How To Evaluate Digital Currency Exchanges from the Perspective of a Token Issuer?

Recently, a plethora of DCEs (Digital Currency Exchanges) have emerged, providing intermediary services for the exchange of digital assets in the cryptocurrency space. From a market perspective, these DCEs enable the listing, buying and selling of digital assets such as bitcoin, altcoins and utility tokens. Before considering the listing of a token, it is critical to evaluate the need to enter into the highly speculative crypto market as potential investors can win or loose big, and this may imply serious legal risks for the token issuer, especially if an ICO (initial coin offering) have taken place which is forbidden or heavily restricted in countries like the US, China, Singapore, Vietnam, and Canada.

Even in the case of a utility token like Icecat’s Icury, that avoided an ICO or STO (security token offering) process, it’s important to analyse a DCE first, before considering to list a token there. Some of the critical factors of any DCE are: liquidity, security, costs, technology and compliance.

High Liquidity

The average daily trading volume over a period of time indicates the rate of liquidity of an exchange. High liquidity in an exchange reflects that a large number of traders use the platform frequently, which causes the prices of the digital assets to fluctuate within a relatively smaller bandwidth. High liquidity benefits the tokens listed on the exchange as they can gain or maintain value and become valuable for their respective issuer’s ecosystem, as people that receive tokens as a benefit can convert them to other cryptos or to fiat money on the exchange.

One of the major factors for a token to gain value also depends on the profile of the DCEs it’s listed on. For example, if a currency is listed on more than one exchange with a different geographical reach, the total trading volume in the market increases as more traders are able to trade the respective token.

Altcoins, like potentially the Icury, are mostly traded against bitcoins or other major cryptos. Such altcoins are usually not traded against fiat currency on DCEs.

How Secure is the DCE in a Hacker’s Paradise?

The digital currency industry is still in its infancy and is prone to many critical challenges. One such critical challenge is security. DCEs, decentralized or not, need to prevent any major security breach as one such incident can kill the reputation of a DCE, and lead to a “bankrun” and bankruptcy. At the same time, improving security should go hand in hand with a better usability. The crypto industry is notorious for its bad user interfaces.
A large number of DCEs are known to have faced intense hacking in its early stages of operations. The industry is still not free of the risk of security breaches and hacking, as the potential rewards for thieves are often in the millions, and the catch rate is still too low. 

Several other security issues are: undefined loss of funds, difficulty in accessing user accounts, data leaks, and lack of infrastructure to handle high trade volumes. The major DCEs have been working on improving security and provide high customer satisfaction, one step at a time, and radiate optimism about their long term perspectives.

Whooping Listing Costs

The storehouse of power lies with exchanges with the highest liquidity, as it means that they are the gatekeepers to large concentrations of money. Having a token listed on a reputable and liquid exchange adds value and credibility to tokens, since they then are considered high quality blockchain or DLT projects thus. 

According to Bitcoinjournal there is a strong correlation between the value of a cryptocurrency and the number of exchanges on which it is listed. Most of the DCEs charge nowadays a listing fee. An exchange with a better reputation tends to charge higher fees. Broadly, exchanges are of three types: small, medium and large. Small exchanges charge around $6,000-$30,000, medium exchanges charge from $60,000-$300,000 and large exchanges charge a whooping $1 million-$2.5 million to list a token.

Now, that the ICO hype of 2017/2018 is clearly behind us, tariffs tend to go down quickly and reach more reasonable territories. High listing costs are not tenable, and we expect them over time to become more in line with the tariffs of traditional (security) exchanges.

Legal Conformity

Every country follows different standards to regulate digital currency exchanges and tokens that might be seen as securities. There’s no standard global regulation framework present at the moment, although governments have agreed in the context of G7 and G20 meetings to apply at least KYC (know your customer) regulation to DCEs. 

In April 2018, the EU agreed therefore on the Fifth Money Laundering Directive (5MLD), which requires cryptocurrency/fiat exchanges to perform KYC compliance on their customers and fulfill standard reporting requirements. A step taken under the EU’s anti money laundering (AML) legislation. These policies are now rolled out by the EU’s local regulators: central banks and financial market authorities. For example,  Germany’s financial supervisor authority (BaFin), France’s  Autorité des Marchés Financiers (AMF) or Italy’s Ministry of Finance. 

There are also personal tax implications. For example, the EU member states charge capital gains tax on cryptocurrency-derived profits at rates of 0%-50%. In order to strengthen future regulations, the European Central Bank is working with the Single Supervisory Mechanism to identify various financial risks posed by cryptocurrency. 

Icury: The next step

Icecat has been working towards rolling out its Icury loyalty tokens within its ecosystem in a series of pilots to understand what works in its community and what not.

Listing the Icury tokens on a DCE platform is a strategic decision. Therefore, a detailed analysis is carried out of DCEs, to ensure the best approach for the future of the Icury project.

The various factors taken into consideration are: the number of cryptos listed, weather hacking has been a problem, technological efficiency, listing fees, user-friendly interface, account verification process, payment methods, compliance to regulations and reputation.

Some of the exchanges to be analyzed are: Binance, Bittrex, Kucoin, Kraken, HitBTC, and Coinbase. 

In a follow-up post, I will elaborate in detail on the qualities of each analyzed exchange.