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Blockchain and finance in 2019
The Economics of Cryptocurrency Delisting
Cryptocurrency delisting has been a phenomenon in the market since the advent of digital assets. Given that there are thousands of coins and tokens being listed in hundreds of cryptocurrency exchange in the cryptocurrency universe, certain coins are bound to fall through the cracks. Just as certain stocks in the traditional financial markets are occasionally delisted from a stock exchange due to non-compliance, cryptocurrencies are similarly susceptible. There are various reasons that contribute to delisting traditionally; bankruptcy, discontinuation, mergers and acquisitions (M&A) and non-adherence to listing requirements. Although the factors underpinning cryptocurrency delisting are conceptually different than stocks, there are a few nuanced similarities.
This article will take a deep dive into the economics of cryptocurrency delisting and the underlying factors behind the phenomenon.
What is Cryptocurrency Delisting?
Delisting refers to the removal of a cryptocurrency (coin or token) or a trading pair (e.g. LTC/XMR) from a cryptocurrency exchange. The act of delisting can occur voluntarily from the request of the project managing the cryptocurrency itself, due to certain reasons such as project discontinuation. Alternatively, a more common reason for (involuntarily) delisting is due to the cryptocurrency no longer upholding the various listing requirements established by the exchange.
Various major exchanges have periodically announced delisting of coins and tokens either voluntarily or involuntarily, regularly sieving out their offerings through the act of delisting.
Criteria for Delisting
There are several factors that can lead to the delisting of a coin from an exchange.
There is still a grey area throughout the global regulatory landscape when it comes to digital assets. While governments around the world are still trying to understand digital currencies and its implications, no comprehensive and dynamic set of regulations has been publicly established and enforced. This has blurred the status of cryptocurrency exchanges that are offering coins and tokens to the wider public. However, in the pursuit of long-term sustenance, cryptocurrency exchanges – particularly those based in the United States – are assuming the responsibility of self-regulation by ensuring that their operations closely adhere to general guidelines or any semblance of legal form insinuated by regulatory bodies. For example, the Securities and Exchange Commission (SEC) in the US has published a set of guidelines defining cryptocurrencies which has clarified the demarcation of a cryptocurrency as assuming the capacity of a security, a currency or a commodity. With that in mind, cryptocurrency exchanges based and licensed in the USA are internally required to adhere to said guidelines by ensuring that no security coins or tokens should be listed on their platform, to avoid regulatory scrutiny around securities regulations. The SEC-issued guidelines are not legally mandated or enforced, but cryptocurrency exchanges are not taking any chances, with several exchanges known to regularly delist coins and tokens that could be classified as security tokens.
Low Volume and Liquidity
The core business of a cryptocurrency exchange is extracting trading fees and a slew of other fees (e.g. withdrawal fees). Whenever a user buys or sells a cryptocurrency on the exchange, a trading fee is charged. With millions of trades being executed on a daily basis, there is a strong incentive for exchanges to support (and continue to support) coins with a high trading volume. A cryptocurrency with high trading volume equates to a high degree of liquidity, implying that it is a widely popular coin that users trade. Coins with declining volume and low liquidity implies a coin that has lost its appeal among users, which validates its exclusion from the exchange. Supporting a coin or token on the exchange requires economic resources that needs to be employed by the exchange, and if the coin has low liquidity, it does not make financial sense for the exchange to continue supporting the coin. Given the quantity of interesting coins and tokens being created on a daily basis, delisting coins which do not seem to hold much potential is viable to ‘free up the spots’ and allocate precious resources into maintaining them.
Non-Adherence to Listing Requirements
Listing on any exchange entails a set of requirements by which the project must abide. Failure to adhere to these requirements can result in delisting of the coin. Among the main factors for deciding to delist from an exchange include:
- General team commitment of the project
- Activeness, quality and level of development activity
- Network stability and security
- Degree of external communications by the team
- Responsiveness of due diligence request from exchange
- Cases of fraudulent or unethical instances
There are many other factors which are native to the exchange itself. Given that cryptocurrency exchanges are pivoting towards adherence to regulations, active and effective enforcement of its criteria is a vital component in ensuring long-term viability of their business. Hosting coins or tokens that go against the exchange’s requirements and policy could pose a reputational and even a legal risk for cryptocurrency exchanges.
Security is the topmost consideration for any project given the digital nature of operations, especially at the nascent stage of blockchain technology. It comes to no surprise that any major technical and security vulnerabilities could risk delisting of the project from an exchange. If security vulnerability or technical ambiguity in the coin’s network – such as a 51% attack – is discovered by the cryptocurrency exchange’s in-house developers, actions must be undertaken to protect holders of the coin. This entails constant back and forth between the exchange and the project team members, and if the response of the team’s developers are subpar, a delisting is likely to be set in motion, for example, Bitcoin Gold (BTG) was recently delisted from an exchange following a 51% attack on its network.
Effects of Delisting
Any cryptocurrency that experiences delisting from a cryptocurrency exchange – particularly large exchanges – could suffer devastating impacts that may compromise the project.
1. Price Depreciation
The most obvious effect is the sharp decrease in prices when the announcement is made. Usually, there will be an initial announcement with the aim of delisting several coins that are currently actively traded on the exchange. The exchange would give a lead time of two or three weeks for holders of the coin to prepare for the delisting, until which the cryptocurrency would be permanently removed from the exchange and there will be no more trading support for the coin. Coins could lose 20% to more than 50% of their value when there is an official announcement from an exchange planning to delist the coin, especially if it is a major exchange where the majority of trading happens.
2. Reduced Liquidity & Volume
The liquidity of a coin is contingent on the amount of trading that occurs; a coin with low liquidity means that there is low trading activity and there are few buy and sell orders for the coin. A coin’s liquidity can also be impacted by the number of exchanges that lists them; if a coin is traded in many exchanges across the cryptocurrency market, the greater the trading volume and the deeper its liquidity.
If a coin is delisted from an exchange the trading volume and depth of liquidity from that exchange will vanish, thereby leading to an overall reduction in the overall trading volume of the coin. This is much worse if the exchange that announces the delisting is where the majority of trading for the coin happens at. With a significantly reduced liquidity, it will further reduce the appeal of the coin towards users, since it is harder to trade the coin since there are lesser exchanges that support trading of said coin.
3. Loss of Credibility
Perhaps a major consequence of delisting is the general loss of faith and credibility of the public towards the project. Generally, a coin is likely to be delisted from a cryptocurrency exchange if there are serious fundamental weaknesses or adverse changes to the project which could lead to issues with its long-term sustainability. Public perception towards a project is one of the core determinants of the appeal and potential success of the coin. Delisting carries a negative perception of the coin and could result in irreversible damage to the reputation and credibility of the project.
The lack of a global and uniform regulatory framework for cryptocurrencies has elevated the role of cryptocurrency exchanges to be the core “stewards” of the industry. In the pursuit of their interest for credibility and long-term sustenance as a legal entity in particular, exchanges have to abide by guidelines issued by major regulatory bodies and institute strict policies and enforcement to ensure that their exchange is not compromised from technical, legal and credibility perspectives. It therefore follows that cryptocurrency exchanges must constantly evaluate the status and progress of coins to ensure that they do not pose a risk to the overall vision established by the exchange.