Navigating Legal and Regulatory Challenges: A Guide to Starting a Cryptocurrency Exchange

In the current digital era, one of the most intriguing questions is “How to start a cryptocurrency exchange in this day and age?” This inquiry is particularly relevant given the evolving landscape of blockchain technology and cryptocurrencies. Initially, countries were hesitant and inconsistent in their approach to these new technologies. The legislative and regulatory framework varied significantly, ranging from the creation of national cryptocurrencies to outright bans and criminalization. This inconsistency highlighted the dual nature of the sphere, with some jurisdictions still grappling with how to handle it effectively.

The reticence of politicians to fully embrace crypto assets is somewhat expected, given the complexities involved in the financial aspects of these technologies. Governments often prefer a hands-off approach unless intervention becomes imperative. However, there has been a noticeable increase in governmental interest in blockchain technology and its potential applications beyond the financial sector.

Recently, there has been a shift towards establishing clearer regulations. Several countries have started to recognize the potential benefits of engaging with the financial aspects of cryptocurrencies. In the past few years, legislative efforts have intensified, aiming to create a more stable and predictable environment for the use of these digital assets.

Our focus will be on examining the most significant examples of regulatory initiatives, or lack thereof. We will provide insights into legislative enactments and other relevant publications, shedding light on how different governments are navigating the complex world of crypto-economics.

In Europe, a landmark development occurred in April 2023 with the European Parliament’s approval of the Markets in Crypto Act (MiCA). This comprehensive framework aims to regulate the cryptocurrency industry, marking a significant step forward in consumer protection. Service providers are now accountable for the safety of investors’ crypto-assets. The MiCA imposes various obligations on cryptocurrency platforms and traders, including stringent disclosure requirements, authorization, and supervision of transactions.

Under these new regulations, crypto platforms must inform consumers of inherent risks, and new token sales are subject to regulatory oversight. Stablecoins, like USDC and tether, are required to maintain sufficient reserves for mass redemption scenarios. The European Securities and Markets Authority (ESMA) now has the power to limit or ban platforms that fail to protect investors or pose risks to market integrity or financial stability. Additionally, MiCA addresses environmental concerns, requiring companies to disclose their energy consumption and the environmental impact of digital assets.

Another significant aspect of the EU’s approach is the implementation of the “travel rule” to combat money laundering in cryptocurrency transactions. Financial institutions must now screen and record information about both the sender and recipient of crypto transactions. Transfers exceeding 1,000 euros between exchanges and self-hosted wallets are subject to reporting.

This groundbreaking law positions the EU ahead of the U.S. and U.K. in cryptocurrency regulation. The law also facilitates the operation of crypto companies across the EU, provided they are licensed in one member state. Consequently, many crypto companies are actively seeking licenses in various European countries and establishing new offices in anticipation of the law’s implementation.

Despite these advancements, many EU countries maintain a conservative stance on cryptocurrencies. There’s no unified legal classification of digital assets applicable across the EU, so it’s crucial to consider each country’s specific legislation. In 2019, several international and European regulators published studies on the legal status of cryptocurrency assets and initial coin offerings (ICOs), providing greater clarity for authorities and legislators. Some key publications include:

• ESMA: Advice – Initial Coin Offerings and Crypto-Assets (Jan. 2019);
• EBA: Report with advice for the European Commission (Jan. 2019);
• EBA: Report on Regulatory perimeter, regulatory status, and authorization approaches in relation to FinTech activities (July 2019);
• IMF: The Rise of Digital Money (July 2019);
• European Council and the European Commission: Joint statement on “stablecoins” (Dec. 2019).

The EBA defines virtual currencies like Bitcoin as a digital representation of value not issued by a central bank or public authority, and not necessarily tied to legal tender. These currencies can be used as a means of payment and transferred, stored, or sold. However, they do not classify as electronic money under the EU Electronic Money Directive (DIRECTIVE 2009/110/EC).

Regarding taxation, the EU’s common system of value-added tax (VAT) has specific provisions. According to Article 135(1)(e), transactions involving the exchange of traditional currencies for virtual currencies are exempt from VAT. This provision reflects the growing recognition and integration of cryptocurrencies into the broader financial system, marking a significant shift from the early days of uncertainty and varied regulatory approaches.