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Regulatory bodies around the world are reforming day by day to ensure security and transparency for cryptocurrency trading. Knowing the basics about the rules, regulations, compliances, licenses, etc isn’t just a formality rather it acts as a lifeline for a successful crypto exchange business.
To make it more clear, have you heard about BitMEX, a popular crypto exchange that paid $100 million as a fine? They violated the Anti-Money laundering regulations for its exchange platform. Awareness about compliances and regulations can certainly help to cut down such situations. This blog presents crucial information for newbie startups about every compliance and regulation for launching a crypto exchange.
Let’s start with…
Major Regulatory Bodies for Crypto Exchange
Each country has a special regulatory body to regulate the rules and norms for trading crypto assets. Some of the common regulatory bodies for crypto exchange are,
- FATF (Financial Action Task Force)
- SEC (Securities and Exchange Commission)
- FCA (Financial Conduct Authority)
- ESMA (European Securities and Markets Authority)
FATF
FATF or Financial Action Task Force is an inter-governmental organization that combats anti-money laundering, and terrorist activity to maintain integrity in the global financial system. This regulatory body maintains two different lists:
- Black list – This comprises a list of countries that have severe jurisdictions with serious deficiencies that counter money laundering, and terrorist financing. Countries like Iran, Myanmar, etc come under this list.
- Grey list – Countries that are working with FATF organizations to address the strategic deficiencies against money laundering and terrorist financing. Countries like the Philippines, Kenya, etc come under this list.
It is necessary to analyze the geographical jurisdiction before launching the crypto exchange and to follow the rules of FATF. The organization often revises its laws, and policies related to virtual assets (cryptocurrencies), proliferation financing, and other financial crimes.
SEC
After the financial crash of 1929, the SEC, or the Securities and Exchange Commission plays a vital role in regulating fair and efficient trading. The SEC ensures that every company offers investors relevant and accurate information regarding finances. The commission not only regulates exchange platforms rather it also regulates the work of brokers, dealers, intermediaries, and financial advisors. The commission is led by five members who are appointed by the US president and approved by the Senate. Other key responsibilities of the SEC include,
- Overseeing corporate disclosure
- Enforcing security laws
- Facilitating capital formation
- Overseeing corporate disclosure
The Securities and Exchange Commission actively revises laws in regulating the launch of ICO or Initial coin offering. By enforcing strict laws, norms, and regulations, the commission ensures that investors can trade efficiently and be protected from fraud.
FCA
The UK-based organization FCA or Financial Conduct Authority is responsible for the efficient functioning of the UK’s financial market. This is a public body of the UK government’s parliament. The operational objectives of the Financial Conduct Authority are,
- To promote healthy competition among financial markets
- To protect virtual asset consumers
- To enhance the integrity of the United Kingdom’s financial system
The major goal of this organization is to ensure fair and transparent markets for individuals, angel investors, businesses of all sizes, etc. Hence, it is essential to get authorization from the FCA before launching an exchange platform in the UK.
ESMA
The ESMA or European Securities and Market Authority is a decentralized agency that promotes a stable and orderly financial market to improve investor protection. The three main objectives of this regulatory body are,
- Investor protection
- Stability in finances
- Orderly markets
The ESMA ensures that investors are served with protection and security. It also promotes integrity, stability, and transparency for the proper functioning of a financial market in European countries.
These are the major regulatory bodies that ensure to offer global investors proper security, and hassle-free trading. Policies, terms of conditions, and regulations are revised occasionally to maintain financial stability in the crypto market. Thus, ensure to follow the key objectives of these regulatory bodies.
Countries that seek Crypto Exchange License
As the dynamic crypto market has flourished in numerous countries worldwide, some countries have formulated strict rules and regulations. This has been made to avoid scams and hacks. Here are the top countries that imposed strict laws on Cryptocurrencies and exchanges.
- Japan
- USA (United States of America)
- European Union
- Australia
- Canada
- United Kingdom (UK)
- Switzerland
- South Korea
- Hong Kong
- United Arab Emirates (UAE)
- New Zealand
Some of the countries that are lenient in enforcing licenses, and rules are,
- Germany
- Singapore
- Portugal
- Malta
- Georgia
- Malaysia
These are the countries that have their regulatory bodies, and laws to formulate crypto trading without any hassles.
Regulations for Launching Crypto Exchanges – A Detailed Landscape
Adhering to compliance and rules for launching a crypto exchange enhances the platform’s credibility, user trust, and essential secured financial services.
Essential Regulatory
Some of the essential regulations that must be followed are KYC/AML factors and crypto exchange licensing.
- Licensing
Each region, jurisdiction, and country has its unique set of licenses to adhere to the regulatory aspects for starting a crypto exchange. Some of the licenses needed are Money Transmitter License (USA), BitLicense (New York), Financial Services License (Europe), Electronic Money Institution (EMI) License (UK), etc.
- KYC/AML Factors
Anti-money laundering (AML) and Know Your Customer (KYC) are crucial elements in the crypto industry. These factors are important to prevent illegal activities and customer’s due diligence.
The KYC factor verifies the customer’s identity to prevent fake user entry, and to report suspicious activities within the platform. This ensures trust and financial stability in the crypto exchange platform.
Technical Compliances
- Data Protection Laws
The data protection laws adhere to the user data that will be stored, secured, and processed with end-to-end security. Some of the laws like GDPR in Europe or CCPA in California demand the crypto exchange platforms to enforce strict privacy policies, terms of services, and conditions. And also the platform must ensure the security of user data.
Security compliance
- Cybersecurity Measures
Cybersecurity measures are undertaken to protect the crypto exchange, its user data, and other financial information from hackers. This includes the integration of two-factor authentication, SSL protection (Secure Socket Layer), and anti-phishing protocols for advanced-level security measures. For more insights on how security contributes to regulatory compliance, explore the essential role of security in crypto exchanges. Some of the relevant laws include:
- General Data Protection Regulation (GDPR)
- Cybersecurity Information Sharing Act (CISA)
- Network and Information Systems (NIS) Directive
- California Consumer Privacy Act (CCPA)
- Personal Data Protection Act (PDPA)
These security measures align with regulatory requirements, protecting user data and supporting compliance to mitigate the risks of fraud and cyber threats.
- Due Diligence
Due diligence is conducted to examine the crypto business about its compliances, legal followings, and financial obligations. The ultimate aim of conducting due diligence is to ensure that the crypto exchange platform is transparent, secure, and safe for crypto asset trading.
- Legal Opinions
Countries all over the world perform security compliance to ensure whether the specific crypto asset is legal to perform trading actions. Securities Exchange Act or the Financial Services and Markets Act are adopted in the USA and UK respectively to mitigate risk factors.
Legal opinions help startups ensure that rule contracts, including user agreements, partnerships, and vendor contracts, are legally binding and enforceable
Financial Licensing
- MSB
MSBs or Money Service Businesses are institutions that offer financial services such as money transmission, currency exchange, money orders, and virtual assets. US-based jurisdictions follow this license before establishing the crypto business. This also builds credibility with customers and financial institutions.
- VASP
Virtual Asset Service Providers are entities that offer widespread services to virtual asset exchange, transfer, safekeeping, issuance, etc. These regulations are followed in the USA and other European countries.
Tax Compliance
- Tax Obligations
Tax regulations and terms of usage may vary based on the region and country. Tax obligations, profits, capital gains, etc may change accordingly. Internationally, every startup has to adopt tax laws like FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard).
These laws ensure the crypto exchange’s financial stability, transactions, and financial data.
Legal Considerations
- IP Rights
IP rights or Intellectual property rights are processed to protect the platform’s software, copyrights, patents, and trademarks. It eliminates the unauthorized utilization of the exchange platform’s copyrights.
- Copyright law – This law protects the website’s content, software code, and other website-related software from other illicit users.
- Trademark law – The trademark law protects the logos, brand name, etc associated with the crypto exchange platform. This reduces the misuse of the brand identity.
- Patent Law – This ensures the protection of the unique technology, software, etc used by the crypto exchange. With the exchange owner’s consent, the software can’t be utilized.
- ToS
ToS or Terms Of Service is a legal and written agreement where users have to agree to utilize the exchange platform. This agreement points out the user obligations and financial securities. Crypto users must be informed about their rights, refund policies, and liabilities.
These are the common compliances and regulations for deploying a crypto exchange platform. Proper tax registration and law transparency are essential for an efficient crypto exchange platform.
Final Thoughts
Hope you have got enough idea about the regulations, licenses, rules, norms, etc. Even though you are good in the legal aspect, you need a hand on the wheel and a clear map to guide you. Pixel Web Solutions has potential developers, technicians, and legal experts to guide the crypto exchange development process with perfection.
As a leading cryptocurrency exchange development company, We ensure to bring you a crypto exchange platform that is not only legally sound but also positioned for long-term success. As a newbie startup, you may fear having only limited resources, but we assure to offer. If you are ready to build a rock-solid legal foundation for your crypto business, let’s connect.
