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The world's oldest cryptocurrency exchange prefers doing business in Luxembourg
One of the newest niches in fintech, cryptocurrency exchanges may fare very well in Luxembourg
A new industry has sprung up around cryptocurrency over the past 12 years. The growing ecosystem includes cryptocurrency exchanges, which function much like stock market exchanges. 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.
Bitstamp is the world’s oldest crypto exchange, offering crypto access to more than four million clients in the world, mostly retail, but also providing access to 5,000 institutional clients – including banks, payment service providers, traders, and family offices. Bitstamp was not the first exchange in the world, when it was established in Slovenia in 2011, but it is the oldest one still in business – 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 clients, but they also need credibility and security – and they need good lawyers to help navigate the fledgling 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 area 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 human beings 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 to move 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, the Asia Pacific, and Europe.
Graftieaux says: “When we looked around the European region for places to do business, the only country with the appetite to endorse this innovation was Luxembourg. It was still considered early days for cryptocurrencies, and there was virtually no regulatory framework. 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 licensing.
“Luxembourg is a small country, but very international and very connected. It’s 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 figure out what kind of license was required. In the end, we became authorised as a payment institution in Luxembourg in 2016.”
Bitstamp found that, beyond the relative ease of obtaining a license, Luxembourg has many other benefits for companies operating in the new crypto ecosystem. The population is highly educated and multi-lingual – and the workforce is full of people who are deeply involved in financial services.
Six years later, many challenges remain around licensing. For example, while many types of fintech licenses can be passported from one European country to another, crypto licensing is not yet ready for this convenient mechanism. A good example of passporting 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 arrangement to work, the institutions in the different countries have to exchange information regularly, which requires some standardisation.
So far, there is no uniform and harmonised European framework for crypto assets – each country has its own approach. This means that while Bitstamp can offer access to crypto assets everywhere in Europe, they cannot market their services locally without registering locally, which is a complicated process.
“Regulations and licensing are important to our business because they boost our credibility in the market,” says Graftieaux. “We’re looking forward to the day when it’s easier to get licensed 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 “markets in crypto assets” (MiCA), that will provide a regulatory framework for digital finance at the EU level. The next steps on MiCA are to go through formal approvals. MiCA is expected to have an impact 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 got its license in Luxembourg, it expanded to the US, where it needed to obtain more then 40 different licenses to operate in the states where they wanted to market their services.
Cryptocurrency and the Travel Rule
A cryptocurrency is a digital asset, built on blockchain – the blockchain being a public ledger, where all transactions can be viewed. An audit trail includes all transactions minus the information that identifies the parties involved.
“You can look at a transaction, but you don’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 address.
“Nevertheless, with this address, what’s happening very regularly is that if there is a fraud or an offence committed with a bitcoin address, the law enforcement agencies will reach out to the different crypto players to see if they have clients associated to that specific address – and if so, to share that information. When we get a law enforcement request, we have to comply to protect our license – and we are always happy to oblige.”
The regulations are changing to make it easier to identify people. This is reflected in a new guideline from the Financial Action Task Force (FATF), called Travel Rule, which requires the crypto players to communicate some level of information about senders and receivers.
This will operate 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 offenses.
The future of cryptocurrency
In May this year, cryptocurrencies experienced a crash, with $40bn of value destroyed in one week, according to research firm Gartner. Bitcoin, the most popular crypto asset, was down 32% as of the end of May 2022.
Even though billions of dollars were lost in cryptocurrency value, most industry watchers 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 adoption by enterprises 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, Bitstamp indicated that 76% of retail respondents and 82% of institutional respondents expect crypto to become mainstream within 10 years.
While the industry is expected to survive, industry players can still expect to suffer a few more growing pains. As is true with any new industry, the crypto market is still fragmented, with the sheer number and variety of digital assets causing confusion among buyers and standing in the way of wider acceptance. The challenge for a cryptocurrency exchange is to select, from the 15,000 available assets, the ones that are attractive to buyers and sellers. It’s important to make sure the assets are viable.
“What makes us different is that we do the due diligence before we list an asset on our platform and on the company backing the asset,” says Graftieaux. “We ask around 350 questions to make sure...clients will not be hacked and to make sure it isn’t a case of money laundering or terrorist financing. The companies we select need to 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 money to expand.”
In addition to fragmentation, another barrier to acceptance of cryptocurrency is the lack of education. People don’t understand what it is – and most of those that do get the concept don’t know how to select a currency or an exchange. Like many other exchanges, Bitstamp provides a learning centre to help potential and existing customers get up to speed on all things crypto and blockchain.
A third obstacle to wide acceptance is regulation, as discussed above. Institutional clients want to deal with regulated exchanges. But the regulation is not yet in place where it needs to be – and where there is regulation, it is not yet mature. For the moment, each country has its own approach.
Despite these obstacles, cryptocurrency already has traction and has changed the way we do finance. “Crypto started out as a peer-to-peer payment method,” says Graftieaux. “And now, the overall financial market is experiencing a trend towards this kind of decentralised finance, what we call ‘DeFi.’ Rather than have people borrow from a big 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 industry. 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 watch is the increasingly important role of Metaverse. There is a strong link between Metaverse, gaming and NFT’s 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 evolve and to see how we are going to participate.”
Many industry analysts agree that there will be a strong link between cryptocurrency and Metaverse. According to Gartner: “Cryptocurrencies will underpin Web3 and Metaverse economies based on business models enabled by peer-to-peer decentralised protocols.”
But for now, the market is in a bit of a crypto winter. According to Graftieaux, the turbulent conditions will result in a lot of consolidation. A few very large players will emerge with end-to-end solutions for crypto payments, NFTs and crypto derivatives. These solutions will be linked with gaming and the Metaverse.
In the meantime, Luxembourg is a good place to hunker down. The small but highly educated population makes it easier to connect with the right people; and the multicultural and forward-thinking government makes it easier to break into in a new industry – especially when it involves fintech.
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