The cryptocurrency industry is continually growing and is expected to reach a value of $13.17 billion by 2030. For entrepreneurs looking to capitalize on this potential by starting a crypto exchange, securing a crypto trading license is an essential first step.
A cryptocurrency exchange license lends credibility to your business and can help you attract more investors and traders. It also promotes compliance, which legitimizes your exchange.
In this post, we’ll explore everything there’s to know about crypto exchange licenses, including why you need one, the different types of licenses, and how to apply.
A cryptocurrency license is a permit issued by regulatory authorities that allows you to facilitate trades, offer brokerage services, manage digital wallets, or provide custodial services. In other words, a crypto trading license gives you the legal go-ahead to offer specific services within the crypto market.
Technically, you can create a decentralized exchange and operate without official licensing. However, without a license, you may be unable to partner with reliable liquidity providers and acquire funding from investors. And, depending on your jurisdiction, you may also incur penalties, which can significantly dig into your profits.
Different players in the cryptocurrency market offer varying services, and each one requires a specific license. The most common licenses include:
A broker license is necessary for any company that plans to serve as an intermediary in crypto trading. To get one, you typically need a reliable trading platform, evidence of adequate capital, and transparent pricing mechanisms.
To stay compliant, you need to report transactions in accordance with financial regulations, implement efficient risk mitigation strategies, and adhere to all market rules.
A custody license is a must-have for any entity that plans to hold and safeguard virtual currency on behalf of clients. To qualify for one, you must have high-level security measures in place, such as cold storage options, multi-signature cryptocurrency wallets, and audit trails.
You also need contingency plans to minimize customers’ losses in case system breaches occur.
Depending on your jurisdiction, you may need a mining license if you validate blockchain transactions. If your operating region requires it, you’ll need to show how you plan to handle fees and rewards from mining activities.
Getting a wallet license is crucial if you plan to offer digital wallets to facilitate cryptocurrency transfers and trades. As with the custody license, you must show advanced security measures to protect clients’ assets.
You also need to ensure data privacy and have mechanisms in place to help users recover their accounts if they lose or forget their keys or credentials.
This is a requirement for cryptocurrency companies that either convert crypto into fiat currencies (or vice versa) or facilitate the transfer of digital assets. To obtain one, you need to show robust internal consumer protection policies, maintain a surety bond, and demonstrate sufficient capital reserves.
To stay compliant, you’ll need to adhere to anti-money laundering (AML) and Know Your Customer (KYC) requirements.
Because of the relatively new nature of the cryptocurrency market, some regions have yet to impose strict licensing rules. Still, it’s important to get a license, and here’s why.
The last thing you want is to pay all of the white-label crypto exchange costs or development expenses, only for your platform to fail to attract customers. Unfortunately, this is a possibility, since some people are still hesitant to invest in crypto assets because of fraud concerns.
Licensing can minimize this risk. A license shows that you’re ready to comply with legal requirements and can distinguish your platform from fraudulent ones, increasing your likelihood of attracting traders.
Licensing can also build legitimacy and trust with partners like liquidity providers, which is vital for efficient cryptocurrency transactions.
While licensing isn’t a requirement in all regions, most jurisdictions have some sort of licensing system in place. For example, in the U.S., you must register as a financial services provider and get a license before you engage in crypto-related activities. Failure to do so can result in penalties that disrupt or even shut down your business.
Crypto exchange companies rely on many partners, some of the most important being banks and financial institutions. However, many may be unwilling to work with you without a license, as this can affect their reputations and potentially expose them to legal risks.
Getting a license gives you legitimacy and credibility, increasing your likelihood of securing relationships with them. This allows you to manage funds, process transactions, and offer fiat-to-crypto services more efficiently.
The licensing process can take a significant amount of time, so it should run parallel with your crypto exchange development. This way, you can deploy your platform faster. Here’s a step-by-step process to guide you:
Your choice of jurisdiction will determine how easy (or difficult) it will be to obtain a license and run a successful business. This is why it’s important to do your due diligence before deciding on a region.
An ideal region will have clear business laws for crypto companies to streamline compliance, as well as a favorable tax environment to support growth.
Some fintech and cryptocurrency-friendly jurisdictions include:
Once you settle on a jurisdiction, use all available resources to understand its regulatory requirements.
While you can gather information on your chosen region’s government sites, it’s better to consult with legal professionals who specialize in the crypto market. They can take you through the crypto landscape and help you prepare all essential documentation.
The necessary documents vary by region, but at a minimum, you’ll likely need:
Make sure your CTF, KYC, and AML internal policies comply with local regulations and are stringent enough to adhere to international standards, as many crypto businesses operate on a global scale.
The process of forming your startup will vary depending on your chosen jurisdiction. Still, there are some general steps you’ll likely need to take regardless of where you are. These include:
Again, consulting a legal professional here can make the process much simpler and ensure you don’t miss any important steps. The cryptocurrency industry is under a lot of scrutiny, so you need to make sure you dot all your i’s and cross your t’s for a smooth company registration and licensing process.
This step will determine whether you can run a legitimate crypto exchange. Your licensing application needs to detail several key things, such as:
To make sure you get everything right, schedule pre-application meetings with regulatory bodies to understand their requirements.
Depending on your chosen jurisdiction, you might need to meet specific capital requirements. For example, Estonia requires a minimum, fully paid-up share capital of €100,000. Demonstrating sufficient financial resources shows regulators that you can operate securely and meet all your regulatory obligations.
Other jurisdictions, on the other hand, are more relaxed when it comes to capital. For instance, the Czech Republic has close to no minimum share capital requirement — you can demonstrate as little as €0.04 in share capital.
Make sure you consult with legal and licensing professionals before applying to determine your specific requirements.
This is the final step in the licensing process. When you submit your application, the relevant regulatory authority in your jurisdiction will review it to determine whether to approve your request. This may take anywhere from a few weeks to over a year, depending on the region you’re applying in.
The regulatory body may conduct inspections or ask for additional information during this process. If so, cooperate fully for a smooth and quick approval.
While still optional in some regions, crypto licenses are quickly becoming a requirement in a bid to protect traders’ investments.
Getting one can minimize your risk of penalties, enhance relationships with partners and customers, and make it easier for you to access banking services for efficient crypto transfers and trades.
AlphaPoint can help you meet regulatory requirements and get your cryptocurrency business up and running faster. We offer robust white-label exchange software equipped with support for AML, KYC, and other security measures. So you get built-in, battle-tested tools to simplify compliance.
Schedule a demo with Alphapoint today to see how our technology can streamline the license application process!
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