A Warning on Crypto Exchange Projects

Although interest in crypto investing has lately seen a gradual decline, with the recent explosion in the value of Bitcoin, we are often approached by prize-eyeing customers who are eager to begin their own crypto exchange.

Unfortunately, however, this is very much akin to taking a rudderless rowing boat out into the open ocean — without an adequate plan, you are likely to be rocked by unexpected tidal waves.

For this reason, Software Planet would now like to divulge some critical information for those who are still determined to embark upon this journey.

What is it anyway?

As the name rightly suggests, a cryptocurrency exchange is a business, online or otherwise, allowing its customers to trade digital and traditional fiat currencies.

Of course, cryptocurrencies themselves allow for decentralised exchange, but by charging a small percentage on every processed transaction, cashing in on the crypto train is indeed a possibility — a proposition made all the more enticing given the success of companies like Binance.

Just 143 days after launching, Binance was already ranked as one of the top three global crypto exchanges. In fact, in the first six months of 2018 alone, the Tokyo-based company grew from a healthy two million users to an astonishing 10 million.

Yet alas, things are not always what they seem.

The issue of legality

Sad though it may be, cryptocurrencies are still very much viewed with suspicion, and regulators across the globe are yet to reach a decisive consensus on how best to tackle the issue.

In the United States, for instance, laws will vary by state. So while the Securities and Exchange Commission (SEC) is yet to propose any new, formal legislation aiming to target crypto investment specifically, they have been known to issue some very stark warnings:

“A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”

Of course, at any time, the federal government may also override existing state laws.

Similarly, here in the UK, while crypto exchanges have not yet been made illegal — as in a handful of other countries — the Financial Conduct Authority (FCA) advises that crypto investment is “highly unregulated, offers no investor protection and has big price volatility.”

Confusingly, however, they also add that while cryptocurrencies themselves are not currently regulated, “cryptocurrency derivatives are.” Likewise, “firms conducting regulated activities in cryptocurrency derivatives must comply with all applicable rules in the FCA’s Handbook and any relevant provisions in directly applicable European Union regulations.”

Thus, it is highly advisable to bring on board a reputable lawyer who will be able to keep you informed on all the latest legal developments.

A Digital Wild West

Unsurprisingly, therefore, criminality is also rife in the crypto world, as unlike traditional exchanges, very few checks and balances are currently in place to protect investors and entrepreneurs.

1. Scams

These days, there is already growing evidence that long-time illegal practices like Pump and Dump, Spoofing and Laddering are making powerful comebacks in the digital universe. These are led by large and highly organised financial groups who band together to misleadingly manipulate the value of cryptocurrencies — for their own personal gain and at the expense of their helpless victims.

Naturally, this poses an enormous risk for traders and exchange companies alike. So with this in mind, every crypto exchange should have its own KYC and fraud prevention modules, to detect such scams and immediately act.

2. Security issues

While working on crypto exchange projects, developers could obtain unfettered access to all financial activities. Even if you trust a company completely, the very nature of a crypto exchange means that they — like your money and that of their many clients — are always in grave danger. This happens because very often, developers work as collectors, moving “gold” from one location to another without any security or protection whatsoever. Any wrong move here such as sending to the wrong address, computer virus or even an application defect could result in a serious loss of money. This is why a decent software architecture as well as multiple security audits should be implemented prior to launch.

Be prepared

Often, our customers are far more concerned about the pitfalls of implementation, features and software architecture than the various non-technical risks that are associated with their projects. Unfortunately, however, this part of the project in particular demands huge amounts of attention to business activities that fall outside the technical scope.

For this reason, though setting out into the unknown with a burgeoning new business idea is understandably a tantalising concept, due to the issues spelled out above, it could also prove a shipwreck in waiting.

Thus, SPG believe it is paramount to be well aware of where the journey may lead, and accordingly, develop a thorough, educated plan.

To that end, of course, we are happy to assist you in any way we can.

David Blackwood

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