.
EXX’s spread converges to around $6, never
goes above $12, and rarely goes to $0. For an
exchange with such high volume, this seems
unlikely unless the market is truly very thin.
EXX, another of the top exchanges by ADV, again fails all three data analyses. We believe its volume is
fabricated.
*Average Daily Volume. Source: CoinMarketCap. March 4-8,
2019.
Graph Source: Bitwise. March 4-8, 2019.

34. How Beaxy is addressing
these market issues

35. What is Beaxy?
► Beaxy is a spot cryptocurrency exchange built in collaboration with
OMD
► Matching engine achieving never before seen performance in the
industry, clocking 250k tps
► Key features include advanced order types, sophisticated security,
multiple wallets per currency, profit/loss calculators and more

36. How does Beaxy approach transparency
and compliance?
► KYC/AML is mandatory for users, a best practice the industry is slowly but
surely adopting
► We put community first, maintaining an open dialogue with users through
channels like Discord and Twitter
► Pursuit of full licensure like Money Transmitters, ATS etc. is also a key
component
► Last but certainly not least, market surveillance through our partners at
OneTick

37. Challenges Beaxy faces in pursuit of
transparency and compliance
► User acquisition is challenging in an industry where users view KYC as a
breach of privacy and anonymity
► Maintaining a community and communicating transparently requires
constant effort and attention to detail
► Full licensure as an exchange is expensive and time consuming, limits
opportunity and agility
► Market surveillance data requires proper reporting structure, and users
must be educated on why it’s important as they often don’t know

38. Best Practices Moving
Forward

39. State of Crypto Exchanges
► Catch Up Needed:
► Trade and Market Surveillance Technology implementation
► KYC/AML procedures
► Increased compliance practices and licensure
► Transparency and valuation improvements
► Progress Made:
► Recognition of the effects of lack of compliance and transparency, and
resulting efforts to explore or adopt additional practices
► Increased licensure
► Increased KYC/AML adoption
► Crypto Excels at…
► Market adoption – in trading and compliance
► Openness to new solutions and technology, including vendor solutions
► Willingness to listen to market participant demands – as participation
fuels value

40. Webinar Questions

41. Webinar Questions
► Beaxy
► What makes Beaxy unique outside of their commitment to real volume?
► How else does Beaxy differentiate itself from competitors?
► Why did OneTick and Beaxy originally decide to work together?
► How would Beaxy defend against the recent Binance coin theft?
► General
► What changes can exchanges make to be more compliant and legitimate?
► Are institutional traders trading directly or indirectly on these exchanges, i.e., via
intermediaries?
► Will typical financial service providers (Broadway, Fidelity, Trading Technologies, Fidessa,
etc.) usurp all current crypto-oriented Capital Markets Companies?
► Are crypto exchanges for the frontier and emerging markets?
► Do tokens represent the future of crypto industry?
► What is the main source of volume in traditional finance and how is this different in
crypto?
► What conditions must occur for a stock exchange to consider adopting crypto currency
and blockchain & distributed ledger technology as part of product offerings?

42. Contact Info and Learn more
► Matt Hougan, (@Matt_Hougan),
www.bitwiseinvestments.com
► Franklin Fitch, (@beaxyexchange),
www.beaxy.com
► Dermot Harriss, (@OneMarketData),
www.onemarketdata.com