Start Your Cryptocurrency Exchange
Now that you’ve seen the steps required to start your own cryptocurrency exchange, let’s take a closer look at them.
1. Get legal advice to ensure licensing requirements are met.
Before starting your plan, it is important to seek legal advice to understand the regulatory requirements of your new business. It will be necessary to obtain the appropriate license in all jurisdictions in which the company plans to operate. In many places, cryptocurrency exchanges operate without significant oversight as government and regulation have yet to catch up with the technology, while in other places, including the US, Bitcoin traders must have a Money Transmitter business license and must follow the rules and regulations of the SEC and CFTC, among others. . Proper legal advice is a must. It is typical that exchanges, because they fall under the foreign exchange umbrella, are required to comply with Know Your Customer (KYC) regulations, which have become increasingly prevalent to combat money laundering. In the United States, for example, these rules have been in place since 2002 as a result of the Patriot Act. Regulations vary by jurisdiction, so be sure to consult with an attorney familiar with the industry.
2. Get funding for the venture.
Before starting your project, you should know the approximate costs involved. To develop and launch a cryptocurrency exchange, a minimum of $135,000 will be needed. This includes the cost of technology, hosting, some initial legal advice, government registration, and initial advertising. While not all funds are required up front, it is important to ensure that the business has access to enough capital to allow for a proper runway. A major mistake startups make is that they don’t plan for the future, earning small upfront raises that may cover development costs, but will leave the business starved of critical operating cash needed until it’s profitable. Startups also often make the mistake of licensing unscrupulous crypto exchange providers who charge ongoing fees and fail to mention the legal obligations and costs involved in setting up and maintaining an exchange.
3. Find a technology solution provider.
Modulus provides turnkey custom cryptocurrency exchanges, charging a one-time license fee with no royalties or commission structures. This means there are absolutely no ongoing fees, clients can host the exchange themselves, and clients receive the full source code, which is important for auditing purposes, as some regulators request to inspect the source code. Always with the intention of providing clients with added value, Modulus has over 20 years of experience in developing stock exchanges, including back-end technology used by some of the largest stock exchanges in the world.
Why white label with source code? White-label exchange software with full source code allows for all the customization of a custom exchange while significantly reducing time to market and overall cost.
4. Connect your exchange with others for additional liquidity.
The cornerstone of any successful exchange is liquidity. Without an order book and business activity, potential customers will view your new venture with skepticism. To avoid these issues, without facing the need to simulate activity through dummy accounts within the new exchange, we can connect your exchange to a network of existing exchanges, improving your liquidity. Remember, the larger the network of exchanges, the less liquidity will be a problem for your new exchange.
5. Partner with a payment processor.
Not all payment processors are created equal. Fee structures, among other things, will vary widely between companies. You will need the lowest transaction fee to be competitive with other exchanges. Also, some processors build hidden fees into their contracts, so make sure you understand the contract you’re signing. Other differences between processors include settlement time and compliance with PCI DSS, a set of best practices for ensuring cyber security. Please note that in the United States, compliance is not required by federal law, although many state laws do. Make sure your payment processor is PCI compliant to protect your new business from cyber threats. This is another example of the importance of understanding the complexities of industry regulation.
6. Implement security best practices.
Exchanges built with Modulus technology are among the most secure in the world, using offline cold storage wallets, two-factor authentication, and encrypted databases. Also, Modulus technology does not store passwords (only hashes). We have written extensively about the data breaches that have become infamous within the industry, including Mt. Gox and Bithumb.The bottom line? Cryptocurrencies have become a ripe target for cybercrime and hacking, causing exchanges to strive to differentiate themselves based on security.
7. Go live via beta test.
You have created your exchange. You have entered into a contract with a payment processing company. And you have put a lot of effort into making sure that your exchange follows all the rules and regulations. You have ensured that your company is protected against cybercrime. Now is the time to launch your exchange and test its full range of capabilities in beta.
8. Start the marketing and PR campaign.
Once your exchange has launched, it’s time to connect with crypto news outlets like Coindesk for example. It’s important to properly plan your marketing activities, along with your costs, to ensure that your initial raise doesn’t leave you scrambling to raise additional funds. Often, exchanges don’t include a marketing budget, but instead focus on free social media marketing until a critical mass of merchants is reached.
9. Be careful when providing customer support.
While customer support is the last step to a successful cryptocurrency exchange, your ability to shine in this area will determine your long-term success. Those who deal with consumers must be vigilant and satisfactorily resolve customer complaints and technical problems. Customers must be responded to in a timely manner, so plan to implement a ticketing system like ZenDesk and staff with knowledgeable and helpful representatives who are available 24/7 as that cryptocurrencies never stop operating.
10. Maintain a legal team for ongoing compliance.
We cannot stress enough that it is extremely important to maintain legal compliance and follow all current and proposed laws and regulations, not just in the jurisdiction in which you are domiciled your exchange, but also in all foreign jurisdictions in which your exchange members or traders will reside or transact. Cryptocurrency laws are rapidly evolving globally, so it is very important to hire a full-time in-house legal compliance team or outsource to reputable law firms to keep your exchange legal in all geographies where you will do business.
Of course, no step-by-step guide, however extensive, can answer all your questions. However, hopefully this has helped you build a preliminary action plan with which he can move forward. As always, Modulus is here to help you on your journey, so if he has any additional questions, please don’t hesitate to reach out via phone or email.
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