What To Expect When Starting a Crypto Exchange?
Many companies and entrepreneurs are entering the cryptocurrency market with hopes of leveraging blockchain technology to revolutionize traditional financial institutions. The crypto market, valued at nearly $2 trillion, has become an increasingly lucrative opportunity for investors and technology innovators to create new businesses that meet a growing need for decentralized systems and create cryptocurrency exchanges. However, investors should consider what risks come with this revolutionary idea before investing significant time or money into their company. While cryptocurrencies provide unprecedented freedom and anonymity to their users, they also present unique challenges for those who want to use them as legal tender.
Investors interested in cryptocurrencies should know that the lack of regulation, such as money laundering laws, can make transitioning into the cryptocurrency world difficult for potential investors. While there are many pros to investing in these currencies, such as liquidity and transparency, it’s essential to understand its weaknesses before jumping head first into this market. This article will discuss four key considerations which an investor should consider when starting cryptocurrency exchange: privacy/anonymity, KYC, security, and jurisdiction and licensing.
Privacy/Anonymity
Since the early days of Bitcoin, many governments have attempted to regulate cryptocurrencies due to them being used for illegal activities such as buying and selling drugs on the dark web. While these currencies provide an unprecedented amount of privacy for their users through features like transactions with pseudonyms and unlinkability, they also offer this same level of security to financial criminals who typically avoid centralized banking institutions. Many countries such as China have introduced harsh regulations such as requiring exchanges to reveal users’ identities to prevent money laundering; however, when it comes down to cryptocurrencies, there is no central entity controlling the currency, which makes it much harder to regulate.
KYC
Before you start cryptocurrency exchange, consider the KYC (Know Your Customer) procedures. While cryptocurrencies have mostly avoided any serious regulation, that doesn’t mean that authorities don’t want to control them. Financial regulators are increasingly concerned about illegal activities associated with these currencies since no one entity is responsible for its creation or maintenance, making it difficult for authorities to discover instances of fraud or criminal activity. One way to manage this risk is through Know Your Customer (KYC) procedures which require exchanges or other entities using cryptocurrencies for transactions to track their users’ identities by requiring proof of identity before allowing them to transact on their system. For example, if a company ran a blockchain of a cryptocurrency, the company would be required to follow KYC rules. Whenever a new person transacts with their system, they must identify them. To do this, some companies have started requiring users to provide government IDs, passports, or even pictures of themselves holding up their ID cards on camera before allowing them to use their platforms. While KYC procedures are expensive and time-consuming, there is no doubt that the additional layer of security for individuals who transact on these exchanges helps maintain its legitimacy in the eyes of financial regulators.
Security
When you create your crypto exchange , investors will have another common concern when transacting on your exchange: its security to protect its users’ assets. Since cryptocurrencies are used as investments and as a transactional currency like cash, many exchanges will store their users’ money in hot wallets that allow withdrawals and deposits anytime; however, these online wallets make them less secure since they are under constant attack from hackers. On the other hand, some exchanges take advantage of offline storage where they store their users’ funds by encrypting their private keys and hiding them within USB sticks, hard disks, or even printed papers, making them much harder for hackers to gain access.
Jurisdiction and licensing
Different countries choose to address the regulation of cryptocurrencies and digital asset trading platforms differently, and it is crucial to understand these differences before you start your own crypto exchange. Some countries such as China have released strict regulations that ban trading on real-time exchanges or require entrepreneurs to be held responsible for losing user funds. Other jurisdictions, such as Malta, have sought new legislation protecting citizens from losing their money while allowing companies to innovate within the blockchain industry. Investors need to look at the legal qualifications required within each jurisdiction to determine which are best suited for them when deciding where to begin.
Investors must understand that they are taking on additional risks when trading cryptocurrencies since this space is still in its early stages. There are still several issues facing exchanges. While KYC procedures may help filter out potential scammers or thieves, these measures can also be burdensome for some users who want to remain anonymous. On the other hand, security varies significantly from exchange to exchange, but investors must know which measures their chosen platform has taken before deciding where to trade. Finally, although there are plenty of different regulatory regimes around the world, which situations best suit an investor’s needs will depend largely on their specific situation—as with any investment, understanding these risks is just as important as knowing how to protect yourself against them.
