Cryptocurrency exchanges have an important role in driving adoption around the world, but even the biggest operations face significant challenges when trying to expand their services. The advent of Bitcoin (BTC) and the subsequent development and launch of numerous other cryptocurrencies have changed the way people look at transacting across the world. Dependency on traditional banking systems is no longer the only option available to people.
Blockchain networks and cryptocurrencies are able to bypass conventional financial systems and allow people to transact directly, without having to go through a centralized institution. In an ideal, cryptographically secure world, users would transact peer-to-peer, but there are some barriers to entry for the uninitiated. Therefore, most of those new to crypto use exchanges as their entry points into the ecosystem as they convert their fiat currency into their cryptocurrency of choice. In 2020, users are spoiled by choices with the sheer number of cryptocurrency exchanges operating internationally.
Nevertheless, a handful of these exchanges are attempting to surge ahead of the pack and establish themselves as truly global enterprises. But what are the key challenges they face, and how have they gone about building their respective empires?
A juggling act
It’s clear that building a successful cryptocurrency exchange requires an enormous amount of time and resources as well as the ability to jump through a number of hurdles at any given time.
This is compounded when working across borders and continents, given that many countries have their own regulations and laws around the use of cryptocurrencies and the transfer and flow of fiat currencies. Jay Hao, the CEO of OKEx, told Cointelegraph that there are a number of considerations that make for a complex and challenging business environment, which means that “most CEOs in this business don’t get much sleep.” He added:
“Growing a global cryptocurrency exchange is probably one of the most difficult businesses to be in. There are many challenges from attracting and retaining the right talent to consolidating and expanding your user base, ensuring liquidity, depth of market, and an attractive product offering. You also have to make sure that the exchange is robust and secure, can handle high unexpected amounts of volume with next-to-no downtime, all the while meeting requirements from regulators. The list of challenges is actually endless.”
In a recent interview with Cointelegraph, Changpeng Zhao, the CEO of Binance who is otherwise known as “CZ,” stressed the importance of having a "global mindset" while maintaining a sustainable business model. In order to do this, CZ believes that exchanges need to understand the specific needs of users in different regions. “We have different approaches for various markets,” he further told Cointelegraph, adding:
“To run a global business, we have to make sure we are always offering a solid infrastructure for the users and enhance their experience, which is especially important for the 24/7 crypto space. Then, we have team members from different communities to provide customized products and services to a local market, and ensure our marketing strategy is aligned with local culture, custom and language.”
Huobi’s head of global business and markets, Ciara Sun, shared a similar idea, highlighting two major considerations that the exchange has focused on since its founding: localization and regulatory compliance. Sun told Cointelegraph that having a sound grasp of the wants and needs of users is a driving factor in launching exchange support in new regions:
“Localization doesn’t just mean offering the exchange in a new language. Users in different markets and regions each have different preferences, habits, and requirements, so we need to adapt to each audience and provide local users with highly tailored experiences.”
As Sun explains, understanding why users in specific countries or regions are looking to use cryptocurrencies also provides some insights into what sort of offerings will work in different places: “We spend a lot of time learning the intricacies of a new market before we enter it.”
Cointelegraph also spoke to BitMEX to gauge its views on the most challenging aspects of running a cross-continent operation. A spokesperson for the company highlighted customer support as a considerable undertaking and one that requires the highest amount of its resources:
“As a 24/7 cryptocurrency derivatives trading platform serving users from around the world, our ability to provide seamless support, regardless of time zone, is an important part of our service. Our Customer Support team is now one of the largest teams within our organisation and offers support in multiple languages.”
A spokesperson for the exchange Kraken told Cointelegraph that regulatory considerations in different jurisdictions are some of the toughest challenges in terms of trying to set up new bases of operation:
“Clear regulatory guidance is important because it helps determine what products we can offer and who we can target with our businesses. If done properly, it can also ensure a level playing field for all competitors. Additionally, education continues to be a focus of ours as well, as there are both awareness and knowledge gaps when it comes to crypto and its benefits.”
Navigating the global waters
So, becoming a global cryptocurrency exchange is not a clear-cut endeavor either, as there is no single regulatory body that exists for the industry. Given that cryptocurrencies have been in existence for just over a decade, regulation is very much down to individual countries and their laws.
Given that most financial institutions around the world face strict control measures from regulatory bodies, cryptocurrency exchanges have had to adopt similar practices. Many of these operations have to abide by Know Your Customer and Anti-Money Laundering guidelines in order to operate.
As OKEx’s Hao explained, the company takes direction from the guidelines of the Financial Action Task Force, or FATF, when looking to branch out to new regions. Nevertheless, Hao believes that a global body overseeing cryptocurrency regulation is an unlikely scenario, forcing the exchange to have a large legal team on board in order to ensure compliance in each jurisdiction where the exchange operates:
“I think that it will be very hard to establish a global regulatory authority for this space as all jurisdictions have their own laws and requirements. They are also constantly changing as the industry evolves.”
Huobi’s Sun hammered home the importance placed on regulatory compliance by its exchange as a fundamental part of its business model. “It's crucial that a crypto exchange meets all local regulatory requirements with the proper licenses to operate,” Sun said, adding: “This requires an enormous amount of time and effort and most ‘global’ exchanges don’t actually bother with this but we believe it’s critical.”
A major takeaway from most of the exchanges is the challenging task of navigating a global landscape that has vastly different regulatory and legal parameters. Sun admitted that it is a difficult undertaking, but said that the first port of call is a country or region’s securities and exchange commissions and its financial regulators, adding: “As of yet, there isn’t a global consensus for classifying and regulating digital assets, so each market is unique with its own complexities.”
Binance’s CZ told Cointelegraph that the lack of a global body that governs all markets is down to the fact that the crypto industry is still in its infancy, meaning exchanges have to work closely with regulators in every single country:
“To take the US for example, it has well-established legal and compliance systems, where a crypto exchange has to apply for various licenses from different states in order to serve citizens of those states. [...] For Binance, we always work closely with local governments and regulatory agencies and operate compliantly in all the jurisdictions we serve.”
Kraken’s spokesperson highlighted how operating in different continents requires specific compliance with various regulatory bodies and watchdogs and the rules that they set out. These considerations go deeper than just adhering to KYC, AML and FATF regulations; they also include following United States sanctions, meaning that Kraken is prohibited from operating in some countries. The spokesperson added: “We are also increasingly cognizant of maintaining compliance with global data protection regulations, such as the General Data Protection Regulation (GDPR) in Europe.”
BitMEX’s spokesperson said that a key driver of success would come down to an exchange’s ability to adapt to regulatory parameters as it continues to develop. Additionally, the exchange sees that regulators all over the world are upping their interest in crypto, adding:
“We welcome their efforts, as they will help to establish greater standards for the cryptocurrency market that will underpin the advancement of this rapidly growing asset class. We believe that the successful platforms of the future will be those that can quickly embrace and maintain these standards.”
Plugging into legacy systems
The proliferation of cryptocurrencies has been slow and steady over the past decade, but the industry has already made the traditional financial landscape aware of itself. Nevertheless, “the new” still has to plug in and be compatible with “the old.” In order to create accessibility for new users, cryptocurrency exchanges have to create fiat gateways to their platforms, which requires building relationships and compatibility with the traditional financial system.
Kraken offered its take on the intersection of cryptocurrency and traditional banking, conceding that the relationship between the two is important to drive adoption of the former. Nevertheless, the apathy of some banking institutions and the difficulty of interfacing and working with such organizations is still a challenge, as it’s “time-consuming to come to terms with these partners,” the company stated, adding:
“Despite the presence of many forward-looking banks, many others are extremely (and unnecessarily) risk-averse when it comes to crypto. This is unfortunate because they are depriving their clients of opportunities to engage with and benefit from this new and exciting opportunity.”
Further challenges are created by countries that try to apply existing laws to govern the use of cryptocurrencies. As Hao explained, “It’s a help and a hindrance” for the growth of cryptocurrency use, as some countries have developed crypto regulations upon realizing that the current framework cannot be adapted, while other jurisdictions are still lagging behind. He added: “This can be to the detriment of cryptocurrency as it all depends on how crypto is defined in the first place.”
For Binance’s CZ, regulation is not necessarily in opposition to cryptocurrencies. CZ believes that supporting regulation can drive innovation and help shape the crypto and blockchain space, much like the evolution of foreign exchange trading: “Given that the forex industry and the crypto industry, both driven by high technologies, share some similarities, forex regulation could serve as a good reference for regulators to formulate more supportive regulatory frameworks for the crypto industry.”
Huobi’s Sun believes that there is a changing attitude toward cryptocurrencies from regulators and the traditional financial system as they slowly gain an understanding of crypto and blockchain systems: “It’s only natural that forex regulation and banking systems have not yet fully caught up,” Sun said, adding that “current regulation continues to evolve as regulators adapt to the changing financial landscape.”
Sun told Cointelegraph that as a result, more and more traditional banking and financial institutions are onboarding the technology and opening up support to cryptocurrencies and exchanges:
“We’re also seeing less resistance from legacy financial institutions and banks. [...] We’ve also partnered with banks to enable fiat gateways for local users in several markets, so while there’s still progress to be made, I believe the legacy banking system is moving quicker than anticipated.”
Ever-changing world
As the various representatives of these cryptocurrency exchanges have highlighted, the global cryptocurrency environment is a complex one. Building and launching a cryptocurrency exchange is a technical and challenging endeavor in and of itself. Taking that exchange and launching support in different jurisdictions adds multiple layers of complexity that require an inordinate amount of resources and energy.
Given the effort required, exchanges that are slowly building a global footprint are surely at the forefront of the industry and are pushing the adoption and acceptance of cryptocurrencies around the world.