Mar 10 2022

What is a cryptocurrency exchange: formalities and requirements

A cryptocurrency exchange is generally a virtual space, that is, an exchange platform that allows users to buy or sell their cryptoassets, either with cash or through trading using cryptocurrencies, although many exchanges also allow trading with shares or any other financial security that is accepted by the community that conforms it.

Basically, it is a meeting point or online money exchange where cryptocurrencies and tokens are bought, sold and exchanged and, in addition, the market price is generated and subsequently awarded to the cryptocurrency based on supply and demand.

Types of cryptocurrency exchanges in existence

There are currently five major groups or types of different Exchanges, these are:

Traditional or centralized Exchanges

This type of Exchanges includes platforms where users buy and sell taking into account the market price. These are highly regulated platforms that scrupulously comply with the rules called KYC (Know Your Customer) and AML (Anti-Money Laundering) and in which users must identify themselves in order to participate.

Cryptocurrency Broker

This category of Exchanges are spaces that allow their users to exchange their cryptoassets for others of their choice. Therefore, they are not oriented towards buying and selling, but rather for the exchanging or trading of cryptocurrencies.

OTC (Over the counter) platforms

OTC platforms are characterized as peer to peer (P2P) exchange platforms between buyers and sellers. In other words, the negotiation that takes place is directly between the two parties involved, without the mediation or supervision of the platform itself, which means negotiating at prices outside those expected in the market.

Cryptocurrency funds

Cryptocurrency funds are born at the initiative of professionals with the aim of managing cryptocurrency investments. The main feature of this type of platform is that the user can buy and sell in a simple way without the need to store the cryptocurrencies (since they are not his own) but trades with the existing coins in the fund.

Decentralized Exchanges

Decentralized Exchanges are those that work in the same way as centralized ones, but with the peculiarity that there are no intermediaries, and the platform is self-sustained by its programming. In other words, it is an anonymous way of investing in cryptocurrencies, without depending on the custody of third parties, thus eliminating intermediaries through the use of Smart contracts.

How an Exchange works

As indicated above, Exchanges work like a conventional exchange house, with the difference that they specialize in transactions with cryptocurrencies instead of tangible money, although there are currently a variety of platforms on the market that also allow transactions with fiat money.

In this sense, Exchanges are an excellent tool that allows users to enter the cryptocurrency trading and exchange markets, providing them with a series of auxiliary tools, such as technical analysis and other indicators so that the user can make decisions with full knowledge of the opportunities for profit and risk.

Formalities and requirements for Exchange platforms

Following the entry into force of Royal Decree Law 7/2021, which transposes the fifth European directive on money laundering, the registration of cryptocurrency exchanges with the Bank of Spain and SEPBLAC is a requirement to be able to operate.

In accordance with the above, this requirement must be formalized by all those individuals or legal entities that provide services of exchange of virtual currency for legal tender and by the providers of electronic wallet custody services, this is, individuals or legal entities that are engaged in the safeguarding of private cryptographic keys on behalf of their clients, for the holding, storage and transfer of virtual currencies. All this will be applicable when these persons or companies provide these services from Spain, regardless of the location of the recipient or beneficiary of the service.