Creating a crypto-exchange: The types and steps

Cryptocurrencies, also known as virtual currencies, are digital alternatives to conventional fiat funds. The market value for most cryptocurrency types is highly volatile.

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There is a long to-do list when you’re learning how to make a cryptocurrency or exchange. Hiring a lawyer would be smart to make sure you have covered all your bases.

Cryptocurrency Types

There are thousands of cryptocurrencies available. The currencies divide into three major categories.

Bitcoins

Bitcoins are an alternative to traditional currencies. They were created in 2008 by the character behind the pseudonym ‘Satoshi Nakamoto.’ There is no governing agency for bitcoins; the transactions occur on a peer-to-peer network.

Bitcoins can purchase goods and services on the internet. The blockchain parameters dictate there can only be 21 million bitcoins in existence.

Altcoins

Altcoins refers to the thousands of other alternative cryptocurrencies created after Bitcoin. Some examples include Litebit, Ethereum, XRP, and Ripple.

Altcoin operates through a blockchain similar to bitcoin. A major difference is that bitcoins will only generate 21 million. Other virtual currencies like Litecoin can generate over 80 million.

Tokens

Tokens run on the same ideas as bitcoins and altcoins, with a few major differences. For starters, tokens don’t operate on a specific blockchain. A company generates the tokens through an Initial Coin Offering(ICO) or a Social Coin Offering(SCO). There are no limits to the number of tokens a company can offer.

This cryptocurrency type transfers through the use of smart contracts. Utility tokens help crowdfund for a product or service still in development. Commonly used security tokens provide secured access to networks.

Exchange Types

Learning how to start a cryptocurrency exchange can be overwhelming. There are a few options available, depending on the services you want to offer with your exchange.

Centralized

Centralized exchanges are the middleman between the accounts in the transaction. Examples of these platforms are Binance and Coinbase. There are fees charged for every transaction that go towards paying the blockchain miners.

These platforms also provide other financial services such as wallets and crypto-debit cards. Those features allow for the purchase of goods and services at available retailers.

Decentralized

Decentralized crypto exchanges are peer-to-peer networks with intermediaries. These exchanges facilitate e-wallet to e-wallet transactions.

Decentralized transactions are direct transfers from account to account. There is a degree of anonymity that centralized exchanges don’t offer. This anonymity is available because users don’t need to share their personal information.

The Steps

Now for the big question: How to start a cryptocurrency exchange?

Know The Rules

The legalities of cryptocurrency exchanges vary by region. In Poland and other countries, it’s legal to operate and exchange. The regulations are dependent on the service area.

To incorporate an exchange as a legitimate business, you must ensure it’s legal in that area. You must know and follow the regulations for any other areas you offer your service.

It’s also important that your exchange abides by the rules of Know Your Customer. Especially since the business involves financial transactions. KYC means verifying customers’ identities before processing any financial transactions.

Develop The Software

The right operating system for your service area is essential. Android is the most popular OS in Poland, but the rest of Europe favors Windows.

Cryptocurrency software requires a lot of time and human resources to create. The user interface’s maneuverability is crucial, as clients must be able to navigate the software intuitively.

The trade engine processes are integral for the function of the software. It must be capable of handling multiple transactions simultaneously and efficiently.

Another important piece of the exchange is a secured admin panel. This feature is critical to access and secure key information.

Partner With A Financial Institution

If your cryptocurrency software will accept transactions between fiat and virtual currencies, your exchange needs to partner with a financial institution to accommodate that process.

Many banks don’t classify virtual currencies as legal tender. Regulations increase the difficulty of finding a partner financial institution. Some banks may not legally conduct business with any of the cryptocurrency types.

Security Is Critical

Any business that operates online is susceptible to hackers. The good news is that you can take steps to take to increase security for your customers and business.

It would be best if you used protected frameworks to protect your client’s assets and information. High volume transactions should always have administrator approval.

Multi-factor authentications and other KYC and AML compliant features are essential. These features include obtaining copies of clients’ personal information to verify their identity.

You must protect your system with clearly defined administrator privileges and encrypted servers. Firewalls protect against those with malicious intent. Using admin notifications to protect against suspicious transactions is also a smart idea.

Conclusion

To recap: you need to know the laws in the area your service will operate. You should also develop secure software on the right operating system and partner with the right bank.

Now that you’ve figured out the basics of how to start a cryptocurrency exchange, it’s time for you to get to work. Let’s see what you’ve created!

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