Cryptocurrency trading is indeed lucrative. But the risks of being scammed and involved in illegal practices have demanded the importance of crypto exchange license.
In the past years, technology has changed how we communicate, work, and even pay for goods. The world has evolved into a technology-driven place that affects many sectors, including the financial industry. Consumers may not prefer cash anymore because they can pay for items with their smartphones. This behavior further encourages cashless payments with advanced technology such as cryptocurrency and its blockchain network.
Everyone possibly heard about Bitcoin by now. It was the first cryptocurrency that grabbed people's attention and introduced the concept of digital coins to the world. Over the years, other coins are growing too. There are currently thousands of altcoins available on the market and more are coming.
But even so, the huge potential of cryptocurrency and blockchain has not been fully developed yet because many people are still questioning its worth and debating whether digital coins can really be the future of the financial industry. Many banks and financial institutions have not adopted blockchain and crypto. Some countries even ban cryptocurrency altogether.
Despite that, the crypto industry keeps growing and there are many improvements in several aspects, including safety and regulation. In the past few years, the regulating initiatives from various financial jurisdictions have become more frequent to make the environment both safer and more respectable for everyone. These regulations were specifically designed for crypto exchanges and other businesses concerning cryptocurrency. Today, we will unfold everything you need to know about crypto license and why it matters to the industry.
Crypto License: Does it Matter?
Generally speaking, most crypto traders are interested to invest their money in crypto because it promises mouthwatering returns and high privacy due to its anonymity. Blockchain technology also offers the advantage of safe transactions with its decentralized nature.
However, we should also acknowledge that the very same reasons that make crypto attractive are also what make investors cautious. Compared to fiat currency, Bitcoin and other cryptocurrencies are prone to cyber crimes like hacking and fraud.
Hackers can gain access to an individual's crypto wallet by breaking into the server of a crypto exchange to steal their holdings. According to the US Attorney General's cyber-digital task force 2020 report, there are at least three areas of concern regarding cryptocurrency use:
- Direct use of cryptocurrency to commit crimes and finance terrorism.
- Using cryptocurrency to launder money and evade taxes.
- Cryptocurrency theft and investment fraud.
One of the most widely known examples of how people can use cryptocurrency to commit crimes is the dark web marketplace Silk Road. The site was live from 2011 to 2013 as one of the central marketplaces for drugs, forged documents, ransomware, and other illegal products. It was designed to use Bitcoin as the payment method so the participants can hide their identities. Ross Ulbricht, the Silk Road founder, was convicted in 2015 for several serious charges.
Not only that, a massive hack breakout happened in 2014 to the Mount Gox crypto exchange. Many investors lost hundreds of millions of dollars of Bitcoin because of it.
That is why it is highly crucial to store your coins in a safe place. Today, there are many crypto exchanges and wallet providers to choose from and it can be pretty hard to separate the safe ones from the rest. As a result, there is a need to set a safety standard and regulate these companies in order to protect clients from illegal activities such as scams, money laundering activities, etc. This is where the crypto license comes in.
Crypto license is probably the easiest way to spot a reliable exchange. If you're unsure about which broker is the best one, at least you must check the legality by reviewing its license. The license is usually issued by a respected authority of the country or region where the exchange is based, so make sure to research this beforehand.
That being said, if you're planning to start a crypto exchange business, it is vital to understand the legalizing process for the company. While most of the regulations are still relatively new and each jurisdiction typically uses different approaches or guidelines to their licenses, the process may be slightly more challenging than legalizing traditional exchanges. Therefore, the safest option would be to seek experts' advice on legal and financial terms. Make sure to choose a trusted and well-experienced team to take care of your legalization process.
Crypto Licenses Across the World
The expansion of cryptocurrency has reached almost every part of the world at this point, so there are many big and small crypto businesses spread all across the globe. To cope with such popularity, different approaches and regulations are used in many countries. Some are trying to take complete control over the industry, while some even try to forbid crypto exchanges. Here are some of the noteworthy examples:
Estonia is known as one of the pioneers to have introduced legalization for blockchain and crypto-related businesses. The country is considered really good for facilitating cryptocurrency regulation compared to other EU member states. In Estonia, every crypto exchange must obtain two financial licenses, namely the Virtual Currency Exchange Service License and the Virtual Currency Wallet Service License. Recently, these licenses were united into one.
In order to obtain an Estonian license, the exchange must adhere to Estonian crypto exchange rules and have a registered branch in the country. Other than that, the company should also follow strict reporting and essential procedures such as Know Your Customer (KYC). As a side note, even though licensed crypto exchanges are deemed legitimate in Estonia, cryptocurrencies are not considered legal tender yet (like in the UK).
In the US, crypto trading is regulated at both federal and state levels. As for now, the regulations regarding cryptocurrency are mainly based on the Bank Secrecy Act (BSA) of 1970 and the Patriot Act. Crypto assets that are considered eligible must comply with the Securities and Exchange Commission (SEC), under the US securities law. The exchange should also comply with other US federal regulations to operate.
Australia is another progressive country when it comes to crypto regulation. The country made a standpoint that crypto trading and other digital assets are now eligible to be regulated in Australia's existing financial services regulatory regime. All crypto exchanges in Australia must obtain a license issued by the Australian Securities and Investment Commission (ASIC). AML/CTF imposed on the exchanges should also be regulated under the Australian Transaction Reports and Analysis Centre (AUSTRAC).
The United Kingdom
There have been significant changes in the UK regarding cryptocurrencies. On January 6, 2021, the country has banned promoting crypto assets like crypto derivatives to individuals. That means, companies are not allowed to offer crypto derivatives to individual traders within the UK. However, companies are still allowed to engage in crypto exchange in the UK as long as they follow all the business conduct and operations guidelines.
Japan is another crypto-friendly country with sophisticated regulations and customer protection. The country has started regulating cryptocurrency as early as 2017, which is quite early compared to others. Crypto exchanges are entirely legal in Japan, as long as the exchange is registered as a Crypto Asset Exchange Service Provider under the authority of the Japanese Financial Services Agency (FSA).
The legalization process is rigorous and can take as much as 6 months in total. During the process, the company must keep records, have customers' due diligence procedures and security measures, follow counter-terrorism funding rules and anti-money laundering, and hold at least 10 million yen in capital.
The Bottom Line
While there is a massive opportunity in crypto trading and other crypto-related businesses, one must be aware that there are significant risks and regulatory issues that can't be underestimated. Every trader should know that crypto exchanges are vulnerable to being hacked and becoming targets of various criminal activities. These security issues have led to significant losses for investors who have had their coins stolen.
That is why regulations are very important to protect clients and ensure that the exchange complies with the rules. At the moment, regulations regarding cryptocurrencies are still pretty limited. Many crypto exchange owners still find it hard to understand the legalization process. It is considered complicated and tends to consume a lot of time compared to the regulations for traditional exchanges.
However, we can see that more jurisdictions in each country are starting to improve their regulations and guidelines for crypto exchanges. Hopefully, as cryptocurrency continues to become mainstream and gain broader acceptance in the global financial system, the regulation process and law enforcement keep continuing to develop in the following years.