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How to Create a Cryptocurrency Exchange

21 June 2019 13:55, UTC
How to Create a Cryptocurrency Exchange
By Massimo Di GIUDA

Cryptocurrency exchanges are constantly appearing. And as you know, where there is great competition, there are high margins. How to create a cryptocurrency exchange from scratch, where to find investors and how long the whole process will last – read about it all in the Bitnewstoday article.

Exchanges or one more way to make money on cryptocurrencies

Interest in cryptocurrency exchanges appeared after the fall of hype on mining, ICO and STO. Infrastructure projects of trade organizations became even more exciting after the development of a new form of crowdfunding – IEO. The exchange is a key player, and IEO cannot exist without it. For founders, it’s more important to know that the exchange, like any intermediary, earns commissions from the seller and the buyer so the business model does not include the market risk of a fall in the price of a cryptocurrency. 0.5% from $1,000 will remain the same amount, regardless of the price of Bitcoin and that is the advantage. This is how crypto exchanges also earn:
  • margin trading. The crypto exchange lends money to trade with leverage, just like a standard broker;
  • subscription to additional information useful for trading (widgets, calculators, training systems, etc.);
  • advertising;
  • API for connecting trading robots (for example, for intra-exchange or inter-exchange arbitration);
  • development and subsequent access to trading in cryptocurrency derivative financial instruments;
  • currency conversion fee;
  • premium accounts;
  • earnings from the sale of its own cryptocurrency as an element of the exchange infrastructure;
  • participation in IEO;
  • listing of new tokens.

As the exchange has no limit on the number of participants, there are large market players who serve the majority of customers. They have optimal conditions, relatively convenient functionality, high liquidity, reliability tested by years, etc. The issue with liquidity is especially acute, since it is actually impossible to find even hundreds of exchanges with 100,000 bitcoins wallets, and this is the main currency in trade pairs with altcoins. Therefore, customers will have to poach users from other exchanges, which is rather hard. Experts also doubt the success of new cryptocurrency exchanges. John FRIGO, Best Price Nutrition:
“What reason does someone have to use your new small unknown exchange over say Binance? The only niche I can see is catering to small coins other exchanges don't want to deal with like SMOKE, but even then there's already a number of small exchanges doing that.”
As a result, a cryptocurrency exchange can successfully develop, earn and attract customers, but it’s not possible to relax and make a profit. It is hard work at the moment, as like in many other industries, there are not too many successful projects from the whole mass.

The choice of jurisdiction and company setup

The issue of regulation of cryptocurrency, tokens and blockchain remains an open question in many countries. How to create a crypto exchange lawfully? Before you register a company, you need to understand the local legislation. It can be done in some different ways:
  • hire lawyers;
  • read forums;
  • look through exchanges and choose one of the most popular jurisdictions;
  • study legislation and market practice

The pros and cons of each method are obvious. Either expensive, fast and reliable, or budgetary, this process will take more time. BNT editors have read forums, analyzed the market and interviewed experts. That's what they said.

The advisor of the Pelican company Ian COGSWELL:
“The best country to start would be one where cryptos are legal and the living is cheap. Estonia, Malta, Belarus, Iceland, France, and many South American nations are good places to look on the basis of legality and the cost of electricity.”
Akim ARKHIPOV, CEO of Basis ID:
“The most convenient location for a legal entity is, of course, Cyprus, and the CySEC regulatory zone because it’s very easy to ensure legal compliance there of working with clients from all over the world.”
18.07.2018  |   in ICO
Malta occurs frequently in the reports of experts – for example, the first ICCO in the history from the Palladium company was held there. We can also mention Hong Kong, Switzerland and Singapore – the selection of countries shouldn’t be underestimated. Sometimes you have to spend 3–6 months in the offices with your documents, but to secure a legal basis for your business. Although not everyone has such a goal.

For some companies, it’s easier to take shelter in offshore, where local authorities do not impose special requirements on cryptocurrency transactions. In this case, we must bear in mind that the opinion of the regulator may change and things that had been previously permitted would be prohibited. Therefore, after choosing a jurisdiction and registering a legal entity, it is necessary to continue to monitor the situation and communicate on this topic with other founders or experts in order to re-register the legal entity in advance, rather than after adopting a new anti-script law.

A particular problem occurs with American customers, as the US financial regulator causes lots of problems throughout the industry. In the United States, it’s better to register a company in Delaware or California. The cost of licensing in the USA is probably one of the highest. Kyle ASMAN, partner and co-founder of BX3 Capital:
“In the US, you have to register as a money transmitter with FinCen, then again with all of the states where you plan to do business. If you are at all considering trading security tokens, you will also need a partner who is a broker-dealer or hire one.”

Selection of team and software

When the matter on jurisdiction is closed, you need to deal with servers and software. So, how to set up a crypto exchange and choose equipment that won’t fail? There are two fundamentally different approaches: develop the software yourself or buy a cloud service. The second method is cheaper and faster. For seasoned pros, the launch on third-party servers will take a little more than a week. Making your own unique code is much more expensive, and if you don’t understand how to structure the work, then you can spend several years and still not to become a good developer.

Fortunately, there are already a lot of specialists on the market with experience not only in writing blockchain architecture but also in the practice of creating exchanges. Only at CoinMarketCap there are 250 of them. Often vacancies on Upwork come across, you can look at the necessary skills and find the right specialist using the same algorithm, or rather a development team at once. At the same time ask the price. Chris SKORDIS, Editor in Chief at InsideBitcoins, told about staff needed to create the crypto exchange:
“At least 10. CEO, CTO, Co-Founder, Product Advisor, Technology Advisor, Developers, Marketing, Cyber Security, Business Advisor, Community Managers, Customer Support, Legal Advisor.”
In reality, the staff needs to be doubled, since one developer will not be able to cope with the volume of work, as, indeed, many other positions. The legal advisor can take on the duties of a compliance officer and deal with client's KYC / AML checks, as well as other specialists can combine functions, but it is unlikely that they will be able to solve all the problems. For an already operating exchange, the number of employees is greater at times. For example, at Kraken, 21 vacancies were posted at the time of this writing.

Even not all successful entrepreneurs have enough money to create a high-quality exchange with a thoughtful interface. It is good if the future funder is already in the blockchain business or at least understands the process of selecting projects for investing in VC funds. Seed money at the idea stage will significantly increase the chances of preparing the MVP and establishing the exchange as quickly as possible. In addition to traditional venture capital funds and crypto funds, there is another option to raise money for your project – is to hold another ICO. Projects with a sound token economic management are still in demand among investors. Stan STALNAKER, a Founding Director of Hub Culture explains expenses to launch the exchange:

“The cost to establish a quality exchange trading cryptocurrency and digital assets is not small — even to build the basic infrastructure for trading with established component and service providers, to meet regulatory requirements and to develop capabilities for securely managing assets takes enormous resources. It's hard to see how a company would spend less than $1M in its first year of operations.”
For decentralized exchanges, the price is lower and can start at $ 100,000, considering the fact of the offshore legalization and interface without frills.

Another element to consider is the payment system. Will the processing be crypto-fiat or will the exchange work on receiving and issuing only with cryptocurrencies? The decision rests on the existence of contracts with banks and payment systems. Even now, some large exchanges do not withdraw dollars and euros, so for a start, you can run a simplified withdrawal through BTC and ETH and then refine the functionality. On the other hand, licensing and withdrawal of fiat money will definitely attract the attention of customers, which in itself will be a marketing ploy. The following comment was made by John MacLEOD, CEO of JEA Associates Ltd:
“Liquidity with fiat currencies will depend on the type of license established in the exchange’s chosen jurisdiction. Most decentralized exchanges do not currently offer fiat deposits or withdrawals because they lack the required licenses and banking partnerships.”
The entire process from planning to the first trading will take from three months to a year. There is a wide choice on the market; a customer will switch to a new exchange only if it has significant advantages in commissions, in the diversity of tools or in safety. Otherwise, it will be another exchange with near-zero turnover.

Image courtesy of Blog.Goodaudience

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