Running a cryptocurrency exchange comes with a lot of considerations. What are the regulations in the country you operate in? Do you have sufficient liquidity? How will you handle security? Adhering to all of these requirements leads to excessive costs involved with setting up and operating these platforms, which means that a high price is often required to get a coin listed on them. This only makes it that much harder for new assets to find a market.
Regulations still uncertain and vary by location
Depending on where you are in the world, the regulations concerning cryptocurrency can be anywhere from strict to completely absent, with changes often coming swiftly after long periods of silence. While local rules can vary greatly, many governments have been moving toward stronger Anti-Money Laundering laws, such as the European Union’s 5th Anti-Money Laundering Directive, which is currently forcing some firms in the EU to rethink their location.
In the United States, Representative Paul Gosar, a Republican from Arizona, introduced the Crypto-Currency Act of 2020, which would see unique definitions and oversight of crypto commodities, cryptocurrencies and crypto securities. Moreover, South Korea just passed a law requiring cryptocurrency exchanges to partner with banks to enforce AML policies. Meanwhile, the Reserve Bank of India recently lifted a ban on cryptocurrency that had only been enacted in April of 2018.
The point here is that regulations are subject to change based on geopolitical location and can also quickly evolve within just one jurisdiction. This can be costly to mitigate for exchanges. Paying for professional help just to understand the latest laws can add up, as can employing the teams necessary to collect and verify AML documentation from customers. However, failing to do so could lead to expensive fines or even to the platform being shut down. Unfortunately, these regulations are rarely seen as optional once they are decided upon.
Managing other complications
Regulations aren’t the only obstacles for new exchanges. Issues can arise just in the act of setting up an exchange. There are myriad facets to think about, and all of them can be complex and expensive. Designing an interface, programming the matching engine, integrating AML practices, and working with local banks are just a handful of the concerns a team setting up a new exchange would need to address. All of these would also need a fair amount of time just to be implemented. Then, there is interacting with multiple blockchains in real time, security systems, and the sheer cost of storing and maintaining servers. The amount of time needed just to find quality programmers, build the codebase and debug it can easily take a year or longer if a team is starting from scratch.
Even once that has all been navigated, and the exchange is live, there will still be ongoing and expensive issues to contend with. Take liquidity, for example, which can be a major problem for smaller exchanges as well as smaller markets. This refers to the small number of buyers and sellers available to give traders confidence that they can make the trades they want when they want. Without this, traders will often miss out on opportunities because they cannot enter or exit a position in time, which will be frustrating and hurt business.
In other words, exchanges want to bring in as much traffic as possible and to curate a user experience that pleases everyone. Here, things like security and customer service are front and center. Clients want to know that the exchange is safe from both outside hackers and inside operators and that funds are always available where the exchange says they will be. Inevitably, there will be some mistakes or technical issues. This is why it is important to have support teams to address upset customers, as well as others to fix issues with the platform. Having the capability to respond to all of these matters doesn’t come cheap, but without this, a new platform will surely fail.
How this is affecting the entire market
In addition to the aforementioned issues, it can take a significant amount of capital to open and operate a cryptocurrency exchange. This can lead to platforms having large fees attached to listing fresh assets, which harms new development teams. It also causes much of the market to be channeled through a handful of “gatekeepers,” namely, the biggest exchanges that have already established themselves.
This is clearly problematic for smaller projects that aren’t already available across multiple exchanges. If they cannot raise the capital needed to be listed on larger platforms, which can often be in the $100,000 range or higher, then nobody would be able to buy them. Of course, in that case, they won’t grow, and potentially sound ideas may get wiped out due to lack of liquidity and exposure. Projects need a way to know that they can create their own market when necessary, but for the most part, the costs may be too steep to launch an exchange platform.
Are there any available solutions?
This is where white-label exchanges enter the picture. A white-label exchange uses specially designed software to launch a new platform fast and cheap. A team, for example, could get an exchange running in days instead of months, and for thousands of dollars as opposed to millions. These exchanges generally follow templates but are highly customizable and can negate the need for a company to develop its own proprietary software. Generally, the software should provide everything necessary to get up and running, as well as to be in compliance, though not all exchanges are identical. It is important to know about a few specific options that are available.
In general, exchanges can be centralized or decentralized, and cloud-based or do-it-yourself. A centralized exchange means you will be hosted on another company’s servers, which are generally paired with cloud-based models. It could also be hosted on your own servers, but this will also be cost-prohibitive for most. While you won’t have as much control, usually the company offering this will handle a great deal of the operations behind the scenes, as well as manage technical issues. Although they offset some costs, subscription fees help to keep the platform running, but the upfront costs of getting started should be relatively cheaper.
DIY exchanges can be either centralized or decentralized, but when it is decentralized, it runs across many servers, and not simply by a single third-party entity. The DIY part means that while the software may be set up to assist you, there will generally not be anyone else operating the exchange behind the scenes. These packages may also come with subscriptions that allow you to access a team of experts for support, but you will be making the final decisions. Such offerings may be less expensive on a monthly basis but can often still have larger, one-time fees associated with being allowed to run the software.
One solution that solves many of the issues faced by teams looking to create new exchanges is the HollaEx Kit, offered by bitHolla. The kit is open-source, free to install and offers the most comprehensive set of tools for anyone to create a new cryptocurrency exchange in minutes. It includes a desktop and mobile user interface, a trade matching engine, and an administrative control panel. You can add any trading pairs you choose, including your own newly created coins or tokens. It is also designed to keep you in compliance with most modern regulations by offering a system that collects relevant AML data from your customers.
The process of setting up a new platform is streamlined, and there are options for getting advanced help from bitHolla’s team of experts. This makes HollaEx Kit the most attractive option for development teams who need to create new markets for their coins but can’t afford to pay the exorbitant fees that come with most exchanges. The bitHolla team has created a product that seeks to be the “WordPress” of building exchanges. In time, DIY software will likely become the gold standard and will be increasingly integrated into more websites, potentially weakening the draw of centralized services. This is what bitHolla’s HollaEx Kit is trying to achieve with this software package, which will hopefully make access to building the cryptocurrency market a bit easier for everyone.
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