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ETH/BTC order book depth chart on a cryptocurrency exchange. The x-axis is the unit price, the y-axis is cumulative order depth. Bids (buyers) on the left, asks (sellers) on the right, with a bid-ask spread in the middle.

A cryptocurrency exchange or a digital currency exchange (DCE) is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. A cryptocurrency exchange can be a market maker that typically takes the bid-ask spreads as a transaction commission for is service or, as a matching platform, simply charges fees.

Concept

A digital currency exchange can be a brick-and-mortar business or a strictly online business. As a brick-and-mortar business, it exchanges traditional payment methods and digital currencies. As an online business, it exchanges electronically transferred money and digital currencies.[1] Often, the digital currency exchanges operate outside the Western countries to avoid regulation and prosecution. However, they do handle Western fiat currencies and maintain bank accounts in several countries to facilitate deposits in various national currencies.[2][3] Exchanges may accept credit card payments, wire transfers or other forms of payment in exchange for digital currencies or cryptocurrencies. As of 2018, cryptocurrency and digital exchange regulations in many developed jurisdictions remains unclear as regulators are still considering how to deal with these types of businesses in existence but have not been tested for validity.

The exchanges can send cryptocurrency to a user's personal cryptocurrency wallet. Some can convert digital currency balances into anonymous prepaid cards which can be used to withdraw funds from ATMs worldwide[2][3] while other digital currencies are backed by real-world commodities such as gold.[4]

The creators of digital currencies are often independent of the digital currency exchange that facilitate trading in the currency.[3] In one type of system, digital currency providers (DCP) are businesses that keep and administer accounts for their customers, but generally do not issue digital currency to those customers directly.[1][5] Customers buy or sell digital currency from digital currency exchanges, who transfer the digital currency into or out of the customer's DCP account.[5] Some exchanges are subsidiaries of DCP, but many are legally independent businesses.[1] The denomination of funds kept in DCP accounts may be of a real or fictitious currency.[5]

Decentralized exchanges

Decentralized exchanges such as Etherdelta, IDEX and HADAX do not store users' funds on the exchange, but instead facilitate peer-to-peer cryptocurrency trading. Decentralized exchanges are resistant to security problems that affect other exchanges, but as of mid 2018 suffer from low trading volumes.[6]

History

2004 – Early Regulatory issues

In 2004 three Australian–based digital currency exchange businesses voluntarily shut down following an investigation by the Australian Securities and Investments Commission (ASIC). The ASIC viewed the services offered as legally requiring an Australian Financial Services License, which the companies lacked.[7]

In 2006, US-based digital currency exchange business GoldAge Inc., a New York state business, was shut down by the US Secret Service after operating since 2002.[8] Business operators Arthur Budovsky and Vladimir Kats were indicted "on charges of operating an illegal digital currency exchange and money transmittal business" from their apartments, transmitting more than $30 million to digital currency accounts.[5] Customers provided limited identity documentation, and could transfer funds to anyone worldwide, with fees sometimes exceeding $100,000.[5] Budovsky and Kats were sentenced in 2007 to five years in prison "for engaging in the business of transmitting money without a license, a felony violation of state banking law", ultimately receiving sentences of five years probation.[9]

In April 2007, the US government ordered E-Gold administration to lock/block approximately 58 E-Gold accounts owned and used by The Bullion Exchange, AnyGoldNow, IceGold, GitGold, The Denver Gold Exchange, GoldPouch Express, 1MDC (a Digital Gold Currency, based on e-gold) and others, forcing G&SR (owner of OmniPay) to liquidate the seized assets.

A few weeks later, E-Gold faced four indictments.[10]

In July 2008, Webmoney changed its rules, affecting many exchanges. Since that time it became prohibited[by whom?] to exchange Webmoney to the most popular e-currencies like E-gold, Liberty Reserve and others.

Also in July 2008 E-gold's three directors accepted a bargain with the prosecutors and plead guilty to one count of "conspiracy to engage in money laundering" and one count of the "operation of an unlicensed money transmitting business".[11] E-gold ceased operations in 2009.

In 2013, Jean-Loup Richet, a research fellow at ESSEC ISIS, surveyed new money laundering techniques that cybercriminals were using in a report written for the United Nations Office on Drugs and Crime.[12] A common approach to cyber money laundering was to use a digital currency exchanger service which converted dollars into Liberty Reserve and could be sent and received anonymously. The receiver could convert the Liberty Reserve currency back into cash for a small fee. In May 2013, digital currency exchanger Liberty Reserve was shut down after the alleged founder, Arthur Budovsky Belanchuk, and four others were arrested in Costa Rica, Spain, and New York "under charges for conspiracy to commit money laundering and conspiracy and operation of an unlicensed money transmitting business."[13] Budovsky, a former U.S. citizen and naturalized Costa Rican, was convicted in connection with the 2006 Gold Age raid.[9][14] A U.S. indictment said the case "is believed to be the largest international money laundering prosecution in history."[14] More than $40 million in assets were placed under restraint pending forfeiture, and more than 30 Liberty Reserve exchanger domain names were seized.[13][15] The company was estimated to have laundered $6 billion in criminal proceeds.[13]

2014 – Major bitcoin exchange failure

Following the launch of a decentralized cryptocurrency bitcoin in 2008 and the subsequent introduction of other cryptocurrencies, many virtual platforms were created specifically for the exchange of decentralized cryptocurrencies. Their regulation differs from country to country.

In February 2014, Mt. Gox, the largest cryptocurrency exchange at the time, suspended trading, closed its website and exchange service, and filed for bankruptcy protection in Japan from creditors.[16][17] In April 2014, the company began liquidation proceedings.[18] This was the result of a large theft of Bitcoins that were stolen straight out of the Mt. Gox hot wallet over time, beginning in late 2011.[19][20]

Regulations

By 2016, several cryptocurrency exchanges operating in the European Union obtained licenses under the EU Payment Services Directive and the EU Electronic Money Directive.[21] The adequacy of such licenses for the operation of a cryptocurrency exchange has not been judicially tested. The European Council and the European Parliament announced that they will issue regulations to impose stricter rules targeting exchange platforms.

In 2018, the US Securities and Exchange Commission maintained that "if a platform offers trading of digital assets that are securities and operates as an "exchange," as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration".[22] The Commodity Futures Trading Commission now permits the trading of cryptocurrency derivatives publicly.[23]

Among the Asian countries, Japan is more forthcoming and regulations mandate the need for a special license from the Financial Services Authority to operate a cryptocurrency exchange.[24][25] China and Korea remain hostile, with China banning bitcoin miners and freezing bank accounts.[26][27] While Australia is yet to announce its conclusive regulations on cryptocurrency, it does require its citizens to disclose their digital assets for capitals gains tax.[28]

Largest cryptocurrency exchanges (2018)

In early 2018, Bloomberg News reported the largest cryptocurrency exchanges based on the volume and estimated revenues data collected by CoinMarketCap.[29] Similar statistics was reported on Statista in a survey by Encrybit to understand cryptocurrency exchange problems. According to the survey, the top three cryptocurrency exchanges are Binance, Huobi, and OKEX. Other data points in the survey included the problems that cryptocurrency traders experience with cryptocurrency exchanges and the expectation of traders. Security and high trading fees are the top concerns.[30][31] The exchanges are all fairly new and privately held. Several do not report basic information such as the names of the owners, financial data, or even the location of the business.[32] A study by Mistertango reported that 88% of cryptocurrency exchanges are in favor of regulation for operational certainly and price stability.[33]

See also

References

  1. ^ a b c Working Group on Typologies (18 October 2010). "Draft Report on Money Laundering and Terrorist Financing through New Payment Methods" (PDF). Paris: Financial Action Task Force. Archived from the original (PDF) on 11 February 2014.
  2. ^ a b "Substantiation – Money laundering in digital currencies (Unclassified)". Money Laundering in Digital Currencies. National Drug Intelligence Center, US Department of Justice. June 2008. Retrieved 11 January 2014.
  3. ^ a b c Sood, Aditya K; Enbody, Richard J; Bansal, Rohit (2013). "Cybercrime: Dissecting the State of Underground Enterprise". IEEE Internet Computing (1). IEEE Computer Society. pp. 60–68. doi:10.1109/MIC.2012.61.
  4. ^ Byrnes, William H.; Munro, Robert J. (2 October 2013). Money Laundering, Asset Forfeiture and Recovery and Compliance – A Global Guide. LexisNexis. p. 2802. ISBN 978-0-327-17084-6. (Page number assigned by Google Books.)
  5. ^ a b c d e Hesterman, Jennifer L (17 April 2013). The Terrorist-Criminal Nexus: An Alliance of International Drug Cartels, Organized Crime, and Terror Groups. CRC Press. p. 218. ISBN 978-1-4665-5761-1.
  6. ^ Russolillo, Steven; Jeong, Eun-Young (2018-07-16). "Cryptocurrency Exchanges Are Getting Hacked Because It's Easy". Wall Street Journal. ISSN 0099-9660. Retrieved 2018-09-11.
  7. ^ "ASIC acts to shut down electronic currency trading websites" (Press release). Australian Securities & Investments Commission. 9 November 2004. Archived from the original on 23 March 2011. Retrieved 9 January 2014.
  8. ^ McCullagh, Declan (30 March 2001). "Secret service raids Gold-Age". Wired. Retrieved 9 January 2014.
  9. ^ a b Boddiger, David; Arias, L (24 May 2013). "Millions of dollars in limbo after shuttering of digital currency site Liberty Reserve". The Tico Times. San José, Costa Rica. Retrieved 9 January 2014.
  10. ^ "#07-301: 04-27-07 Digital Currency Business E-Gold Indicted for Money Laundering and Illegal Money Transmitting". Usdoj.gov. 24 April 2007. Retrieved 11 December 2013.
  11. ^ Grant Gross (22 July 2007). "IDG News Service Internet currency firm pleads guilty to money laundering". Archived from the original on 14 April 2009.
  12. ^ Richet, Jean-Loup (June 2013). "Laundering Money Online: a review of cybercriminals methods". arXiv:1310.2368.
  13. ^ a b c "Written testimony of U.S. Secret Service for a Senate Committee on Homeland Security and Government Affairs hearing titled "Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies"". United States Department of Homeland Security. 18 November 2013. Retrieved 11 January 2014.
  14. ^ a b Matonis, Jon (28 May 2013). "U.S. Shuts Currency Exchange Allegedly Tied To $6B In Money Laundering". Forbes. Forbes.com LLC. Retrieved 11 January 2014.
  15. ^ "Digital currency biz Liberty Reserve shut down, founder arrested | by Sean Ludwig". VentureBeat. Retrieved 11 December 2013.
  16. ^ McLannahan, Ben (28 February 2014). "Bitcoin exchange Mt Gox files for bankruptcy protection". Financial Times.
  17. ^ Abrams, Rachel; Goldstein, Matthew; Tabuchi, Hiroko (28 February 2014). "Erosion of Faith Was Death Knell for Mt. Gox". The New York Times.
  18. ^ "Mt. Gox abandons rebuilding plans and files for liquidation: WSJ". The Verge. Retrieved 9 December 2017.
  19. ^ Nilsson, Kim (19 April 2015). "The missing MtGox bitcoins". Retrieved 10 December 2015. Most or all of the missing bitcoins were stolen straight out of the Mt. Gox hot wallet over time, beginning in late 2011
  20. ^ Popper, Nathaniel (25 May 2016). "Mt. Gox Creditors Seek Trillions Where There Are Only Millions". The New York Times. Retrieved 9 December 2017.
  21. ^ "Bitcoin firm bags first electronic money licence in the UK". arstechnica.com. 4 July 2016.
  22. ^ "Statement on Potentially Unlawful Online Platforms for Trading Digital Assets". U.S. Secured and exchange commission. 7 March 2018.
  23. ^ Cheng, Evelyn (2018-03-07). "The SEC just made it clearer that securities laws apply to most cryptocurrencies and exchanges trading them". CNBC. Retrieved 2018-09-03.
  24. ^ Cheng, Evelyn (2018-03-23). "Japanese regulator warns big cryptocurrency exchange for operating without a license, bitcoin falls". CNBC. Retrieved 2018-09-02.
  25. ^ Castor, Amy. "How Japan Is Creating a Template for Cryptocurrency Regulation". Bitcoin Magazine. Retrieved 2018-09-02.
  26. ^ Hsu, Sara. "China's Shutdown Of Bitcoin Miners Isn't Just About Electricity". Forbes. Retrieved 2018-09-03.
  27. ^ "China's Regulators Freeze Multiple Bitcoin OTC Accounts in Latest Crackdown on Cryptocurrency". Yicai Global. Retrieved 2018-09-03.
  28. ^ Tax treatment of cryptocurrencies in Australia - specifically bitcoin | Retrieved 3 September 2018.
  29. ^ Russo, Camila (5 March 2018). "Crypto Exchanges Are Raking in Billions of Dollars". Bloomberg. Retrieved 10 June 2018.
  30. ^ "Traders: biggest problems of cryptoexchanges 2018 | Statistic". Statista. Retrieved 2018-09-03.
  31. ^ "Expectations of traders from cryptocurrency exchanges 2018 | Statistic". Statista. Retrieved 2018-09-03.
  32. ^ "Leading cryptocurrency exchanges according to traders 2018 | Statistic". Statista. Retrieved 2018-09-02.
  33. ^ "88% Of Crypto Exchanges Want Industry Regulation, New Study Reveals". CCN. 2018-07-31. Retrieved 2018-09-03.
  34. ^ Park Si-soo (20 June 2018). "Korea's major crypto exchange Bithumb hacked; coins worth $32 million stolen". Korea Times. Retrieved 20 June 2018.

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