Entrepreneurs and companies are venturing into the cryptocurrency market in hopes of using blockchain technology to transform traditional financial institutions. With a market value of nearly $2 trillion, the crypto market has become a lucrative opportunity for technology innovators and investors to create new businesses that meet growing needs for decentralized systems . But, before they invest significant time or money in their company, investors need to consider the risks involved. Although cryptocurrencies offer unprecedented anonymity and freedom to their users, legal tender can present unique challenges to those who wish to use them.
Potential investors interested in cryptocurrency should be aware that there is no regulation. This can make it difficult to transition into the cryptocurrency market. Although there are many benefits to investing in these currencies such as transparency and liquidity, it is important to know its weaknesses before you jump headfirst into the market. An investor must consider four important considerations when starting a cryptocurrency exchange : privacy/anonymity and KYC security as well as the jurisdiction and licensing.
Privacy/Anonymity
Many governments have tried to regulate cryptocurrency since the inception of Bitcoin. This was due to their use for illegal activities like the sale and purchase of drugs via the dark web. These currencies offer unprecedented privacy to their users, including transactions with pseudonyms or unlinkability. However, financial criminals often avoid central banking institutions and can also benefit from this level of security. China and many other countries have imposed strict regulations, such as requiring exchanges reveal their users’ identities in order to prevent money laundering. However, cryptocurrencies are not controlled by a central entity, making it difficult to regulate.
KYC
Before you open a cryptocurrency exchange, make sure to consider the KYC procedures. Although cryptocurrencies are not subject to any significant regulation, authorities still want to regulate them. Because no single entity is responsible for creating or maintaining these currencies, financial regulators are becoming more concerned about illegal activity. This makes it harder for authorities to detect fraud and criminal activity. This risk can be managed by Know Your Customer (KYC), which requires exchanges and other entities that use cryptocurrencies to process transactions to verify their identities before they allow them to transact. If a company owned a blockchain of cryptocurrency, they would need to comply with KYC rules. Every time a new user transacts with their system they must be identified. Some companies require users to present government IDs, passports or photos of themselves holding their ID cards in camera to be able to use their platforms. Although KYC procedures can be costly and time-consuming it is clear that these additional security measures help maintain the legitimacy of the exchanges in the eyes financial regulators.
Security
When you set up your crypto exchange , investors will also be concerned about the security of your exchange. Many exchanges store cryptocurrencies as both investments and transactional currencies like cash. However, they will often allow users to withdraw and deposit their money at any time. These online wallets are less secure as hackers can constantly attack them. Some exchanges use offline storage to store users’ funds. They encrypt their private keys and hide them in USB sticks, hard drives, or printed papers. This makes it much more difficult for hackers to access them.
Jurisdiction & licensing
Different countries have different approaches to regulating cryptocurrencies and digital asset trading platforms. It is important to be able to distinguish these differences before you create your own crypto exchange. China, for example, has issued strict regulations banning trading on real-time exchanges and requiring entrepreneurs to pay any losses. Others, like Malta, are seeking new legislation to protect citizens and allow companies to invent within the blockchain industry. When deciding where to start, investors should look at the legal requirements in each jurisdiction.
Because cryptocurrencies are still in their early stages, investors need to understand that trading them can bring additional risk. Exchanges still face many challenges. Although KYC procedures can help to identify potential thieves and scammers, they can be too burdensome for anonymous users. However, exchange security is different from one exchange to another. Investors must be aware of the measures taken by their chosen exchange before they decide where to trade. There are many regulatory systems around the globe, but which one is best for an investor will depend on their particular situation. Understanding these risks is as important as how to protect yourself from them.
