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- [00:00]
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- [00:57]
Jen
Benchmark provides an institutional grade assessment of digital asset exchanges, measuring risk, market quality, security and regulatory compliance. It evaluates exchanges across eight risk categories using over 100 metrics. In its latest report, Binance snagged a double A rating despite having the highest score for negative events. Joining us now to introduce the benchmark and discuss the latest report is CoinDesk research lead Josh DeVos. Welcome to Markets Daily.
- [01:25]
Josh DeVos
Hi Jen. Thanks for having me.
- [01:27]
Jen
Of course. We have a new product to talk about. We have the CoinDesk exchange benchmark. You and I are going to be unpacking the report a little bit, but first talk to me about what the exchangement bench exchange benchmark is.
- [01:40]
Josh DeVos
Yeah, the Exchange benchmark is something that CC data introduced in 2019. It now falls under CoinDesk. What it is is essentially the most comprehensive counterparty risk assessment for centralized exchanges in the industry. It underpins a core portion of our index products and feeds into our regulatory compliance with FCA authorization. So it's a really, really important product, something that people can look at whenever they like and it'll help you assess which exchanges to to use if you're worried about risk.
- [02:11]
Jen
Okay, Josh. Now, people who watch Markets Daily are really interested in market movements alpha, making sense of what's going on so that they can apply that to their investment strategy. Talk to me about how those investors can use this tool to help enhance what they're already doing.
- [02:27]
Josh DeVos
Yeah, I think there's a lot that retail can take away from this. So it is designed for both retail and institutional and there'll be different use cases and ways that you can manipulate the data for what you're looking for. But if we're thinking about retail, we have multiple categories which you can filter by in the ranking system. Market quality, incredibly important. It'll give you an understanding of which exchanges offer that sort of best execution around volumes and liquidity. If you're interested in learning a little bit more about proof of reserves, the security aspects of these exchanges, I know a lot of retail participants might not have the same opportunities afforded to institutional when it comes to custody. So understanding how these exchanges are holding your assets and keeping them safe is very, very important.
- [03:10]
Jen
On the flip side, let's talk about institutions. How are institutions using the exchange benchmark.
- [03:16]
Josh DeVos
In a similar way? Again, this is a counterparty risk assessment, but with institutions, they are much more focused on that execution angle. I think there's a lot of differentiation, especially in terms of regulatory compliance. So what we do is we've constructed a data set which looks at all of the licenses held by these exchanges where they're held, providing a score for regulators via our partners at Vastnet. So we provide for institutions ways that they can understand which exchanges offer the best execution, the most regulatory compliance and security as well. And we've broken this down into a table which can be easily manipulated and played around with. So it's a very bespoke solution, but everybody can use it.
- [04:00]
Jen
Let's talk about some of the tables in the latest report. This is the April report that we are looking at now. I'm looking at the top five. I see Binance as number one there with a double A score. All of these actually have a double A score. We have Binance, Coinbase, Bitstamp, Kraken, Crypto.com. what goes into scoring these exchanges? What are you looking at? Let's get into the nitty gritty, because I feel like folks who are looking at these scores really want to know what's being taken into consideration so that they can properly weigh their risk appetite.
- [04:32]
Josh DeVos
Yeah, absolutely. It's great question. And what we've tried to do is we've got this comprehensive data set, but we want to make it as easily accessible for people to understand as possible. We have maybe about seven, seven different categories, over 100 metrics, which we look at, we collect data for. And so what we're doing is we're sort of aggregating scores across each of these metrics and the categories within which they exist. And so what you get towards at the end is this sort of total score, which is a cumulative sum of all the scores available in those categories. So depending on what you're looking for, you can filter by category, such as legal regulation, KYC Security, and you can almost make your own sort of total score, depending on which categories you find interesting. But again, we provide that sort of holistic view, collecting all the data.
- [05:18]
Jen
Let's talk about Binance. I'm looking at it, final score of 90.11, double A rating. But I go over to negative events and it has a negative 3, the highest score for that category in the chart. Talk to me about what those negative events are and how that weighs into the score. Like how do I make sense of this if I'm trying to make a decision to use Binance or not?
- [05:39]
Josh DeVos
Yeah, another great question. You can actually find a full methodological site which is available that we make available for people to look at all the individual metrics, how we score it. But focusing on negative events here, the way that we look at this is mostly around is it a major minor negative event? Those are the two different scores you might see -2 and -3 here. In terms of negative events, some of the things we cover any sort of regulatory action that has been enforced and accepted by the exchange, as well as data breaches, any types of hacks, and we always look at the severity of this. We look at the stringency of the regulator applying those penalties. We look at the size of the hacks that have occurred. We look at the amount of people affected by a data breach, for example. So we do have a set of metrics which looks at objectively and independently these, these events.
- [06:29]
Jen
Talk to me about the key findings that maybe surprised you while you were putting this report together.
- [06:36]
Josh DeVos
Oh, that's. I think there's been a couple of really, really improved exchanges, particularly those who submitted due diligence questionnaires to us. This is a really fundamental part of how we collect the data for the exchange benchmark. So we send out a form to all of the exchanges in the benchmark and I think we've actually had our all time high participation in the last edition for exchanges communicating with us. But what it allows us to do is go through all their answers, verify what we put in as data entries and they can provide evidence to support this. So what we saw is a lot of new exchanges submitting these forms to us for the first time and seeing their scores grow as a result. So a couple of key growers, bitvarvo was actually the. The exchange which picked up the highest difference between their last rank and this one. So I think it's worth calling that one out. But in terms of other surprises, I wouldn't say Binance finishing first was a big surprise, but I think with the context of the negative event being applied, that's what was surprising.
- [07:37]
Jen
Talk to me about what's Next, I know that the exchange benchmark just launched. We know that we're going to have these monthly reports that you and I discuss right here on Markets Daily. But what's the bigger vision for this?
- [07:49]
Josh DeVos
Well, the exchange benchmark underpins so much of our index business already. And we know our clients are creating custom indices based off of grades, so some might opt for only AA graded exchanges, for example. But the goal for the exchange benchmark really is to expand and amplify the risks associated with centralized exchanges. We're also trying to work as closely as we can with exchanges in the industry to make sure that they are able to provide us with all of the data we need that we can verify so the scoring is as accurate as possible. So really, our goals here are just to expand the reach of the data set, continue supporting its use in index products, but also building, you know, building a platform for us to communicate with exchanges so that they can contribute to this as much as possible.
- [08:38]
Jen
Data is, I think, probably one of the most important things as this industry continues to mature, as we continue to think how to protect retail investors, how to protect investments, and how to act maybe a little bit like a more mature financial industry. So I think that this is great and I look forward to speaking with you more about the reports to come.
- [09:02]
Josh DeVos
Thanks for having me, Jen. Always a pleasure.