Considering Launching a Crytocurrency Exchange Platform

[Doplin Young]

Franklin County Ohio

I am considering launching a crytocurrency exchange platform as an additional revenue stream for my small business. One thing I was concerned about was the increase in federal and state regulations for exchanges and cryptocurrencies as a whole (i.e. Binance Shutdown).

So my question is has anyone else successfully launched a similar platform here in Ohio or the U.S. in general? What would be the legal requirements (liscensure, tax obligations, registrations etc) I would have to meet in order to be in compliance with the law when launching a platform like this in the U.S.?

 

[Taxing Matters]

You're really going to need to see an attorney in your area about this, and it probably should be several different lawyers. Setting up a cryptocurrency exchange may be regarded as the offering of a security, which then triggers responsibilities under the complex rules that apply under the federal securities law. See the Securities and Exchange Commission (SEC) chairman's statement from two years ago titled Statement on Cryptocurrencies and Initial Coin Offerings which indeed indicates the SEC believes at least some cryptocurrency offerings are indeed subject to the securities laws. So the details of exactly what you plan to do will matter greatly. If you are offering a security and you fail to register the offering or meet the requirements for exemption the result can be huge exposure to claims by disappointed investors and possible prosecution by the SEC. Securities law is a specialized area of law that most attorneys are not all that familiar with, so you want to get some advice from a securities lawyer on this part of it. Because of the risks involved, you do not want to skip over getting advice from a securities lawyer on this.

As for taxes, again exactly what you plan to do matters. You may want to get advice from a tax lawyer to figure out the most tax effective way to structure this. The tax lawyer may be able to assist you with any currency transaction (CTR) reporting obligations you may have as a result. It was CTR concerns that resulted in the Binance change in its U.S. operations. FinCen is the agency that enforces these rules, and you may want to read its cryptocurrency guidance.

There are also various general business and liability concerns to discuss with a business lawyer, like what kind of entity or entities to use for the operations, what contract terms and terms of service you need, help with employment law issues if you will have employees, etc.

If you will be offering your services to people outside the U.S. you will need to address legal issues in those other countries, too.

Getting the legal advice for all this is likely to run you at least several thousand dollars. But don't be pennywise and dollar foolish here. The fees you pay for good advice now may well save you many times those fees later on, as well as perhaps saving you from prosecution. As you noted, the federal government is now increasing it's oversight of cryptocurrencies both because of investor concerns and concerns about these currencies being used to finance illegal activity. So you don't want to be on the wrong side of the law on this.

Finally, note that cryptocurrencies are rather volatile and the competition in the space is rather fierce, so there is considerable risk in these kinds of operations. You'll want to consider whether you want to take on that risk.

 

[FlyingRon]

You bet. Not only do you have the regulators to worry about but no sane person would deal with a ill-conceived exchange that didn't spend money to get proper controls put in place. There's already been some massive fiascos, some fraud, some just incompetence that have cost people substantial sums in this area.