Blockchain technology has the potential to revolutionize traditional financial institutions, which is why many companies and entrepreneurs are venturing into the cryptocurrency market. It is becoming increasingly lucrative for investors and technology innovators to create new businesses that meet a growing need for decentralized systems and create cryptocurrency exchanges on the rapidly growing crypto market, valued at nearly $2 trillion. But before investing significant time or money into a new company, investors should consider its risks. Even though cryptocurrency provides unprecedented freedom and anonymity to its users, it also presents unique challenges for those seeking to use it in a legal area.
There are significant risks associated with the investment in cryptocurrencies, such as money laundering laws that make it difficult for potential investors to transition into the cryptocurrency world. Even though investing in these currencies has many advantages, such as liquidity and transparency, it is vital that investors fully understand their weaknesses before entering this market. During this blog post, we will examine four key considerations that an investor should take into account when starting a cryptocurrency exchange: privacy/anonymity, know your customer (KYC), jurisdiction and licensing, and security.
Privacy/Anonymity
Due to the widespread use of cryptocurrencies for illegal activities such as the purchase and sale of drugs on the dark web, many governments have attempted to regulate them since Bitcoin’s early days. In addition to providing unprecedented privacy for their users, these currencies are also advantageous to criminals who usually avoid centralized banking institutions due to features such as transactions with pseudonyms and unlinkability. There have been many strict regulations introduced by countries such as China to prevent money laundering, including the requirement that exchanges reveal users’ identities; however, when it comes to cryptocurrencies, there is no central authority governing the currency, which makes regulation extremely difficult.
KYC
Even though cryptocurrencies have mostly remained unregulated, authorities continue to seek ways to control them. Since no single entity is responsible for creating or maintaining these currencies, financial regulators are increasingly concerned about illegal activities, making it difficult for authorities to uncover evidence of fraud. To avoid this risk, exchanges or other entities using cryptocurrency for transactions should implement Know Your Customer (KYC) procedures that require users to provide proof of their identity before transferring funds. Before you start cryptocurrency exchange, KYC (Know Your Customer) procedures should be considered. For example, companies running blockchains of cryptocurrencies must comply with KYC requirements. For their system to function correctly, a new individual must be identified whenever they transact with it. To accomplish this, some companies require users to provide proof of identification, such as a government identification card, passport, or even a picture of themselves holding up their ID card in front of a camera. The KYC procedures are time-consuming and expensive, but no doubt it contributes to maintaining the legitimacy of these exchanges in the eyes of financial regulators by providing an additional layer of security for individuals who transact on the exchanges.
Security
When you plan to create your crypto exchange, investors will have another common concern: the exchange’s safety to protect its users’ assets. Considering that cryptocurrencies can be used as both an investment and a transactional currency, many exchanges will store their users’ money in hot wallets where they can withdraw and deposit at any time; however, since these online wallets are constantly being attacked by hackers, they are not as secure as they should be. Alternatively, some exchanges store their users’ funds offline, encrypting their private keys and hiding them within USB sticks, hard disks, or even printed documents, making it extremely difficult for hackers to access their accounts.
Jurisdiction and licensing
Understanding the differences between countries when it comes to regulating cryptocurrencies and digital asset trading platforms is critical before you start your own crypto exchange. The government of some countries, such as China, has issued strict regulations that prohibit trading on real-time exchanges or hold entrepreneurs liable when user funds are lost. Several other jurisdictions, like Malta, have attempted to introduce legislation to protect citizens from losing money while allowing companies to innovate within the blockchain industry. When determining which jurisdiction is best suited for a particular investor, it is essential to review the legal qualifications required by each jurisdiction.
As the cryptocurrency space is still in its infancy, investors must understand the additional risk they are taking when trading cryptocurrencies. Exchanges continue to experience several issues. Although KYC procedures can help identify possible scammers and thieves, they may also burden some users who wish to remain anonymous. However, security measures vary significantly from exchange to exchange; investors should be aware of the measures implemented by the exchange they are considering before deciding where to trade. Also, although there are numerous different regulatory regimes in the world, the most appropriate situation for an investor depends mainly upon their specific situation – understanding the risks involved with any investment is just as important as knowing how to protect yourself from them as it is with any investment.
