What's the legal process to start a Bitcoin exchange?

Cryptocurrencies, like Bitcoin, are trending. Those who invested in, or mined, Bitcoin early are sitting on small fortunes, and the concept is becoming mainstream.

As famed investor Peter Lynch said, "During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans made a nice profit." In the gold rush that is the cryptocurrency boom, one might compare the manufacturer of picks and shovels to the owners and operators of crypto exchanges.

If you, too, see the potential reward and you're looking to start up your own Bitcoin exchange business, this step by step guide will point you in the right direction.

How to Start a Bitcoin Exchange

 in 10 Simple Steps

1. Obtain proper legal counsel to ensure licensing requirements are met.

2. Attain funding for venture.

3. Find a cryptocurrency exchange software solution provider.

4. Connect your exchange with others for added liquidity.

5. Partner with a payment processor.

Start Your Crypto Exchange

Now that you have seen the steps necessary to start your own crypto exchange, let's examine them in more detail.

1. Obtain legal counsel to ensure licensing requirements are met.

Before you set your plan into action, it is important to seek legal counsel to understand the regulatory demands of your new venture. Proper licensing will need to be obtained in all jurisdictions in which the company plans to operate. In many places, cryptocurrency exchanges operate without significant oversight, as government and regulation have not yet caught up with technology, while in other places including the US, Bitcoin operators must be licensed Money Transmitter businesses and must follow SEC and CFTC rules and regulations among others. Proper legal counsel is a must. It is typical that exchanges, because they fall into the currency exchange umbrella, must adhere to Know Your Customer (KYC) regulations, which have become more and more 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. Attain funding for venture.

Before starting on your project, you should know the approximate costs involved. In order to develop and launch a cryptocurrency exchange, a bare minimum of $135,000 will be needed. This includes the cost of technology, hosting, some initial legal counsel, government registration and initial advertising. While not all funds are required up front, it is important to ensure the venture has access to enough capital to allow a proper runway. One major mistake made by startups is that they fail to plan for the future, landing small initial raises which may cover the costs of the development but will leave the venture without the critical operational cash necessary until it becomes profitable. Startups also often make the mistake of licensing from unscrupulous crypto exchange providers that charge ongoing fees and fail to mention the legal obligations and costs required for setting up and maintaining an exchange.

3. Find a technology solution provider.

Modulus provides turnkey custom cryptocurrency exchanges, charging a one-time license fee without royalties or commission structures. This means there are absolutely no ongoing fees, clients can host the exchange themselves and clients receive full source code, which is important for auditing purposes, as some regulators request to inspect the source code. Always intent on providing clients with added value, Modulus has more than 20 years of experience developing stock exchanges, including backend 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 all the customization of a custom-build exchange while decreasing time to market and overall cost significantly.

4. Connect your exchange with others for added liquidity.

The cornerstone of any successful exchange is liquidity. Without an order book and trading activity, potential customers will view your new venture with skepticism. In order to bypass these issues, without facing the need to simulate activity via dummy accounts within the new exchange, we can connect your exchange into a network of existing exchanges, enhancing its liquidity. Remember, the larger the network of exchanges, the less liquidity will be an issue for your new exchange.

5. Partner with a payment processor.

Not all payment processors are equal. Fee structures, among other things, will vary widely between companies. You will need the lowest transaction rate in order to be competitive with other exchanges. Additionally, some processors build hidden fees into their contracts, so be 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 to ensure cyber security. Note that, in the United States, federal law does not require compliance, though many state laws do. Be sure your payment processor is PCI-compliant to safeguard your new enterprise against cyber threats. This is another example of the importance of understanding the intricacies of industry regulation