A crypto exchange is a trading platform through which you can buy, sell and exchange cryptocurrencies. Like Forex, cryptocurrency exchanges facilitate cooperation between buyers and sellers of cryptographic currency, which ensures the reliability and security of transactions. The crypto exchange operates using a trading engine. The speed and correctness of operations depends on how optimized its code is. The engine keeps records of orders in the database, checks those orders that are placed on the exchange for the security of assets, that is, for the availability of funds on the balance sheet. In addition, it prepares data that is displayed in a mobile application, web service or on the screen of a trading terminal.
The first cryptocurrency exchanges to emerge were centralized. The trading pairs that these exchanges worked with were only cryptocurrencies. However, as the market developed, a conditional distinction began to be traced clearly according to the following types:
- altcoin or bitcoin exchanges. On such exchanges, only cryptocurrency is traded. Fiat currencies are not involved;
- cryptocurrency exchanges where exchange for fiat is possible. Such exchanges allow cryptocurrencies to be traded among themselves, as well as paired with any currency that is freely convertible, for example, the euro, or national currency;
- centralized exchanges (CEX). Such exchanges are owned by companies that set the rules for trading. They are usually licensed and therefore required to comply with financial regulators;
- exchanges of a decentralized type (DEX). These exchanges create P2P markets, but do not act as intermediaries; in particular, they do not store user assets, and are not subject to any regulation. On these exchanges, users make transactions anonymously through a distributed ledger;
- hybrid cryptocurrency exchanges. They combine the best qualities of all centralized – liquidity and functionality – and decentralized – privacy and security – exchanges;
- cryptocurrency exchanges that provide the opportunity for margin trading, that is, provide their users with a trading leverage.
Some cryptocurrency exchanges can be simultaneously ranked as 2 or 3 types. Therefore, it can be considered a conditional classification that is not officially quoted.
The difference between a cryptocurrency exchange and an exchanger
There are two types of services for exchanging cryptocurrencies.
- Crypto exchange. This is a platform through which users trade cryptocurrency among themselves, that is, the cryptoexchange acts as an intermediary regulator between the two parties to the transaction for the purchase and sale of currency.
- Crypto exchanger. An exchanger is a trading party that takes part in a trading operation. This is an analogue of an ordinary currency exchange office.
The prices in the crypto exchanger are controlled by the owner himself/herself directly, while on the exchange the price depends on the balance of supply and demand. On the one hand, this is an advantage of crypto exchangers; however, crypto exchanges are somewhat more democratic in this regard, since the price is regulated not by one person alone, but by a large number of participants.
Pricing in the exchanger takes place in such a way that the owner binds the rate to what is on the exchange. As a rule, the most popular cryptocurrency exchanges act as a benchmark. However, some exchangers, nevertheless, set a rate that is significantly different from the prices that are relevant on large exchange platforms. In addition, in the exchanger, the user cannot choose the most suitable price for himself, since the local exchange rate is set there. On the exchange, in this case, a limit order is created, and the transaction is carried out when the price reaches the required level.
Creating a cryptocurrency exchanger, pay attention to the following points:
- efficiency of technical support;
- working hours;
- the size of the commission;
- variety of currencies;
- simplicity and convenience of the interface;
- stable functioning.
Cryptoexchange development mechanism
A cryptocurrency exchange can be created from scratch or you can buy a ready-made development.
Development of new structure
This is a complex approach, however, the most literate and effective. When creating a cryptocurrency exchange from scratch, you can better study the features of the cryptocurrency market and go through all the stages of development, starting with the development of the concept and ending with the final release of the product. The basic version consists of an administrative panel, a trading engine, a user interface, a database and a wallet, analytics and records management system.
The benefits of this approach
- You get an individual product.
- Security guarantee.
- Ability to improve or modify the exchange.
Minuses
- The final cost of the turnkey exchange will be higher.
- Launching an exchange takes longer than getting started with a ready-made solution.
White label solution
This is an adaptation to your brand of a product that has already been developed. A cryptocurrency exchange running on a ready-made engine can serve as a temporary alternative or additional service that you can offer your users. Mostly, the main activity of a buyer purchasing a White label product is not connected with cryptocurrencies; however, it is very similar in terms of subject matter. The crypto platform is necessary due to the increased demand and current trends.
Pros
- Startup and configuration takes much less time.
- Initial costs are not so high.
Minuses
- You do not have access to the source code, so you cannot be 100% sure that it is secure.
- You are dependent on third parties.
- With the revision, there will be certain difficulties, and in the end, it will cost much more than the engine.
Financial and legal aspects
In creating a cryptocurrency exchange, most of the time is spent not on solving technological problems, but on financial and legal issues. It really takes a lot of time and effort to deal with this.
Registration as a legal entity
First, you need to choose a jurisdiction that would be most loyal to cryptocurrency services. In practice, this is not so easy to do, since until now cryptocurrencies have not been recognized on a mass scale and have not been approved by the state apparatus of most countries. The following jurisdictions are most loyal to cryptocurrencies:
- USA;
- Malta;
- Estonia;
- Netherlands;
- Switzerland.
License for exchange
Many countries require a separate license for activities related to cryptocurrencies. In Estonia, for example, you need to obtain two licenses. One is needed for the functions of a cryptocurrency wallet, while the other is needed for exchanging cryptocurrencies for fiat funds.
KYC, KYT, AML compliance
As you become a member of the financial system, you are required to comply with the provisions of the Anti-Money Laundering Laws – AML. In Europe, since the beginning of January 2020, the fifth AML Directive has been in effect, which spells out strict requirements regarding the procedures for identifying customers and their transactions.
KYC – Know Your Customer. All users of your exchange must go through personal identification and, in some cases, place of residence. You can collect documents from the user yourself and carry out verification, in particular, reconciliation with various databases, however, this is not necessary, since there is a fairly large number of services that provide such services at reasonable prices. Examples include Trulioo, Veriff, and Sum & Substance.
KYT – Know Your Transaction. This is a new requirement that the crypto exchange must verify the cryptocurrencies that the user transfers to it. If the receipt is likely to come from an illegal source, it needs to be blocked. This is necessary because bitcoins are very often used in criminal activities, drug trafficking and others. The clear and relatively inexpensive Traceer service will help you with this.
AML compliance
The legislation stipulates that a cryptocurrency exchange must have a certified AML specialist in its staff, who must monitor and track suspicious transactions, draw up SAR and send them to specialized services.
Bank account
Opening a bank account is one of the most difficult moments when it comes to working with cryptocurrency services. Banks treat cryptocurrency activities as high-risk, so the probability of being refused to open such an account in a European bank is almost 100%.
The only way to get an account is to open it at an electronic money institution – EMI. The essence of the work of such services is that you credit fiat money to their account, and they exchange it for electronic money. When these funds are withdrawn, electronic units are redeemed. It may be a little difficult to understand, but it is quite usable.
Our developers will not only create a cryptocurrency exchange that will function stably and profitably, but will also tell you about all the intricacies of its work. The cost of the project is always calculated individually, since in each individual case, our experts assess the complexity of the work ahead and the timing of its implementation. Regardless of the project structure, you will receive a quality product on time.