Regulation as a Service

Bitstamp recently upped it's KYC game: The exchange now requires a tons of documentation to allow you trading any amount there. To open an account and start trading you need to provide: Your passport, Proof of residence (some utility bill), You trading history (at other exchanges), Sources of funding (documents such as tax slips), and also you need to fill a questionnaire about your trading activity.

If you thought this is bad, here is one more: It costs 0.5% to trade on Bitstamp; whether you are a maker or a taker. The industry standard seems to be around 0.2-0.1%. Bitstamp is 5 times more expensive and 10 times more burdensome to trade with. Which really begs the question: Is there any reason for Bitstamp to exist?

The answer might be a surprising: Yes

See, centralized exchanges are a dead business. The only reason they exist today is that de-centralized exchanges are still impractical, complicated and very expensive. But this is bound to change: Instantaneous atomic swaps are mostly theoretical for now, but they will become practical in the future. And much cheaper too.

To trade in a centralized exchange, first, you need to send your crypto to the said exchange and entrust its solvency. Then, you can access the pool of liquidity of that exchange, and rely on arbitrage traders to transfer liquidity from other exchanges. Once the trade is completed, you withdraw your converted crypto.

Things are different in a decentralized landscape: You only send your crypto to execute the trade. This means all the pools of liquidity are possible, and if there exists a good interface to trade with, you should be able to get the best price of all these available pools. Once the trade is settled, you don't need to withdraw your crypto: There is no counter-party risk.

This completely flips the story: Most exchanges will have to shutdown eventually. There is no business in being a middle-men for traders, or an arbitrage trader. But Bitstamp will probably survive: It's not exchange after all, it has turned into a regulatory service between crypto, the legacy banking system and the government.

Some players have already got the hint: Shapeshift has already moved to a decentralized trading system with no KYC. With more pressure from regulators and improved efficiency from DEX exchanges, most of today exchanges will have no business model.