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Cryptocurrency has garnered a lot of interest and raked in strong opinions, both for and against it. With the number of digital tokens perpetually increasing, there is always a lot of people eager to invest.
The doorway into the sphere of cryptocurrency is provided by crypto exchanges (commonly referred to as digital currency exchanges or cryptocurrency exchanges or Bitcoin exchanges), which allow users to trade their digital tokens for other assets like conventional fiat money, or other digital currencies. A crypto exchange typically acts as a market maker, and performs trades for a fee. Let us take a quick peek into the history of crypto exchanges, and observe their evolution, from then to now.
The Concept behind Crypto Exchange Platforms
The simple concept behind crypto exchanges is to allow the trade of digital assets and various tokens, rather than just trading in Bitcoin(BTC)trade, Ethereum (ETH)trade, and other popular cryptocurrencies. These virtual currency exchanges facilitate the transfer of these cryptocurrencies into the personal wallet of users. These also allow you to trade conventional currency with digital tokens, by opening an account and verifying your ID.
The Types of Crypto Exchange Platforms
There are 3 major types of crypto exchanges:
- Trading platforms, which connect buyers and sellers, claiming a small fee for each individual trade
- Direct trading, whereby sellers set their own exchange rate, and offer direct trading, involving traders from different countries.
- Brokers, which allow anyone to buy cryptocurrency at a price set by brokers, who are akin to foreign exchange dealers.
The History of Crypto Exchange Platforms
Subsequently, the first Bitcoin exchange ever recorded, went live in March 2010. It was Bitcoinmarket[dot]com, a now defunct platform, proposed on the popular Bitcointalk forum, by “dwdollar”, on Jan 15, 2010. Dwdollar stated:
“I am trying to create a market where Bitcoins are treated as a commodity. People will be able to trade Bitcoins for dollars and speculate on the value. In theory, this will establish a real-time exchange rate so we will all have a clue what the current value of a Bitcoin is, compared to a dollar.”
In July of that year, Mt. Gox, another crypto market, was also launched. It was later hacked into, in June 2011, and 2,000 Bitcoin(BTC)trade, holding a value of $30,000, was stolen at the time. However, they went on to become the largest crypto exchange, handling 70% of all transactions in 2013. This joy was short lived, however, as it was followed by yet another hack, this time 850,000 BTC, priced at $460,000,000 (!) at the time.
This was an important moment in the history of cryptocurrency, and much needed too, as there was a lot of guesswork going around on how much Bitcoin was actually worth. The launch of Bitcoinmarket, however, priced the BTC at around 0.003$, and went live on March 17, 2010. With a lot of giddiness surrounding it, Bitcoinmarket went down, but it no doubt paved the way for future crypto exchanges.
These digital currency exchanges act as a financial intermediary, and there are now multiple cryptocurrency exchanges for many altcoins, all of which facilitate the easy trade of these virtual coins. Most crypto exchanges now allow traders to trade digital currencies for other digital currencies, buy them for conventional cash, and perform a lot of different functions, and of course trades.
Small Sample of Crypto Exchange Hacks
There have been countless incidents that caused major safety concerns and shook the crypto markets all around the world. Some of the more infamous crypto exchange hacks and scams are:
The Bitcoin exchange, based in Japan, was the largest crypto exchange at the time. Lack of security had already been hinted at, after recovering from a 2011 hack. In 2014 the cryptocurrency exchange put a sudden stop to services, and an investigating team found malleability attacks. The company shortly filed for bankruptcy, and the net worth of BTC tokens stolen would amount to $437 million in today’s world. This resulted in a 36% drop in the Bitcoin price.
2016: Bitfinex and the Tether Scam
Bitfinex claimed a loss of around $60 million in Bitcoins, in 2016. While the case was never solved, it was widely believed that the resulting price inflation was related to sustaining the rates of the Tether (USDT) stablecoin, with many regarding it as a scam.
2018: The Coincheck Heist
The Japan-based crypto exchange, Coincheck, saw a mighty hack in 2018. All NEM deposits were suspended, and subsequent investigations found that unauthorized transactions had resulted in a loss of around $534 million at the time.
The past four years alone have seen many hacks, resulting in the loss of $1.37 billion in total. This resulted in the rise of a number of security concerns, regarding crypto exchanges.
Decentralized Crypto Exchange Platforms
After a plethora of centralized crypto exchanges came up, regulatory frameworks started being imposed on these platforms, curtailing privacy and seemingly infringing on the very principle of cryptocurrency. In addition, the number of hacks and scams associated with these crypto exchanges has risen rapidly, causing a number of security concerns among investors and traders.
This partially contributed to the rise of decentralized exchanges, commonly referred to as DEXs. They operate without a central authority, and allow peer to peer trading, which ensures that users need not transfer their digital currency to exchanges. This protects their digital assets, ensuring that they do not lose their currency, even if the exchange itself is hacked. They are anonymous, and can prevent occurrences of price manipulation, or faked trading volume.
Crypto Exchange Regulations
With the increasing call for stricter regulations of crypto exchanges, rules and frameworks started changing.
2016 saw a number of major crypto exchanges obtain licenses to operate in the EU, under the EU Payment Services Directive, and the EU Electronic Money Directive. However, the EU council and parliament are yet to impose any regulations.
2018 had the US Securities and Exchange Commission (SEC) demanding that all crypto exchange platforms that offer the service of trading digital assets, which are securities (although there are SEC Commissioners who think differently), must register with the SEC as a national securities exchange, or must receive particular exemption from registration.
All crypto exchanges have sought to conform to the rules and regulations put down by the governing bodies. However, there are still unclear policies related to these crypto exchanges in many nations, resulting in a number of exchanges blocking traders from particular regions. Incidentally, several crypto exchanges have either decided to cancel service to, or limit access to, traders located in the United States (for instance Bittrex and Bancor). All this is a result of confusing regulatory frameworks, which crypto exchanges believe paves a rocky road ahead for them. This has put a number of traders in jeopardy, as they can hold on to their virtual assets, but cannot trade them.
In addition, Know Your Customer, Anti Money Laundering Compliance and other policies are to be worked on by crypto exchanges in order to gain approval. This puts them in a very precarious position.
China and South Korea have a hostile take on the whole affair, and China has banned Bitcoin miners. Japan mandates the requirement for a special license, obtained from the Financial Services Authority, in order to operate a crypto exchange, while Australia is yet to announce conclusive regulations.
In the latest requirements by the G20’s Financial Action Task Force, crypto exchanges have to share customer details, and must also have the means to store transaction information for all transactions over $10. This would essentially require restructuring the blockchain and the design, for both the currency as well as the crypto exchanges.
The Largest Crypto Exchange
In the current crypto market, the largest crypto exchange is, without doubt, Binance , and it has been in this position since early 2018. Founded in 2017 in China, Binance moved its servers and headquarters out of China, following the crypto ban that took over the nation in September 2017. Headed by CEO Changpeng Zhao, its market capitalization stood at $1.3 billion in January 2018. It was subject to a hack on May 7, 2019, but it didn’t appear to leave a serious mark. In fact, it still maintains its position, but as this is an incredibly volatile industry, future developments remain to be seen.
The current crypto exchanges host more than 2,000 digital currencies, and there are many more that spring into existence almost on a daily basis. There is a huge prospect for the development of cryptocurrency exchanges worldwide, and the crypto exchange market cannot be predicted with the large volume of new virtual currencies, and digital currency exchanges that keep forming.
With DEX also playing significant roles now, it remains to be seen what the future of these crypto exchanges is, and how they can shape the future of the world. Crypto is an extremely dynamic market, and change is the only constant.