Officially regulated and unregulated crypto exchanges for cryptocurrency trading

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Officially regulated cryptocurrency exchanges operate in accordance with the laws of different countries of the world, comply with the requirements of financial regulators and, upon request, can ovide government agencies with information about their clients. This approach has its pros and cons – on the one hand, the anonymity inherent in the cryptocurrency industry is lost, and on the other hand, users are more protected. The editorial staff of Profinvestment.com offers to understand what regulated exchanges exist and what are the features of the requirements in different countries.

We recommend that you read: a list of the best cryptocurrency exchanges.

An overview of the first regulated exchange Currency.com.

Which cryptocurrency exchanges can be considered regulated

Regulated cryptocurrency exchanges have official registration in a specific country (most often European), as well as a specialized license. Also, in some cases, the site is registered not only in a specific country, but also in a specific agency. The nuances and requirements are different for each state. However, although regulation varies widely from country to country, there are two requirements that apply in almost every country in the world:

  • KYC (know your customer). This implies verification of the identity and address of residence of the user. To do this, the exchange requires you to provide an identity card, a selfie with a passport, utility receipts or extracts from a house book, etc.
  • AML (Anti-Money Laundering). An exchange that complies with this requirement analyzes each financial transaction for fraud, money laundering or sanctions violations.

In both the world of fiat money and cryptocurrencies, service providers are working to help exchanges and regulators gather the information they need. They can analyze information about the identity and address of the client, assign a degree of risk to each transaction. Most exchanges are forced to resort to the services of these providers, which are essentially third parties in the relationship between users and the marketplace. Many clients are unhappy with this state of affairs, but for exchanges this is the only way to operate legally – otherwise, they would have to leave one or another jurisdiction, and consequently lose clients, money and reputation.

Regulation of crypto exchanges in different states

Consider the intricacies of the work of regulated sites in the countries of the world. Terms and conditions can differ dramatically from one jurisdiction to another.

Regulation of cryptocurrency exchanges in Belarus

On December 21, 2017, the 8th Decree of the President of the Republic of Belarus was issued, affecting the development of the digital economy. On the basis of this decree, new opportunities have opened up for the operation of a legal business related to the exchange of cryptocurrencies and tokens. The main requirement for a person who opens a cryptocurrency exchange is to acquire the status of a resident of the High-Tech Park of the Republic of Belarus.

Other features of regulated cryptocurrency exchanges in Belarus:

  • The company must be established in the Republic of Belarus. Any organizational and legal form (LLC, CJSC).
  • Activities should be conducted primarily in the Republic of Belarus. In this case, it does not matter where the servers are located, you can use Amazon cloud storage, etc.
  • A well-thought-out business project is required.
  • To register a cryptocurrency exchange, a statutory fund is required in the amount of at least 2,000,000 Belarusian rubles, formed even before joining the HTP.
  • The active position of the applicant, the director’s awareness of the planned activities of the company.

Belarusian banks willingly provide the opportunity to open accounts for crypto-exchanges approved by the Hi-Tech Park. Service is usually on standard terms. Accounts can also be opened in foreign banks.

At the moment, there are two regulated crypto-exchanges operating in the Republic of Belarus – Currency and Free2ex, which we will discuss in the corresponding section.

The crypto exchange is not obliged to respond to requests from foreign (Russian, Ukrainian) banks about the source of the money in client accounts, if the RB has not signed an agreement on legal assistance with this institution. In addition, the exchange is not obliged to transfer account data to government agencies, although there are exceptions – for example, if this data is needed for a case in court. Belarusian tax authorities have the right to request data on user transactions.

Regulation of cryptocurrency exchanges in the Russian Federation

On January 1, 2021, the law on digital financial assets, which has been under consideration for more than two years, will come into force. The latest version, which will be valid, has significant differences from the one that was adopted in the first reading. After a negative reaction from the community, many of the nuances were refined.

For many participants in the cryptocurrency industry, the situation will actually not change in any way, since there are many gaps in regulation. For example, there is a replacement of generally accepted terms with their own, introducing ambiguity. There is no regulation in the law for certain types of tokens and coins with different essences. It is forbidden to pay with cryptocurrency for goods and services and advertise such services.

As for exchanges and exchange services, in the law on CFA, they are designated as exchange operators and should be used to exchange tokens recognized by Russian legislation as digital rights. Exchange operators have the right to organize the trade of digital financial assets and utilitarian digital rights. Exchanges that have already been created at the moment remain unregulated in the Russian Federation; it is allowed to create a new site that meets the requirements. At the same time, it would be legally correct to take into account the principle of technological neutrality, that is, permission to use any security technologies, and not exclusively developed by the state.

Regulation of cryptocurrency exchanges in Ukraine

In April 2020, changes came into force regarding the regulation of cryptocurrencies in Ukraine. The amendments were made to the “AML law”, that is, the law on financial monitoring. Ukraine did not come up with these changes, but only implemented the FATF recommendations already in force almost all over the world. This measure was needed in order not to introduce a complete ban on cryptocurrencies.

Major changes:

  • Providers of services for the circulation of virtual assets are legal entities or individuals who are engaged in any of these types of activities: transfer or exchange of digital assets, administration of virtual instruments or assets, provision of financial services using the issuer’s offer.
  • Companies that conduct ICO (Initial Coin Offering) are also referred to as providers of these services.
  • If the transaction amount exceeds UAH 30,000, then identification of both parties to the transaction is required.
  • Exchanges are required to provide information on all transactions, the amount of which exceeds UAH 400,000.
  • Crypto exchanges must verify users. However, if the user does not make transactions in the amount exceeding UAH 30,000, then this is not necessary.

In addition, exchanges that want to comply with regulatory requirements are required to expand their staff to include a compliance officer who oversees the proper conduct of transactions.

Regulation of cryptocurrency exchanges in Estonia

In June 2020, Estonia tightened the requirements for companies wishing to obtain a license to operate in their country. The application now takes up to 120 days to process, and only companies registered in Estonia can submit it. The state duty for obtaining a license has also been increased, and tenfold: now it is 3,330 euros. The minimum authorized capital is 12,000 euros. Company employees must now be physically located in Estonia. A thorough review will be carried out in relation to managers who must have the appropriate education, work experience and a clear criminal record. Any company dealing with cryptocurrencies will be considered a financial institution. The KYC, AML procedure for clients becomes mandatory.

According to the official statement of the Ministry of Finance, the amendments are aimed only at combating money laundering, and not against cryptocurrencies. For the same purpose, it is planned to take other measures in the future. As part of the review of the application, the FIU has the right to speak with the responsible person in terms of their knowledge of anti-money laundering.

In general, Estonia is one of the most progressive countries in the crypto industry. More than 1000 licenses have been issued in three years. Many states, in principle, do not allow licensing cryptocurrency activities or offer registration options that do not fully suit the specifics of cryptocurrency trading platforms.

Regulation of cryptocurrency exchanges in the world

Cryptocurrencies are already in use all over the world and of course all countries are trying to take control of them. But this is very difficult, since the field is developing rapidly, new trends and technologies appear every year. Some states have officially allowed operations with cryptocurrencies, considering them either as an investment asset, or as a commodity, or as a unit of account.

  • Switzerland. A favorable jurisdiction where bitcoin is equated to foreign currencies and is subject to the same rules. Cryptocurrency exchanges require a license from the regulatory body FINMA.
  • China. Cryptocurrency transactions are allowed for individuals, but prohibited for banks. Cryptocurrency exchanges are prohibited.
  • USA. Since 2013, cryptocurrencies in the United States have been regulated by the same principles as exchanging one fiat currency for another. Also in 2013, the government decided to continue to actively work on regulating this business. In the fall of 2017, the Securities and Exchange Commission (SEC) filed an ICO fraud case. In January 2018, they announced the creation of a new FSOC working group to take a closer look at the crypto market.
  • Japan. Since 2017, it has recognized bitcoin and other cryptocurrencies as legal property, and profits from it must be recorded as “miscellaneous income” with a tax rate determined by law. Also, the Financial Services Agency (FSA) has increased efforts to regulate trade and cryptocurrency exchanges in order to protect the state as a whole and the funds of each user. Registration of crypto exchanges with the FSA is a prerequisite for conducting business. There is also a self-regulatory body – Japan Virtual Currency Exchange Association
  • Singapore. The activities of cryptocurrency exchanges here are directly regulated by law. In 2019, the Payment Service Act 2019 was adopted, obliging companies exchanging crypto for fiat to obtain a Major Payment Institution or Small Payment Institution license.
  • Canada. Although it does not allow the use of cryptocurrencies as legal tender, it does not generally prohibit working with it. In this case, payment for goods or services with its help is equivalent to a barter transaction.
  • European Union. The attitude towards digital assets in Europe is more conservative. The heads of the EU are suspicious of the launch of new projects and put forward strict requirements for the activities of crypto exchanges. The 5MLD money laundering directive requires all exchanges to conduct KYC, AML and maintain the necessary documentation.

More than 70 cryptocurrency exchanges have closed so far in 2020, according to a Cryptowisser study. One of the reasons is just the pressure from the regulators – the fifth EU directive obliged companies to verify the identities of customers, and only those exchanges that enjoy unconditional love among users were able to survive this.

Examples of regulated exchanges

Such sites are not considered to be those whose main companies are registered offshore. Although these exchanges may have licensed divisions. Consider truly 100% regulated cryptocurrency exchanges that operate in accordance with the letter of the law.

1. Exchange Currency

Currency Exchange is officially regulated in Belarus. The activity is carried out by Currency Com Bel LLC under registration number 193130368. It is a resident of the High Technologies Park. Belarus has formed a legal framework regulating the circulation of cryptocurrencies, ICOs, smart contracts, tokenized shares, tokenized markets. In the development of the legal framework, the principles of AML, CTF, KYC were used, and the regulation fully complies with the FATF recommendations. In addition, citizens of the Republic of Belarus can trade crypto-assets until 2023 without declaring and paying taxes.

The infrastructure partner of Currency.com, which ensures the safety of clients, is Capital.com, which is authorized by the key European financial regulators FCA and CySEC.

2. Free2ex Exchange

Also a Belarusian platform licensed by the High Technologies Park. Follows a set of regulatory rules, including adhere to AML standards and security systems. Ensures that illegally mined cryptocurrencies do not enter the site, which is important for large traders and businesses.

Due to compliance with regulatory requirements, banks are ready to work with Free2ex; thus, the site provides support for fiat, including deposits and withdrawals in US dollars, euros and other currencies. There is a $ 1,000,000 Guarantee Fund.

3. EXMO exchange

In 2020, the EXMO exchange received an Estonian license to provide cryptocurrency services. Now it officially provides services for the storage and exchange of digital currencies. It is noteworthy that the licenses apply to the whole world, and not only to Estonia.

4. Exchange BTC-alpha

BTC-alpha also has an Estonian license and adheres to the AML / KYC policy, which is designed to reduce the possible risks of involving the site in any kind of illegal activity. The AML / KYC policy covers the following issues: the procedure for verifying identity, address and bank card, Compliance Officer for checking compliance with requirements, monitoring operations, risk assessment.

BTC-alpha, in accordance with international requirements, uses a risk-based approach to combating money laundering and terrorist financing. This means that prevention or mitigation measures must be commensurate with the identified risks. This will help to allocate resources in the most efficient way so that the greatest risk is given the closest attention.

5. Coinbase Exchange

Coinbase is regulated in the United States of America and seeks to obtain licenses in other countries where this is possible. Currently, he is licensed to carry out money transfers in most US jurisdictions.

Most of Coinbase’s money transfer licenses cover wallets and USD transfers. In some states, funds transfer licenses also cover cryptocurrency wallets and transfers within the platform. Other states do not require a digital money transfer license.

Coinbase is also registered as a money services business with FinCEN.

6. Bitstamp Exchange

In 2016, the Bitstamp crypto exchange entered into a formal agreement with the Luxembourg government, as a result of which it received the right to launch regulated and licensed services in all states belonging to the European Union. And in 2019, Bitstamp received a license to provide services in the state of New York from NYDFS (New York City Financial Services Authority). At the moment, the exchange has licensed divisions BITSTAMP EUROPE, BITSTAMP USA.

7. Kraken Exchange

There are a number of legal obligations that the Kraken cryptocurrency exchange is subject to, as well as specific legal requirements, such as anti-money laundering, financial services, corporations, etc. The company is also subject to the rules and laws of various supervisory authorities. Kraken’s products and services are licensed in Europe by Payward Ltd; in Japan by Payward Asia; in the United States of America by Payward Ventures

In 2020, Kraken received the status of a special purpose depository institution (SPDI) in the United States. This means that it has the right to store cryptocurrencies, manage payments, and provide customers with the ability to exchange regular currency for cryptocurrencies.

Advantages and Disadvantages of Regulated Exchanges

Pros: ✅

✅  High security.

✅  Fiat support.

✅  Guaranteed “purity” of the purchased cryptocurrency.

✅  Availability in regions where, without regulation, the platform would be banned.

✅  Availability of guarantee funds.

Cons: ❌

❌  Lack of anonymity.

❌  Waiting for an identity check takes time.

❌  The ability to freeze the account if the transaction seems suspicious.

Expert opinions

Crypto exchanges regularly remind users that regulatory compliance is the only way for an exchange to operate in a particular region, and not a whim to make life difficult for customers. So, Changpeng Zhao (CEO of Binance) says the following on this topic:

From communication with users, it becomes clear that with respect to regulation, KYC and AML, there are still great misunderstandings. It should be recognized that regulators generally prioritize anti-money laundering over confidentiality. Thus, exchanges have two options for action – to introduce tools for checking AML or to refuse to do business in the region. The second option is not good for anyone.

As for the user himself, he also has a choice:

put up with AML checking in the background, like in a bank, and follow the letter of the law;
use less secure unregulated exchanges;
use decentralized exchanges, the minus of which is the absence of fiat support and lower liquidity.

We personally believe that the right to privacy is key and therefore strive to maximize privacy.

Conclusion

Most cryptocurrency exchanges are still trying to soften the requirements of regulators somewhat. For example, they provide several levels of verification, so that a user who does not operate with large amounts does not need to disclose all his confidential data.

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