May 30, 2019
How to Run a Profitable Cryptocurrency Exchange: A Comprehensive Guide

With recent activity in the crypto markets potentially indicating a return to a wider bull-market period, there has been renewed interest in launching and running a cryptocurrency exchange. In this post, we evaluate the steps required to establish your own exchange, including selecting the best software, licensing and legal requirements, and choosing your exchange build-type and partner.

Choosing Software

Over time, exchange owners will spend a huge amount of time and resources on selecting the best software, and rightly so, as both the software platform and vendor are crucial to the long-term success of a cryptocurrency exchange. There are several software avenues which operators can take to launch their cryptocurrency exchange, let’s examine them in detail here.

Software as a service

The first approach is a ‘Software as a Service’ (SaaS), where exchange operators pay a single upfront set-up fee, followed by monthly fees thereafter, which are either fixed or based on exchange volume.
Set-up fees for SaaS offerings typically start around US$10,000, reaching as high as US$100,000 from some software vendors. Monthly fees, unless fees are based upon volume, are usually in the range of $7,000 – $10,000. With a SaaS solution, platform setup may take just a few weeks. As a result, SaaS type offerings are highly affordable, but the trade-off is that generally, operators have limited scope when it comes to changing how SaaS based exchanges are configured and operated.
For example, SaaS exchanges cannot usually be integrated with other blockchains or payment processors outside the originally supported choices, they cannot easily implement new order types, or other types of configuration. Eventually, the restrictiveness of pure SaaS exchange solutions may become a limiting factor when trying to implement new features, such as unconventional asset pairings or implementing digitized commodities trading, to remain a cutting-edge exchange and attract new users.

Customized exchange software

The second most common way of establishing an exchange is to build with the help of a dedicated software development company. Ideally, these providers would be companies that already have experience with exchange technology and can customize their existing software to suit a multitude of clients’ needs.
Exchange operators who follow a purely custom development route must be prepared to spend many months in development, engage in routine project management tasks, and potentially spend at a minimum $150,000 up to $1 million or more in development, operational and consultancy costs.
Although a timely and potentially expensive process, having full control over exchange software architecture can open doors to multiple new business opportunities and revenue streams. Likewise, having customized exchange software would reduce the risk of potential catastrophic exchange failure, should a SaaS software provider cease operating.

Hybrid exchange software

Building an exchange from scratch is, for most operators, not a viable option. Thankfully, there is middle ground for exchange operators who want a mix of both value and customization. Hybrid exchange software solutions, like those that Qoden Technologies offers, allow exchange operators to begin trading on a managed platform, and then gradually transition to a customized set-up as required.
Qoden Technologies has a history of custom software development, dedicated to financial, trading and exchange software, and the company has been active in the exchange software space since 2008. Qodex’s internal exchange framework provides the best of both worlds; a quick and easy managed exchange offering which can be established in just 2 weeks, and a highly customizable exchange environment where users can change software as much as they require.

Legal Requirements and Operating Jurisdictions

Once software requirements have been decided, exchange operators should then choose a country, or jurisdiction, of residence for their exchange. Jurisdictions will dictate both compliance requirements, tax regimes and access to bank accounts for exchanges.
Not all jurisdictions are created equally. Larger investors, professional traders and institutional investors have a preference for highly regulated, premium jurisdictions such as the USA and the United Kingdom. The issue with this is that it is often comparatively difficult, lengthy and expensive to become licensed in such a jurisdiction, which is why many exchange operators choose jurisdictions with a more relaxed regulatory approach.
Many jurisdictions which have typically taken a relaxed approach to other financial instruments and industries such as gaming, are likewise friendly to cryptocurrency products. Jurisdictions such as the Isle of Man, Panama, Hong Kong, Malta, Estonia and Cyprus have fairly comprehensive and welcoming cryptocurrency regulations. Additionally, many of these jurisdictions also offer generous tax allowances to exchange operators.
Qoden Technologies has strong partnerships with companies that are on hand to assist exchange operators with licensing and banking. Our services include working with our clients to secure European bank accounts and acquiring necessary exchange licenses to operate worldwide. Likewise, many jurisdictions which are part of the EU are also able to offer financial products in other European countries by extension of the EU single market, a huge bonus to new exchange operators.

Exchange Licensing

Exchange licensing, while slightly different in each jurisdiction, is a necessary requirement for all new exchange operators. Most licenses will require that exchanges identify their customers via know your customer (KYC) procedures, comply with anti-money laundering (AML) laws and regulations, and hold a relevant account with a bank or financial institution in order to set up an exchange to fiat currency.
Many countries and jurisdictions require two separate licenses, one which allows the operation of an exchange, and another to legally transfer money. It is often far easier for exchange operators to acquire all necessary documents if they only plan to deal with Bitcoin and other cryptocurrencies, and don’t trade fiat or other asset types. Therefore, a common strategy among new cryptocurrency exchanges is to begin trading with cryptographic assets only, and then once funds allow, expand into fiat pairings.

Major Challenges of Building an Exchange

Building an exchange is a very different task compared to most other software, such as eCommerce, websites or CRM. This is because exchanges are typically optimized for latency, which means handling requests as fast as possible, rather than throughput, which is concerned with handling the most requests per second.
As most existing websites are currently built for throughput rather than latency, finding developers and experts with the relevant skills can be incredibly difficult. Most developers with relevant skills can be found in the niches of algo and high frequency trading, real time multiplayer game engines, and low level systems programming. As these are small areas of expertise with relatively few developers, it is a significant challenge to build a team with relevant knowledge to build an exchange from scratch.
Instead, Qoden Technologies’ exchange and trading solutions can save exchange operators from lengthy development times and reduce costs to a fraction of those that would otherwise be spent on development.
Launching an exchange is an exciting endeavor for new operators, but without careful planning and preparation, new exchanges can run the risk of wasting valuable time and resources. Therefore, choosing a trusted and capable software operator and partner who can assist with the integral process of designing, consulting, licensing and launching an exchange is a vital step towards long-term success and profitability.

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