There is nothing wrong with this, and indeed it's a good thing.
I want to be clear here, what happened here is already illegal as is, and no regulation would have prevented it from happening in the first place.
Hell, the firm was already being audited, and those auditors didn't catch the accounting discrepancies, so it's doubtful that any additional regulation would have found this earlier either...
i don't think regulation is a good thing when a single person is trading with a single person. but, at some point an exchange becomes so big (they deal, seemingly fairly and with honestly, with many people) where people start to trust it. there is an inflection point where people can take advantage of that part of the human condition. then, you need regulation, not because people are stupid, but because we're human and it is easy to fall victim.
in these cases regulation helps to preserve the trust in the systems. otherwise, people just will not use them, or they will use them in ways that are not beneficial to the group.
We need to have regulation that allows startups to open mini exchanges and banks with easy compliance and unconditional licensing but with heavy restrictions on per customer funds and total funds they are allowed to manage.
The problem is that if you want to open an exchange in say Germany that is practically impossible. You can't get equity or loans for a bank if you don't have a bank license. You need a million or more starting capital to start your own bank. It is a chicken and egg problem.
That leaves a huge hole that unregulated exchanges want to fill and they have a massive competitive edge because they aren't held back by these regulations that are meant for megacorporations.
(like, turbotax really should not have a say in how i file my taxes... or how hard it is...)
You may also take on insurance against such malfeasance on the part of the exchange, increasing your likelihood of recovering your funds. On the plus side insurance agencies now have a financial incentive to ensure the exchanges they insure are honest.
In other words, see centralized entities as the unreliable partner that they are and work accordingly.
It's a balancing act between appearing to be credible/rigorous and maintaining a long-term customer relationship.
Exchanges are not and should not be banks. They should not be comingling their assets with client assets.
Or raise fees.
"I don't make a profit if I don't steal my customers assets" isn't a valid business plan.
Okay, but that’s only half of what OP said. They’re also trading on customer assets. That is an extremely bad thing no matter how you look at it.
That's where the crime comes in.