Seven requirements for cryptocurrency exchange businesses

How to find the perfect jurisdiction and to prepare for the cryptocurrency exchange license application

Cryptocurrency exchanges, aka digital coin exchange or digital asset exchange, are defined in a broad variety, depending on the experiences and digital competence of the governments worldwide. Just to give one example, under the latest Thai legislation, “Digital Asset Exchange” means

  • a center or a network established for the purposes of purchasing, selling or exchanging of digital assets,
  • operates by matching or arranging the counterparty or providing the system or facilitating a person who is willing to purchase, sell or exchange of digital assets to be able to enter into an agreement or match the order,
  • in the normal course of business, excluding the system or network in the manner as specified in the notification of the SEC.

When comparing the exchange friendliness of different jurisdiction, the varying definitions have to be taken into consideration. The jurisdiction with the highest standards for digital exchanges might be the best choice if the intended venture does not fall under its regulatory hurdles.

Seven criteria for the streamlined selection process

The list of seven criteria for the cryptocurrency exchange business serves two purposes.

  • It enables the selection of the most favorable jurisdiction to set-up the digital asset exchange business
  • It gives the basis for the expert consideration whether the establishment of the exchange at the selected jurisdiction is feasible and how to start the licensing process.

Depending on the business plan, the available resources and the individual preferences of the promoter, the selection can be done between a huge number of jurisdiction which generally allows digital coin exchanges under particular legal requirements and regulatory hurdles.

To evaluate the compliance of the business plan, the available resources and the individual preferences of the promoter with the particular legal requirements and regulatory hurdles, the following details should be identified and determined:

1. Type: Will the cryptocurrency exchange or digital currency exchange (DCE) be operated on a website, decentralized in an app, by a cryptocurrency ATM (Bitcoin ATM, BTM), or also by a physical shop?

2. Company: Will the DCE be set-up and operated by a local corporation or from abroad? What are the intended registered capital and the overall domestic investment? What is the overall investment amount? What is the expected workforce? How many foreign and domestic employees?

3. Coins and tokens: Which coins, tokens, and fiat currencies will be traded? Will fiat currency accepted in check or cash? Will credit card payments, wire transfers, postal money orders, Western Union, Paypal, and similar services be accepted?

4. Customers: Customers from which countries will be accepted?

5. Banks: Which domestic and international bank partners or payment processor are involved? What is the status of the negotiations with these organizations?

6. Software: Will the software be purchased on the market or self-developed (in-house)? Will the software development be done in the domestic market?
Are customer funds stored online or offline? How are the customers’ funds secured and what is the mechanism on this? How are customers’ assets segregated from the company’s own assets? How is cybersecurity to prevent hacking and protect customer data provided?

7. Compliance: What are the intended procedures for KYC, AML, and CDD for purchase, sell, receive, send, and withdraw? Where are the transactions being kept and what are the retention periods for the transaction history?

Beyond the cryptocurrency exchange application

To successfully apply for an exchange license is just half the battle. Depending on the regulatory framework, this license has typically not a “concentration effect”. This means that the single licensing decision does not comprise all the necessary permits. Additional requirements might include:

  • financial service license for domestic transactions,
  • FX license for interacting with foreign currencies,
  • eCommerce license,
  • taxation regulations (withholding tax, tax information exchange, etc.), and
  • general corporate law and foreigner legislation limitations.

A holistic approach is, therefore, necessary to avoid disappointment.

Would you like to know more? Contact the Bangkok investment law firm for a consultation.