Cryptocurrency Exchange License and Registration

With the exponential growth in interest and popularity of cryptocurrencies around the globe, the demand for crypto exchange platforms has continued to rise. Starting a cryptocurrency exchange platform can be a profitable business venture due to the massive amounts of trading volume that take place on a daily basis. 

Before setting up a crypto exchange, it is important to understand the way in which crypto exchanges are regulated around the world, as well as the particular licensing requirements if any. Due to cryptocurrencies being a relatively new market, the regulatory landscape is constantly changing and often highly complex. 

In this article, we take a broad look at the regulatory landscape pertaining to cryptocurrency exchanges in different parts of the world, whether specific licenses are required to operate, and where and how to set up a cryptocurrency exchange. 

Table of Contents:

• Types Of Cryptocurrency Exchanges And Licenses
• Traditional Cryptocurrency Exchanges
• Fiat Cryptocurrency Exchanges
• Do You Need A Crypto Exchange License?
• Where To Set Up A Crypto Exchange?
• How To Setup A Crypto Exchange License (USA)
• Offshore Crypto License Requirements
• 1. Lithuania
• 2. Switzerland
• 3. Estonia
• Conclusion

Types of Cryptocurrency Exchanges and Licenses

Cryptocurrency exchanges can be broadly divided into two main categories:

Traditional exchanges

These are exchanges that only allow crypto-to-crypto exchanges (i.e., users are only able to trade one crypto for another, but cannot directly exchange fiat currency for crypto). Most classical crypto exchanges have operated on this model because the licensing requirements are less stringent.

The widespread adoption of USD stablecoins such as USDT, USDC and UST, makes it easy for users to only engage in crypto-to-crypto trades. However, they will need a “fiat onramp”, which is a platform or exchange which allows them to initially convert their fiat currency into a cryptocurrency or crypto stablecoin.

Fiat exchanges

These exchanges allow users to directly exchange fiat currency for crypto and vice versa, in addition to ordinary crypto-to-crypto exchanges. There are fewer of these more specialised exchanges as they are more complex to operate, and the licensing requirements are more stringent. 

Some of the most established crypto exchanges offer these types of transactions (e.g., FTX, Kraken, Coinbase). Other large players like Binance and KuCoin do allow users to purchase crypto via credit card, but do not allow users to deposit/store fiat currency on the exchange and actively trade with it. 

The licensing and operating requirements of these two types of crypto exchanges are different. Determining what type of license is required depends on the jurisdiction in which the exchange is setup as well as the type of operations/exchanges it offers. 

Cryptocurrency exchange licenses can also be divided into two main categories:

1. Specialised crypto licenses: these are licenses issued by authorities that directly and specifically regulate the activities pertaining to the exchange of cryptocurrencies.
2. Traditional financial licenses: these are other licenses that regulate activities pertaining to various types of financial activities and operations, to which the exchange of cryptocurrencies is indirectly subject to. 

In this article, we are mostly concerned with the former category (specialised crypto licenses), but we make mention of other important financial licenses where relevant. 

Do You Need a License?

If you are operating a business whereby you are actively receiving investors’ funds and buying cryptocurrency on their behalf with it, and in turn transferring ownership of that crypto to the investor, it constitutes a licensable activity that requires either a Broker’s License or a Financial Advisor’s License. 

If, on the other hand, you are merely providing a marketplace where buyers and sellers can meet to trade cryptocurrencies with one another, a license may not be strictly needed. That being said, it may still be useful to acquire some form of special licensing, as it will:

• Allow you to engage in a wider range of activities,
• Offer greater reputability and protection from lawsuits,
• Open up more partnership opportunities with other financial institutions and banks.

The cryptocurrency industry is still new, and the legal classification of a crypto exchange is unclear in many countries. As such, in many jurisdictions, the types of financial licenses that you can apply for are not specifically aimed at regulating the cryptocurrency market. They are more generalised financial services licenses where crypto exchange activities might be deemed to form a part of. Examples include brokers and financial advisor licenses. 

There are, however, some jurisdictions which recognise specific cryptocurrency exchange licenses. Examples include Estonia, Switzerland, Lithuania, Japan, Philippines, and certain US states. The exact nature of these licenses and the way in which cryptocurrency exchanges are governed do vary widely across these jurisdictions.  

Where to Set Up an Exchange?

Before setting up a cryptocurrency exchange, it is very important to thoroughly research the possible countries in which it can be based. The decision of where to set up your cryptocurrency exchange can have significant effects on a range of factors including:

• Tax obligations,
• Range of allowable activities,
• Licenses required and regulations which must be adhered to,
• Setup and maintenance costs. 

While there are certain states in the US that do have specific regulations and licenses pertaining to cryptocurrency exchange activities, and are somewhat friendly towards the industry, the US is not recognised as one of the ideal jurisdictions in which to base a cryptocurrency exchange. Taxes are generally higher than in more favourable offshore jurisdictions, regulations are tighter, and there could be greater obstacles from governing authorities like the SEC.

By contrast, known offshore jurisdictions that have taken a favourable stance towards the cryptocurrency and blockchain industry, make it easier to setup a cryptocurrency exchange, have lower overall taxes, clearer and more favourable regulation, and various other benefits. Some of the best offshore jurisdictions in which to setup a cryptocurrency exchange includes Switzerland, Lithuania, and Estonia. 

How to Set It Up (USA)

As mentioned, the USA is not the first-choice jurisdiction in which to base a cryptocurrency exchange, but it can certainly be done. The US has yet to create clear distinctions about how cryptocurrency is viewed compared to ordinary fiat and/or property transactions. Cryptocurrency regulation began to be implemented in the US in 2013 when the government decided to not ban it. 

Cryptocurrency exchange licenses in the USA are issued by the national regulation bureau, FinCEN. FinCEN issues licenses which, in addition to crypto exchange activities, allows the holder to conduct activities related to:

• Foreign exchange services,
• Background checks,
• Money transfers,
• Sales with prepaid access.

Cryptocurrency exchanges and other entities engaging in crypto transactions must:

• Be registered as a Money Service Business (MBS) providing financial services,
• Receive licenses for the activities that they engage in (e.g., bitlicense)
• Inform law enforcement agencies such as the SEC of any suspicious transactions and activities. 

Cryptocurrency is taxed in the same way as property transactions in the US, and therefore operations involving it are deemed to be capital gains profits and taxed as such by the IRS. The Securities and Exchange Commission (SEC) play a major role in overseeing cryptocurrency exchanges and token trading, and will not hesitate to prosecute any violations as criminal acts. 

In order to be issued with a crypto exchange license in the US, a company must comply with a number of requirements. These include:

• Comprehensive risk analysis associated with the company’s operations,
• Implement written policies and procedures which satisfy the requirements of license compliance standards,
• Appoint authorised personnel in the field of crypto exchange compliance,
• Conduct ongoing training and education of staff,
• Provide ongoing documentation and reports, including instances of suspicious activities.
• Submit all required initial documentation including information about owners, registered agents, directors, company contact details, financial history, etc.

Requirements

There are many crypto-friendly nations in which one can explore setting up a crypto exchange. In this article we will just cover three of these (Estonia, Lithuania, and Switzerland), so as to give an idea of the typical registration and licensing requirements. 

1. Lithuania

Lithuania takes a friendly approach towards the cryptocurrency industry, and is at the forefront of transparent and comprehensive regulation. It also has specific licenses related to cryptocurrency businesses and exchanges. Obtaining a cryptocurrency exchange license in Lithuania will allow the holder to:  

• Exchange fiat to cryptocurrencies and vice versa,
• Engage in exchange transactions with different cryptocurrency types,
• Store digital currencies,
• Store fiat currencies for specified periods of time in preparation for cryptocurrency purchases,
• Transfer crypto between different wallets.

In order to qualify for a crypto exchange license in Lithuania the company must:

• Have clear requirements and policies which define: the types of risk transactions, high-risk transactions and the way in which they are handled, comprehensive due-diligence procedures, documentation requirements for applicants, recording and reporting requirements. 
• Implement proper internal security measures such as: anti-money laundering, safe collection and storage of information, proper notification systems where they are obligated to do so by the legislation.

Finally, the documents and information required to open a licensed crypto exchange company in Lithuania include:

• CV/experience and training of owners in the relevant field of crypto,
• Information about the board members including their reputation and good-standing,
• Business’ financial reports and history, as well as future business plans,
• Certificates proving clean criminal records of owners, directors, beneficiaries, and AML officers. 

2. Switzerland

Switzerland is one of the best countries in the world to register a cryptocurrency exchange company. Companies looking to register a crypto exchange in Switzerland should look no further than Zug (aka Crypto Valley) due to its low taxes and favourable cryptocurrency regulations. 

A crypto exchange license in Switzerland must be obtained from the Swiss Financial Market Supervisory Authority (FINMA). The main requirement to qualify is simply to prove compliance with relevant anti-money laundering practices. In addition, crypto exchanges in Switzerland must:

• Require customer KYC,
• Keep records of all transactions,
• Have a method to identify and report any suspicious transactions or activity. 

Licensed cryptocurrency exchanges can expect to pay a corporate tax rate of 12 – 18% in Switzerland. The only major downside of becoming a registered crypto exchange in Switzerland is that the process of obtaining a license can take up to one year. 

3. Estonia

Estonia is one of the most well-regulated and, at the same time, friendliest nations in the world for cryptocurrency, digital asset, and blockchain companies. The regulators in Estonia do issue a designated crypto exchange license which is required to operate as a cryptocurrency exchange platform based in the country.

However, there have been new regulations that have made things much more difficult as of late, which makes it not as friendly a place to get a license as new KYC and AML requirements have made it much more difficult. In 2021 the government also revoked over 1000 licenses in response to their tightened regulations. Get in touch for more info on these changes as they are ongoing.

The following documents and information are required for the application:

• Contact details of the applicant company (phone numbers, email addresses, website address)
• Information on the shareholders and directors
• Information on the company’s legal representative
• The company’s rules and procedures for working with cryptocurrency transactions, as well as details on the person responsible for ensuring compliance with the aforementioned rules. The rules as well as the information document should be in accordance with Estonia’s legislation pertaining to cryptocurrency.

Conclusion

Due to the relative infancy of the cryptocurrency and blockchain industry, there are wide disparities in how crypto exchanges are regulated and licensed in different jurisdictions. It is important to have a thorough understanding of the ever-evolving dynamics of these regulations and the necessary licensing requirements before proceeding with starting a crypto exchange in your jurisdiction of choice. 

We have outlined some of the essential areas, as well as a few of the preferred jurisdictions in which to become a licensed crypto exchange. As of 2022 we recommend Lithuania to our clients and regard it as the place to get a license in 2022. However, in order to make the most informed decisions and successfully set up an offshore crypto exchange, it is advised to consult directly with an expert who can help you choose and navigate the best path for your particular situation.