How to build your own crypto exchange business?

November 09, 2018
Darya Karatkevich

The cryptocurrency industry has created lots of lucrative opportunities, but one of the most profitable, and as you’ll see, the easiest to get into is starting a crypto exchange. Launched just over a year ago, the Binance exchange expects to haul in over $1 billion for 2018. As you might imagine, that means a rush to join the market to get a piece of this pie.

Crypto exchange guide

First off, a simple definition – cryptocurrency is digital money, traded and stored according to an ever-growing blockchain that records and can recall every transaction from the moment it was started. The thing that makes it so unique is that this data is stored and corroborated on all the users’ computers, not just a central one. This makes fraud, theft, and hacking a thing of the past. A crypto exchange is a website or app where people can trade fiat currency for crypto and vice versa, as well as trade between different types of crypto.

Below, we’ll discuss some considerations you’ll need to make before starting an exchange business. Then we’ll cover the best ways to develop or apply existing technology to roll out your product. We’ll discuss security, liquidity, and even branding. So let’s dive in and go over how you can start a lucrative cryptocurrency exchange business.

Choose a geographical jurisdiction

Every country is treating the growth of blockchain and cryptocurrency trading sites differently. Some are embracing the tech like the future-defining breakthrough that it is. Others are resisting the change and hanging on to legacy institutions through heavy regulations. You’ll want to choose a location for your business (and to serve customers), where you’ll not only be able to have flexibility now, but also in the future.

Also, it’s important to consider the tax structures in the location you choose for your headquarters. Many different locations have drastically different tax laws, so do your research.

Make sure you know and comply with all applicable regulations

If you’ve done your research thoroughly in step one, you’ll already have a good feel for the regulations in your chosen jurisdiction. The next step is to really formalize your knowledge, create a compliance plan, and consider hiring counsel that is familiar with the laws of the jurisdiction.

This will be a difficult and time-consuming task, but you need to make sure that you have peerless understanding of the laws and regulations and an air-tight plan to conform to and keep track of them. You can have the best, easiest-to-use exchange on the planet but your customers will be trusting you to have done this homework. So do it.

Develop or source software and apps for your exchange

There are a few different software components you’ll need to develop or source. Many great solutions are out there which offer ‘white label’ software and technology development to help you hit the ground running. Make sure you understand and trust the security and compliance features built into the software.

You’ll need several key software systems if you choose to develop it yourself. You’ll need a user interface, a trading engine, and a wallet. Another potential need is for an admin panel to allow your team to manage user accounts. This is where your customer service team will work from.

Choosing to build your own platform will result in quite a long time-to-market for your startup, and require you to look for a tech team well-versed in blockchain specifically before you can roll out a product. This will require significant startup capital, so going for a white-label solution may be a rational way to reduce both time-to-market and your total cost of ownership.   

Form partnerships with financial institutions

To be able to facilitate fiat currency purchases, you’ll need to enter into partnerships with financial institutions such as banks or payment processors. This is key to allow your customers to use fiat currency to buy digital currencies. If your exchange only allows for transacting between different crypto assets, you’ll limit your customer base.

How to start your crypto exchange

You should be looking for financial institutions that have fast clearance, processing, and settlement times. Probably the hardest thing to look for in an institution to partner with is one that is open to working with a digital currency company. Many legacy institutions are afraid of doing this type of business. Look for blockchain-friendly ones, which thankfully are now increasing every single day.

Focus on security

Security is absolutely critical, because nothing will lead to losing customers faster than data breaches or digital currency theft. Make sure you protect user data as it’s often a back-door way where thieves find keys and passwords that they can use to complete fraudulent transactions.

Your security strategy should be the thing that keeps you up at night, and is the first and last thing you think about when building your business. Always make sure your software is up-to-date and hire or contract security experts to test your systems. Also, you should educate your customers on ways to protect their sensitive information to keep their currency secure.

Robust customer service

As much as your software will run most of the transactions in your system, you want to have adequate customer service – whether it’s phone support, chat support, or online guides – to ensure that when a customer has a question or a technical glitch pops up, they can get timely assistance. Customer service can also help with compliance.

Manage your liquidity carefully

The hardest time for liquidity is just upon launching your exchange. You’ll have to spend a bunch of your startup capital developing and fine-tuning your interface and exchange, on compliance and security, and of course marketing and promotion. But now, once people are using your exchange, you’ll need sufficient liquidity to be able to settle customer orders when they sell off an asset.

An alternative to raising startup capital is to use APIs (application programming interfaces) to connect to a bigger and more established exchange in order to give the impression of greater liquidity. You can also join an exchange network. These exchanges use the trading activity of all the members of the network to generate liquidity. This can give you an advantage to other startups.

Create a unique user experience

Besides complying with AML/KYC regulations, critical due to increased scrutiny and regulation of the cryptocurrency industry, the ‘look and feel’ of your exchange is critical. You want it to be easy to use, simple and clean in design, and intuitive to understand. Really, all of the topics we’ve covered are important in creating a successful exchange. Take the time to make a solid plan for each, and your chances of success skyrocket.

Take steps to curtail illegal activity

The decentralized and underground nature of the current crypto market does attract people looking to circumvent the law. Ensuring your business is in full compliance with applicable AML and KYC rules will help you identify these problems.

Look into The Fourth Money Laundering Directive and The Financial Action Task Force recommendations – they will help you develop better AML policies, procedures, and controls – a key to helping build good relationships with banks, and establishing Enhanced Due Diligence (EDD) thresholds.

While there are lots of considerations in starting a crypto trading platform, you can take advantage of lots of the work already done by others. Choosing white-label solutions that you can brand is the fastest way to get off the ground. No matter what, keep compliance, security, and liquidity in mind.

Post written by Darya Karatkevich
Darya is a blockchain market observer with 5+ years of experience as an author and editor for major tech blogging platforms. Her fortes are blockchain technologies and solutions, cryptocurrencies and crypto-related regulations.

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