INTRODUCTORY GUIDE

Launching a Digital Asset Exchange

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Overview
​

The demand to issue, acquire, and trade digital assets - proprietary tokens representing loyalty points,
financial instruments, or natively digital currencies such as bitcoin - has grown exponentially over the
past several years, creating a set of dynamic, overlapping exchange ecosystems. The following
document offers a brief, introductory guide for enterprises interested in understanding how to plan,
launch and operate a successful exchange. Specifically, it will cover:

- How digital asset markets works

- What technology powers exchanges
- What business leaders, entrepreneurs, or established firms need to get started
- Which factors contribute to an exchange’s success

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How Digital Asset Markets Work

In traditional foreign exchange markets, spreads are determined concentrically: first by inter-bank
transactions then by prime brokers who place high-volume trades on behalf of smaller brokerages.
Traders, attempting to take advantage of fluctuations between currency pairs, work directly with
brokers, who either act as market makers or route orders to prime brokers.

Digital asset markets operate at a distance from this model. For one, institutional participation is still
growing and only makes up a small percentage of aggregate trading activity. Traders or commercial
entities typically place orders directly on exchanges, and spreads are determined almost wholly by this
activity.

In the case of tokens with a global market (​

e.g.​
bitcoin), traders are serviced by a number of exchanges,
and may trade across a variety of national or digital currencies. Trading activity arises from a variety of
participants - professional traders, market makers acting on behalf of funds or high-net-worth clients,
B2B transfer agents, and bitcoin service companies (​
i.e. ​
merchant or remittance solutions).

 
 

Proprietary or specialized tokens typically trade against fewer currencies or assets, and often may be
serviced by a handful of exchanges. Loyalty points, for instance, often are traded at only one or two
venues with the asset issuer controlling the supply in circulation and acting as a market maker on the
exchange.

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Technology

The success of an exchange resides in three primary factors: (1) providing traders with a stable,
high-performance, and intuitive platform that meets their needs; (2) acquiring and retaining users and
maximizing their use of the platform; and (3) controlling technology and operations costs.

First think about the market segments you wish to attract. If you already know the type of digital
assets and/or national currencies you plan to support, consider what gaps exist in the current
marketplace for those assets. Conversely, you may begin from a strategy (​
e.g. ​
cornering a market for
B2B remittances between Region X and Region Y), and then determine what assets are the best fit for
that strategy. In most cases, defining your anticipated user is the best place to start. Do you want to
cater to firms conducting internal or B2B transfers across national borders or to seasoned traders
running sophisticated algorithmic strategies? Or would you rather offer customers an easy-to-use
venue for filling up loyalty points or buying their first bitcoin? These decisions should guide what sort
of back end and front end features you pursue.

Once you have decided on market segment, you arrive at a crossroads in terms of whether to build
your own platform, or to partner with a technology provider:

- BUILD YOUR OWN PLATFORM​

- The upside includes wholly owning your technology and
having start-to-finish oversight regarding what features are included and how the platform is
architected. The downside is the high upfront cost and delayed time to market. Designing
technology in-house requires deep domain expertise and healthy exchange tech.Likewise, if
this technology is to remain secure and competitive, it will demand ongoing maintenance,
development overhauls, and security updates. Exchange architecture also needs to integrate
and manage third-party APIs, wallet providers, security solutions, banking, and payments
platforms, all of which can be costly and time-consuming.

- WORK WITH A PARTNER ​

- With a white label platform, you attach your brand to a pre-existing
platform, and tweak the UI and feature set to best cater to your anticipated user. The initial

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cost and ongoing maintenance fees are significantly lower than building your own technology,
and time to market can be radically reduced. White label platforms frequently include support
for third party integrations. However, in certain cases there may be limited flexibility regarding
UI customization, backend architecture, and the platform’s development roadmap.

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Getting Started

Either you or a partner will be responsible for designing, building, testing, and maintaining a complex
architecture, which: (1) allows traders to interact with the marketplace; (2) connects your exchange
with order flows from other venues; and (3) securely manages inflows and outflows of orders and
assets. The major component can be broken down into three categories: Front End, Back End, and
Volume.

FRONT END ​
- Simply put, the means - typically a user interface and an API - that traders use to place
orders, manage account actions, and interact with the exchange.

BACK END ​
- The most complex part of the exchange. Back end technology is comprised of complex,
interoperative components, including:
- Matching Engine - to match orders placed on the exchange
- Risk Management System - to prevent risk limits from being breached, at both account and
system levels
- Asset Management System
- Accounting / Auditing System
- Integrations - to connect the exchange to payment gateways (for national currencies), wallets
(for digital assets), as well as third party services

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VOLUME ​
- Connection between your exchange and order flow from other venues hosting markets in
relevant assets, ensuring liquidity available on your exchange is competitive.

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A Note on Capital Requirements
​

Plan to maintain significant funds to cover both trading and operational costs during the early days of
operation. To the extent you wish to engage in market making, keep trading funds separate from
funds used for paying employees, or spent on advertising, supplies, etc. Likewise, funds received from
clients should not be mixed in with operational or trading funds.

Across the digital asset space, government guidance on on regulatory compliance and capital
requirements is incipient and dynamic. Exchange operators are encouraged to seek experienced legal
counsel and maintain a proactive stance towards compliance, regardless of their chosen jurisdiction.

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Startup Risks
​

As with all industries, startups in the digital asset space tend to face several inherent risks. These may
be mitigated and in some cases avoided altogether with proper planning.

TECHNOLOGY​
: Choose platforms with the
ability to support a high number of simultaneous
trades, avoid reliance on cloud-based solutions,
and confirm your technology provider has
system redundancy. Latency, server outages,
system crashes, and other irregular behavior can
damage client confidence, create reputational
damage, and decrease volumes over time.
MARKET & LIQUIDITY RISK​
: Are you prepared
for unexpected market movements? How stable
is the predicted future value of the digital asset
or assets you plan to support? What costs will be
incurred if you need to pivot from your intended
strategy? Stay aware of market news, hedge as
needed, and make sure you are prepared to
weather unexpected contingencies in the
marketplace.

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INCORPORATION & REGULATION​

: It is
important to carefully select the jurisdiction in
which you incorporate. ​
The first question to ask
is whether you want to operate globally, or focus
on a national market. Next, seek legal counsel to
help decide where you want to locate and how to
structure your business. You will want to think
about how you can limit your liability and
exposure to litigation, how the digital assets in
question are treated by authorities in your
jurisdiction, what regulatory requirements exist
in your jurisdiction, and what requirements are
likely to exist in the near term.
BANKING​
- You should ask yourself ​
what sort of
banking relationships you need, and what is
required for your firm to secure them. In the
past, banks have proven hesitant to provide
digital asset businesses with their services. The
process of securing banking can delay and
complicate the launch of exchanges, so it is
important to pursue banking, if needed, as early
as possible once you have decided on a strategy.
Note that, depending on your jurisdiction and
the type of assets you intend to deal in, it may
not be necessary to obtain formal banking.

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Launching an Exchange
​

Every venture is launched on a different timescale, depending on technology needs, relevant market
movements, and regulatory considerations. Below is a sample timeline typical of successful
operations.

RESEARCH (1-2 months)

Define target market and begin research to identify and test
assumptions. Begin organizing a potential team and collecting capital.
Initiate necessary paperwork with banks and secure legal counsel.

STRATEGY (1 month)
Arrive at a go-to-market strategy. Decide whether to built proprietary
technology or partner with a provider. Decide on the digital assets and

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national currencies you wish to support, secure a web domain, and

conduct market research to further test hypotheses.

TECHNOLOGY & TRAINING (1 month - 1 year​

)
Building a novel technology stack can take upwards of one year, whereas
partnering with a provider can take as few as 20 days, making this the
most difficult step to estimate. This period also includes code tests,
employees training, early marketing campaigns, and beta testing.

LAUNCH (1 -2 months)
Proced with full-scale marketing, reach out to relevant press and media,
monitor early profits, and refine products and strategy as necessary
based on early feedback.

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What Exchanges Should Look For

SECURE & SCALABLE TECHNOLOGY ​

- An exchange needs to securely track and store client assets,
sensitive information, and transaction records - all while maintaining constant connection to the
market.

When speaking to potential technology providers, verify that they offer robust infrastructure for
safeguarding personal details in case of attack or system failure, and that their system provides
sufficient redundancy to eliminate trading interruptions. In particular, ensure the provider follows
sound internal procedures ​
and offers:

- High-performance matching engine

- Network and hardware security
- Robust risk management and audit capabilities
- Advanced order types
- KYC (Know Your Customer) + AML (Anti-Money Laundering) solutions
- User-facing security features

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SUPPORT​
– Does the solution provider offer robust, 24-hour expert support? Are dedicated staff
members available to answer questions and troubleshoot issues in real time?

CLIENT RETENTION​
- Volume begets volume, and the lifeblood of any exchange consists in acquiring
and retaining traders. The most successful exchanges begin from a strong user definition, implement
features and UI to cater to that user’s needs, and generate messaging and branding to communicate
value to their intended audience. Successful exchanges allocate substantive time and capital towards
brand creation, messaging, customer acquisition and retention.

Consider hiring marketing or sales professionals familiar with the market for your assets of choice,
as well as also channeling liquidity from larger markets, to ensure that traders who arrive on your
platform are able to interact with deep liquidity and competitive pricing. If rates are not
competitive, it is unlikely the trader will yield repeat business.

Ensure your customers are treated fairly and that their concerns are addressed promptly by
proficient, courteous support staff. Keep the account opening process as streamlined as possible,
and establish a reputation for transparency. In the long run, this will help cement your brand and
encourage sustainable volume growth.

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For More Information

AlphaPoint is a financial technology company that powers digital asset exchanges and provides
institutions blockchain-enabled solutions to store, track, and trade digital assets. For more information
on launching a successful digital asset exchange, or to learn more about the technology leveraged by
our clients, please contact us any time.

CONTACT ALPHAPOINT TO LEARN MORE

- sales@alphapoint.com 
- www.alphapoint.com

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