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Cryptocurrency exchange

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Cryptocurrency exchange, Crypto exchange or digital currency exchange (DCE) is a businesses that allow customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money, or different digital currencies. They can be market makers that typically take the bid/ask spreads as transaction commissions for their services or simply charge fees as a matching platform.

DCEs may be brick-and-mortar businesses, exchanging traditional payment methods and digital currencies, or strictly online businesses, exchanging electronically transferred money and digital currencies.[1] A number of digital currency exchanges operate outside of Western countries, avoiding regulatory oversight and prosecution, but DCEs often handle Western fiat currencies, sometimes maintaining bank accounts in several countries to facilitate deposits in various national currencies.[2][3] They may accept credit card payments, wire transfers or other forms of payment in exchange for digital currencies or cryptocurrencies. As of 2018 regulation of cryptocurrency and digital exchanges in many developed jurisdictions remains unclear, many regulators are still considering how to deal with these types of businesses and regulation regimes that do exist have often not been tested for validity.

They can send cryptocurrency to your 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]

Some digital currencies are backed by real-world commodities such as gold.[4]

Creators of digital currencies are often independent of the DCEs that trade 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 DCEs, who transfer the digital currency into or out of the customer's DCP account.[5] Some DCEs 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]

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.[6]

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.[7] 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.[8]

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.[9]

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".[10] 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.[11] 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."[12] Budovsky, a former U.S. citizen and naturalized Costa Rican, was convicted in connection with the 2006 Gold Age raid.[8][13] A U.S. indictment said the case "is believed to be the largest international money laundering prosecution in history."[13] More than $40 million in assets were placed under restraint pending forfeiture, and more than 30 Liberty Reserve exchanger domain names were seized.[12][14] The company was estimated to have laundered $6 billion in criminal proceeds.[12]

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.[15][16] In April 2014, the company began liquidation proceedings.[17] 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.[18][19]

Regulations

In Japan to operate a cryptocurrency exchange a special license must be obtained from the Financial Services Authority of Japan specifically for the operation of a virtual currency exchange.[citation needed]

By 2016, several cryptocurrency exchanges operating in the European Union obtained licenses under the EU Payment Services Directive and the EU Electronic Money Directive.[20] 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"[21].

Largest cryptocurrency exchanges (2018)

Bloomberg News reported the largest cryptocurrency exchanges in March 2018 based on volume and estimated revenues. 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.[22]

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. ^ "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. 
  7. ^ McCullagh, Declan (30 March 2001). "Secret service raids Gold-Age". Wired. Retrieved 9 January 2014. 
  8. ^ 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. 
  9. ^ "#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. 
  10. ^ Grant Gross (22 July 2007). "IDG News Service Internet currency firm pleads guilty to money laundering". Archived from the original on 14 April 2009. 
  11. ^ Richet, Jean-Loup (June 2013). "Laundering Money Online: a review of cybercriminals methods". arXiv:1310.2368Freely accessible. 
  12. ^ 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. 
  13. ^ 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. 
  14. ^ "Digital currency biz Liberty Reserve shut down, founder arrested | by Sean Ludwig". VentureBeat. Retrieved 11 December 2013. 
  15. ^ McLannahan, Ben (28 February 2014). "Bitcoin exchange Mt Gox files for bankruptcy protection". Financial Times. 
  16. ^ Abrams, Rachel; Goldstein, Matthew; Tabuchi, Hiroko (28 February 2014). "Erosion of Faith Was Death Knell for Mt. Gox". The New York Times. 
  17. ^ "Mt. Gox abandons rebuilding plans and files for liquidation: WSJ". The Verge. Retrieved 9 December 2017. 
  18. ^ 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 
  19. ^ Popper, Nathaniel (25 May 2016). "Mt. Gox Creditors Seek Trillions Where There Are Only Millions". The New York Times. Retrieved 9 December 2017. 
  20. ^ "Bitcoin firm bags first electronic money licence in the UK". arstechnica.com. 4 July 2016. 
  21. ^ "Statement on Potentially Unlawful Online Platforms for Trading Digital Assets". U.S. Secured and exchange comission. 7 March 2018. 
  22. ^ Russo, Camila (5 March 2018). "Crypto Exchanges Are Raking in Billions of Dollars". Bloomberg. Retrieved 10 June 2018. 

Further reading

  • Rash, Wayne (7 March 2018). "Crypto-Currency Exchanges, Coin Offerings Facing Likely SEC Regulation". eWeek. Retrieved 9 March 2018. 
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