Why regulatory compliance is mandatory while involving in Crypto currency Exchange development?

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regulations during Crypto currency Exchange development

Analyzing the importance of adhering to regulations during Crypto currency Exchange development

Cryptocurrency exchanges have positioned themselves as a lucrative business avenue. Cryptocurrency exchanges have not only helped the traders make a profit by overcoming the market and price fluctuations but have also created a lot of crypto millionaires by helping them set up a cryptocurrency exchange business.

Crypto coins like Bitcoin and Ether can be bought over the counter. For every other currency, however, it is essential to use a cryptocurrency exchange to buy those altcoins. Exchanges have evolved to be an integral part of the crypto ecosystem.

At the core of cryptocurrency lies the blockchain, the revolutionary decentralized digital ledger technology. Blockchain ensures that the power to manage data does not vest with just one entity but is spread across the entire network. A copy of the blockchain is stored in every computer that is part of the team and it is essential that all the copies need to be identical. If there is a small difference, the change will not be accepted until all the nodes arrive at a consensus.

This decentralization ensures top-notch security, with anonymity. Since a person who tries to hack into the blockchain can only get access to one of the nodes, the lack of consistency will ensure that the data reverts to its old self, denying access and possibilities of manipulating data. Cryptocurrency also assures anonymity. A person can transact cryptocurrency just by using their public key and not reveal their personal identity.

Cryptocurrency transactions are close to instantaneous. It also does not involve any mediation and the trust of the transaction is confined to smart contracts and the blockchain. Just make sure that a person in the United States can send some crypto coins to someone living in Japan without any involvement of banks and banking charges. Cryptocurrencies are almost terraforming the world of global finance which has not seen quite a lot of changes for centuries together.

The other side…

Although all these advancements might seem like advantages on the surface, it also presents a lot of dubious attributes to the entire financial ecosystem. Taxation is an inevitable part of financial transactions, and it goes a great distance in establishing responsible accountability.

It is feared by a lot of purists that cryptocurrency might disadvantageously alter the way in which transactions, taxation, and accountability is looked at. Given the fact that cryptocurrency is anonymous, instantaneous, and outside the purview of legal scrutiny, it gives rise to a lot of loopholes along with these advantages.

It is something to be concerned about but surely not worried about! Even Amazon had its fair share of bugs in its nascent days. Cryptocurrency is not just nascent with respect to practice alone but even the entire technology. Therefore, it will take time before cryptocurrency becomes organized and completely legal.

Cryptocurrency exchanges have been one of the hotspots of crypto activity. As discussed earlier, cryptocurrency exchanges have opened up the technology even to the technologically uninitiated. Cryptocurrency exchanges have been recognized as legally acceptable businesses in a lot of jurisdictions even if those legal systems do not acknowledge the validity of cryptocurrency.

This opens up a plethora of opportunities for money laundering and usage of the script of funds for activities that might be against the interest of the jurisdiction, the nation, or the human race and the world at large. To counter these possibilities of malicious usage of cryptocurrency, a lot of initiatives have been introduced.

Some of them are the ‘Know Your Customer’, ‘Anti-Money Laundering’, and ‘Combating the Financing of Terrorism’, commonly abbreviated KYC, AML, and CFT, in that order.

What exactly are they?

To understand the intensity of the above requirements, it is important to look at a few breaches that have happened in the crypto world. Probably the most famous among them is the Mt. Gox breach that resulted in a loss of over 7% Bitcoins in circulation. More recently, Binance, probably the biggest name in the world of crypto exchanges had 7000 bitcoins stolen on May 7, 2020. The coins were worth more than $40 million on that day.

Given all the circumstances, it is important for an exchange to know its customers, ensure that their customers do not escape the radars of taxation, and above everything, do not use the profit for funding terrorist activities.

Let us look at each of these legal requirements in detail.

Know Your Customer (KYC):

KYC as it is commonly abbreviated is the process by which a cryptocurrency exchange comes to know about its customers. It helps establish the identity of the user and authenticate their actual identity against who they claim to be. It involves collecting and confirming the identity of the user by using identity cards issued by the government, phone numbers, and at times, a utility bill.

This might seem quite contradictory to the principles on which cryptocurrency was founded. However, most cryptocurrency exchanges, and especially the usually centralized exchanges following this process is extremely essential.

Anti-Money Laundering (AML):

Anti-money laundering, commonly abbreviated as AML, refers to the set of procedures that have been created to put a stop to generating income through illegal activities. Some of these activities include evading taxes, manipulation of the market, public fund misappropriation, and trading of illicit and counterfeit goods.

It is mandatory for financial institutions to conduct due diligence processes in an endeavor to prevent malicious activities. Since the crypto industry falls into the umbrella of financial institutions, it is viewed as an avenue for technology-enabled money laundering. Therefore, stringent laws have to be in place to ensure that such activities do not happen.

Combating the Financing of Terrorism

CFT is a set of procedures that intend to block all the sources of financing meant for spiritually, ideologically, and politically oriented violence and threat directed at civilians. It is a complex procedure that explores deep into the different sources and channels through which money is siphoned for these activities.

It is to be noted that the anonymity and the global reach facilitated by the blockchain and cryptocurrency could be used as a stream of continuously financing terrorist activities. Therefore, the CFT process is strictly enforced by cryptocurrency exchanges to counter such practices.


Today, one of the most common methods used by crypto entrepreneurs for crypto currency exchange development is using white label crypto exchanges. If you are one of those, you should ensure that your white label crypto currency exchange incorporates all the features mentioned above.

The worst thing that you would want to encounter is a legal hassle after investing so much of time and money and building your business. In addition to keeping you legally safe, these KYC, AML, and CFT processes also go a great distance in winning the trust of your customers. Although it might seem like a cumbersome process, in the beginning, the customers will be assured that they have invested their crypto assets in a safe exchange.

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