Crypto-landscape has undergone numerous changes and turbulent times in its early days. This young industry has taken the world by storm by introducing a new way to interact with the digital environment.
A cryptocurrency exchange is a platform that allows users to buy/sell various tokens. It’s similar to the stock exchange, but instead of stocks, you buy or sell cryptocurrencies. Below we will look at the main steps that an interested investor needs to implement efficient crypto exchange setup.
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Table of Contents
Setting Up a Crypto Exchange: Legal and Regulatory Compliance
Most of these platforms are designed like traditional trading rooms, presenting extensive panels filled with important information and trading options. Digital dashboards contain various information related to the cryptocurrency market, including price movements, various analytical charts, and quotes for the most popular trading pairs.
Every platform includes a basic option for directly buying or selling cryptocurrency, but many platforms go beyond this simple concept. Despite the volatility of major cryptocurrencies, this market is expanding, providing opportunities for enthusiasts to grow the industry or simply make a profit. The easiest way to make money on cryptocurrencies is to invest in any coin and speculate on the volatility of rates.
The choice of jurisdiction to launch a crypto exchange determines laws and trends, including taxation, accounting and business management. Regulatory conditions can vary widely across regions, ranging from a clear set of rules to prohibition or no regulation at all.
And, although at first glance the latter option may seem attractive, remember that sooner or later this legislative gap may be filled, and not necessarily in favor of your business, regardless of the specifics of your business.
In any case, it should be noted that the first thing to do is to study all the legal aspects associated with licensing crypto exchanges. Make sure that all regulatory requirements are met. A license in the digital asset industry will be required for all jurisdictions. Most reputable cryptocurrency platforms currently operate under the supervision of financial regulators.
In addition, exchanges are required to implement the “Know your customer” system aimed at combating money laundering. The rules may vary in each jurisdiction. Therefore, it is important to thoroughly understand this issue by consulting with our lawyer who understands the specifics of this field of activity.
In order to start engaging in crypto activities, a company must become a registered official part of the chosen jurisdiction with the right to carry out one or more types of activities provided for by individual regulations of the world cryptocurrency communities. To obtain the status of a registered company, you must provide an extensive package of documents, the key ones of which are:
- a business project planned for implementation as an officially registered crypto exchange;
- auditor’s report on the company’s compliance with the requirements.
A business project, as a rule, is developed by the company independently; it reflects many aspects of future activities and the level of preparedness for its conduct. Naturally, the company cannot prepare an audit report on its own, and it cannot do without auditors. At the same time, the legislation determines that one of the third-party companies can carry out the audit.
Technology Infrastructure Development, Liquidity Management and Asset Integration
The first step when starting your own cryptocurrency exchange from scratch is choosing the type of trading platform you plan to create. This is important because the choice of platform determines the mechanism for exchanging cryptocurrencies, the method of storing them, crypto liquidity management, the ability to trade fiat and other functions.
- Centralized exchanges (CEX). The most common type of trading platforms, the main feature of which is the presence of a centralized operator responsible for the security, updates and functionality of the exchange. The main advantages of centralized platforms are the speed of crypto transactions and the absence of problems with liquidity.
- Decentralized exchanges (DEX). Such platforms bring sellers and buyers of cryptocurrency together, giving them the opportunity to automatically exchange assets without the participation of intermediaries to validate the transaction. The role of the guarantor of the transaction is assumed by the platform’s smart contracts, which operate on the basis of open source software.
- Hybrid. This is a relatively new phenomenon. Such platforms contain features of centralized and decentralized exchanges. The most popular are Nash and Qurrex. They provide security and good speed of transactions, but cannot boast of large trading volumes and high liquidity.
The best platforms offer advanced trading mechanisms such as margin trading and derivatives. Some platforms provide automated trading capabilities, including mirror trading and copy trading, for the convenience of new traders. Thus, the newly minted sector of crypto exchanges is already diverse and competitive, offering traders and investors many options. This young market shows no signs of slowing down, growing with a growing audience around the world.
Choosing software is one of the fundamental tasks critical to launching a cryptocurrency business with a sustainable development perspective. The software is responsible for executing transactions on your exchange, wallet transactions, deposits and withdrawals, and so on. Your choice here determines the final cost of the technical solution and the time required to launch the exchange.
Crypto exchange architecture is as next-mentioned.
- Matching engine. The matching engine is the core of the exchange. It is a system that collects all open buy and sell orders and matches them to ensure trade execution.
- Wallets. Crypto-wallets allow you to store, deposit and withdraw cryptocurrency. There are both multi-currency wallets and those that can only work with one type of cryptocurrency. A functional crypto-business model requires fiat gateways for depositing and withdrawing fiat money, as well as a security system that will ensure the safe storage of user funds.
- Admin panel. The admin panel is designed to monitor the entire trading system, including wallets and transactions. This tool also serves to customize your site and add new features that you may need as your business grows.
- Trading platform. A trading platform is software that allows traders to place orders and manage their trading accounts. The popularity of the exchange among users largely depends on the ease of use of the platform.
- User account. The user account is a portal where exchange clients can manage their funds. The account allows you to register and check your account, deposit and withdraw funds, as well as use available reporting and analytics tools.
Criteria for a reliable crypto-exchange site is next-mentioned:
- two-factor authentication;
- notifications via SMS or email;
- user-friendly interface;
- 24/7 technical support;
- encrypted emails;
- electronic access keys;
- high trading activity;
- protection against hacker attacks.
The popularity and success of a crypto-exchange is also indicated by reviews, ratings, exchange rates, and commissions. Users are attracted to sites with clear navigation, affordable rates and a small percentage of transactions.
Payment Processing and Security
The payment system for asset integration that is used on a particular crypto exchange has its own distinctive characteristics in comparison with the usual similar elements for other exchanges. They differ in settlement time, fraud protection, commission and rates. It is better to choose options with affordable rates and low interest rates.
All these components are important for the normal operation of the crypto exchange, the protection of user funds, the speed and reliability of transactions. The platform level is determined not only by trading volume.
Each payment system has its own characteristics and rules. Choose options with affordable rates and low commissions. This will allow you to compete with other similar projects. Payment systems also differ in settlement time, compliance with PCI DSS, methods and tools for protection against fraudsters. In the latter, it will be possible to integrate a payment gateway for digital currencies, which will allow your users to process electronic assets.
Trading commissions are the easiest way to earn a sustainable income. To do this, it is necessary to create favorable conditions for constant trading and attract a large number of active participants. After all, only real traders can form commissions. Moreover, the higher the average transaction amount, the more the exchange will earn.
Commissions can range from 0.2% to 8% of the transaction, depending on the site. In addition to a percentage of transactions, participants pay for the withdrawal service. The amount of such commissions depends on the assets, amount and type of transfer. At the same time, some charge a fixed price for the service, while others, most often young platforms, refuse it altogether in an attempt to attract a new audience.
An important element is also to implement effective security measures and ensure complete protection for users and traders. Digital currencies are always under the radar of the cybercriminal world. As a result, exchanges remain vulnerable to their actions. Security for a cryptocurrency exchange is one of the key factors.
Dedicate maximum time and resources to solving this problem. Measures aimed at maintaining the required level of security may include a system of cold, warm and hot wallets, as well as two-factor authentication, database encryption and anti-phishing functions. Any confidential information and client funds must be reliably protected.
Even a minor vulnerability can cause serious problems. It is impossible to create a security system that can completely eliminate unpleasant and risky situations. But you need to find a good specialist who can minimize risks and protect client assets from hacker attacks.
To do this, you will have to design a complex security architecture that meets banking standards. Much will depend on how high-quality the code is used by the site. If it was compiled by amateurs, the likelihood of emptying client accounts will increase many times over. That is, an attempt to save on specialists, software and security of a crypto exchange can lead to complete failure of the project.
Marketing Strategy Evolving and Launch
Marketing is the most difficult expense item to predict, as it highly depends on the starting positions and strategy of the exchange. If the owners and top management have large future clients at the start, then you don’t have to spend money on marketing. If the exchange is focused on the retail market, then the marketing costs will be significant.
Most likely, the marketing strategy of the new company will be based on conducting experiments to divide campaigns into successful and unsuccessful ones, followed by scaling the former.
After the full launch of the cryptocurrency exchange, you still have to solve many problems. The software needs to be supported, updated in a timely manner, engaged in marketing and further developing the project.
At the initial stage, liquidity will have to be artificially increased. This problem is faced by all new exchanges where there is no real trading activity. If it is not resolved, users will not want to top up accounts, place orders and build combinations on this site, but will choose a more promoted project. To avoid customer churn, you can use different techniques:
- conduct fictitious transactions with fictitious participants to simulate activity;
- connect the exchange to another platform using the API interface;
- join an exchange network where the trading activity of many platforms intersects.
It is extremely difficult to cope with this task on your own. The most profitable thing is to choose a ready-made solution that has all the properties and qualities without which a cryptocurrency exchange will not be able to operate fully and profitably. We can help you implement this idea.
So, the exchange allows you to carry out large volumes of transactions and engage in trading on an ongoing basis. And in combination with small commissions, it gives more opportunities to earn money on digital currencies. That’s why crypto exchanges are in high demand among both professionals and beginners. Therefore, the opening of such a project is quite promising and far-sighted for lucrative entrepreneurship opportunities.
Our team will professionally cope with any task. We are focused on the best and most effective results for our clients. We are already waiting for you and ready for strong cooperation.
Article’s author is Denys Chernyshov – founder and CEO of the globally-famous organization Eternity Law International.