A prominent economist is advocating for significant reforms in the cryptocurrency markets, suggesting the introduction of rules akin to those applied by the New York Stock Exchange (NYSE) to mitigate severe declines in digital asset values.

On November 6, Alex Krüger expressed on X that the lack of regulated market makers exposes the crypto market to sharp price drops during periods of volatility.

Advocating for Market Maker Regulations

In his post, Krüger pointed out that under traditional finance (TradFi), market makers, who are tasked with providing liquidity, have a legal responsibility to maintain orderly trading.

At the NYSE, these ‘Designated Market Makers’ are obligated to continuously buy and sell specific stocks, even amidst volatile price fluctuations. Nasdaq rules require market makers to adhere to Rule 4613, which mandates the posting of quotes within defined spreads. Failure to comply can result in sanctions from regulators, including the loss of market maker status.

“In crypto, market makers have no regulatory or contractual obligation to provide liquidity,” Krüger stated. Translation: “In crypto, market makers have no regulatory or contractual obligation to provide liquidity.”

His message was clear: “THIS MUST CHANGE.”

The conversation continued, highlighting the intricacies involved in such changes. Tony Pelion, a founder of Pelion Capital, chimed in, agreeing with the need for rules but emphasizing the importance of safeguards. He mentioned that TradFi market makers benefit from protective measures such as ‘circuit breakers,’ which trigger automatic trading pauses when prices fluctuate significantly, allowing them to manage risks.

“Without these MM protections, MMs can suffer horrific losses,” he suggested, arguing that any new responsibilities need to be accompanied by similar safety protocols. Krüger concurred, suggesting that “exchanges can and should implement circuit breakers,” but proposed that remaining inactive is often more beneficial for them.

Community Perspectives and Market Conditions

The discussion expanded, with several users on X questioning the application of traditional finance principles to crypto, dubbing the approach ‘unsophisticated.’ In response, Krüger asserted that the current crypto framework is a major factor in how “exchanges and market makers take advantage of retail traders.”

Some users, however, shifted the blame onto traders, with one insisting that genuine accountability will only commence when market participants abandon their pursuit of high-leverage investments.

Recent developments in the market underline the necessity for stability. Just earlier in the week, the cryptocurrency sector saw a loss exceeding $400 billion in value. According to analysis from the Kobeissi Letter, high leverage played a significant role, with an average of 300,000 traders liquidated daily.

As of now, the market remains volatile, with Bitcoin (BTC) down over 7% in a week, Ethereum (ETH) seeing a near 13% dip, and Ripple’s XRP declining by more than 10%, according to CoinGecko data.