The world’s oldest cryptocurrency exchange prefers to trade in Luxembourg

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A new industry has emerged around cryptocurrency over the past 12 years. The growing ecosystem includes cryptocurrency exchanges, which act much like exchanges on exchanges, where people buy or sell assets on a website, and the exchange never owns the asset – it just serves as an intermediary between buyers and sellers.

Bit stamp is the world’s oldest crypto exchange, offering crypto access to more than four million customers worldwide, mostly retail, but also providing access to 5,000 institutional customers – including banks, payment service providers, merchants and family offices. Bitstamp wasn’t the first exchange in the world when it was established in Slovenia in 2011, but it’s the oldest one still going – a reminder of how difficult it is to stay afloat in such a turbulent market.

To be successful, a cryptocurrency exchange needs a good platform with products that attract customers, but they also need credibility and security – and they need good lawyers to help navigate the new regulatory framework.

“We have a combination of engineers and product people who understand crypto or fintech,” says Jean-Baptiste Graftieaux, CEO of Bitstamp. “We also have experts in information security and data protection – these are important for us to be best in class in terms of technology and cyber security. We also need strong customer support people. We have real people in our customer support instead of bots because customers want to work with real people.”

But one of the smartest moves the company made along the way was moving to Luxembourg, where it is now headquartered. Bitstamp now employs more than 600 people and has other offices in Slovenia, the US, Singapore and the UK. The company offers crypto access in the US, Asia Pacific and Europe.

Why Luxembourg?

Graftieaux says: “When we looked around the European region for places to do business, Luxembourg was the only country that had the appetite to support this innovation. It was still considered early days for cryptocurrencies and there was virtually no regulatory This meant that any company that wanted to become an established exchange had to go to each of the countries where it wanted to operate and help the government define regulations and licenses.

“Luxembourg is a small country, but very international and very connected. It is a good place to do business and engage with the local authorities in the sense that everyone knows each other. We worked closely with the government on how to regulate Bitstamp and to find out what type of license is required. Ultimately, we were authorized as a payment institution in Luxembourg in 2016.”

Bitstamp found that in addition to the relative ease of obtaining a license, Luxembourg has many other advantages for companies operating in the new crypto ecosystem. The population is highly educated and multilingual – and the workforce is full of people deeply involved in financial services.

Six years later, there are still many challenges around licensing. For example, while many types of fintech licenses can be transferred from one European country to another, crypto licensing is not yet ready for this convenient mechanism. A good example of passport is when a payment provider with an appropriate license in Luxembourg operates in any other EU country – and the license from Luxembourg is considered valid. For this system to work, the institutions of the different countries have to exchange information regularly, which requires a certain standardisation.

So far, there is no uniform and harmonized European framework for cryptoassets – each country has its own approach. This means that while Bitstamp can offer access to crypto assets anywhere in Europe, they cannot market their services locally without registering locally, which is a complicated process.

“Regulations and licenses are important to our business because they increase our credibility in the market,” says Graftieaux. “We look forward to the day when it is easier to get a license in countries around the world.”

That day may not be far off – at least in Europe. In June 2022, the EU Council Presidency and the EU Parliament reached a provisional agreement on new legislation, called “crypto asset markets” (MiCA), which will provide a regulatory framework for digital finance at EU level. The next steps at MiCA are to go through formal approvals. MiCA is expected to have an effect within two or three years.

But Europe is not the only part of the world with challenges when it comes to licensing. For example, after Bitstamp obtained its license in Luxembourg, it expanded to the United States, where it had to obtain more than 40 different licenses to operate in the states where it wanted to market its services.

Cryptocurrency and the travel rule

A cryptocurrency is a digital asset, built on blockchain – blockchain is a public ledger where all transactions can be seen. An audit trail includes all transactions minus the information that identifies the parties involved.

“You can look at a transaction, but you can’t see all the underlying data on the sender and recipient,” says Graftieaux. “What you see is that there has been a transaction of one or more bitcoins from one wallet to another, or from one address to another. But what you don’t know today is the owner of the wallet or the address .

“However, with this address, what happens very regularly is that if there is a fraud or an offense committed with a bitcoin address, law enforcement will contact the various crypto players to see if they have customers associated with that specific address. — and share that information, if appropriate. When we get a request from law enforcement, we have to comply to protect our license — and we’re always happy to oblige.”

The rules are being changed to make it easier to identify people. This is reflected in a new guide from Financial Action Task Force (FATF), called Travel rulewhich requires the crypto players to communicate a certain level of information about senders and receivers.

This will work much like Swift in the traditional financial sector, where all parties involved can see the recipient and the sender of the money. These new rules will make it harder for people to use crypto to hide transactions for money laundering or to commit other crimes.

The future of cryptocurrency

In May of this year, cryptocurrencies experienced a crash, with $40 billion in value destroyed in one week, according to research firm Gartner. Bitcoin, the most popular crypto asset, fell by 32% at the end of May 2022.

Although billions of dollars have been lost in cryptocurrency value, most industry observers agree that cryptocurrencies are here to stay. Gartner predicts that by 2024 at least 20% of large enterprises will use digital currencies. In a survey of chief financial officers (CFOs), Gartner found that the biggest obstacle to further corporate adoption is that CFOs consider the value of cryptocurrencies to be too volatile.

Bitstamp conducted its own survey of retail investors and institutional investment decision makers to find out how users think the market will develop. In a report released during the first quarter of 2022, Bitst indicated that 76% of retailamp and 82% of institutional expect crypto to become mainstream within 10 years.

While the industry is expected to survive, industry players can still expect a few more growing pains. As with any new industry, the crypto market remains fragmented, with the sheer number and diversity of digital assets causing confusion among buyers and standing in the way of wider acceptance. The challenge for a cryptocurrency exchange is to select, among the 15,000 available assets, those that are attractive to buyers and sellers. It is important to ensure that the assets are viable.

“What makes us different is that we do due diligence before we list an asset on our platform and on the company backing the asset,” says Graftieaux. “We ask about 350 questions to make sure…clients are not hacked and to make sure it’s not a case of money laundering or terrorist financing. The companies we select must have a business plan and liquidity. They need to have a solid technical architecture with solid security and regular audits. We want to make sure they have the money to expand.”

In addition to fragmentation, another barrier to cryptocurrency acceptance is the lack of education. People don’t understand what it is – and most of those who get the concept don’t know how to choose a currency or an exchange. Like many other exchanges, Bitstamp offers a learning center to help potential and existing customers get up to speed on all things crypto and blockchain.

A third obstacle to broad acceptance is regulation, as discussed above. Institutional clients want to deal with regulated exchanges. But the regulation is not yet in place where it should be – and where there is regulation, it is not yet mature. Currently, each country has its own approach.

Despite these hurdles, cryptocurrency is already gaining traction and has changed the way we finance. “Crypto started as a peer-to-peer payment method,” says Graftieaux. “And now the overall financial market is experiencing a trend toward this kind of decentralized financing, what we call ‘DeFiInstead of having people borrow from a large institution, like a bank, they lend money to each other.

“One thing to watch in the near future is NFTs [non-fungible tokens], There are already cases where these are used in the sports, music and gaming industries. There is a lot of hype right now. But it will be interesting to see how it develops in the future.

“And another trend to see is the increasingly important role of the Metaverse. There is a strong connection between Metaverse, gaming and NFTs now and there is a lot of investment in that space. We are quite interested on the Bitstamp side to see how the ecosystem will develop and to see how we will participate.”

Many industry analysts agree that there will be a strong connection between cryptocurrency and Metaverse. According to Gartner: “Cryptocurrencies will support Web3 and Metaverse economies based on business models enabled by peer-to-peer decentralized protocols.”

But for now, the market is in a bit of a crypto winter. According to Graftieaux, the turbulent conditions will result in some consolidation. A few very large players will emerge with end-to-end solutions for crypto payments, NFTs and crypto derivatives. These solutions will be connected to games and Metaverse.

In the meantime, Luxembourg is a great place to slip into. The small but highly educated population makes it easier to get in touch with the right people; and the multicultural and far-sighted government makes it easier to break into a new industry – especially when it involves fintech,

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