— Ch. 1 · Operational Mechanics And Models —
Cryptocurrency exchange.
~6 min read · Ch. 1 of 5
A cryptocurrency exchange functions as a business that allows customers to trade digital currencies for other assets. These platforms accept credit card payments and wire transfers in exchange for the digital tokens. Some exchanges operate as market makers, taking bid-ask spreads as transaction commissions. Others act as matching platforms that simply charge fees for facilitating trades. A key distinction exists between brokerages and dedicated exchanges regarding fund withdrawals. Brokerages often let users purchase cryptocurrencies but prohibit withdrawals to personal wallets. Dedicated cryptocurrency exchanges allow these direct transfers to user-controlled accounts. The creators of the underlying digital currencies typically remain independent from the exchanges trading them. Digital currency providers administer customer accounts without issuing the currency directly to those customers. Customers buy or sell digital currency through exchanges which transfer funds into or out of DCP accounts. Many exchanges are legally independent businesses despite some being subsidiaries of larger providers. Funds within DCP accounts may be denominated in real or fictitious currencies. Exchanges can exist as brick-and-mortar businesses exchanging traditional payment methods alongside digital ones. Online businesses handle electronically transferred money and digital currencies exclusively. Often these digital currency exchanges operate outside Western countries to avoid regulation and prosecution. They still maintain bank accounts in several countries to facilitate deposits in various national currencies. Decentralized exchanges like Etherdelta do not store users' funds on the exchange itself. Instead they facilitate peer-to-peer cryptocurrency trading directly between participants. These decentralized models resist security problems affecting other exchanges but suffer from low trading volumes.
Early Regulatory Crackdowns 2004 To 2013
In 2004 three Australian-based digital currency exchange businesses voluntarily shut down following an investigation by the Australian Securities and Investments Commission. The regulator viewed the services offered as legally requiring an Australian Financial Services License which the companies lacked. In 2006 U.S.-based digital currency exchange business Gold Age Inc. was shut down by the U.S. Secret Service after operating since 2002. Business operators Arthur Budovsky and Vladimir Kats were indicted for charges of operating an illegal digital currency exchange and money transmittal business. They operated from their apartments transmitting more than $30 million to digital currency accounts. Customers provided limited identity documentation and could transfer funds to anyone worldwide with fees sometimes exceeding $100,000. Budovsky and Kats were sentenced in 2007 to five years in prison for engaging in the business of transmitting money without a license. This felony violation of state banking law ultimately resulted in sentences of five years' probation. In April 2007 the U.S. government ordered E-Gold administration to lock approximately 58 E-Gold accounts owned by entities like The Bullion Exchange and AnyGoldNow. This action forced G&SR owner of OmniPay to liquidate the seized assets. A few weeks later E-Gold faced four indictments. In July 2008 E-gold's three directors accepted a bargain with prosecutors and pleaded guilty to one count of conspiracy to engage in money laundering. They also pleaded guilty to one count of operation of an unlicensed money transmitting business. E-gold ceased operations in 2009. In May 2013 digital currency exchanger Liberty Reserve was shut down after its alleged founder Arthur Budovsky Belanchuk and four others were arrested. Arrests occurred 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. More than $40 million in assets were placed under restraint pending forfeiture and more than 30 Liberty Reserve exchanger domain names were seized. The company was estimated to have laundered $6 billion in criminal proceeds.