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A cryptocurrency exchange deals with financial transactions thus it needs to fulfill certain safety requirements and KYC (Know Your Customer) as well as AML (Anti Money Laundering) regulations.
Cryptocurrency exchanges have their own specific risks, such as hacking, data-loss and unauthorized access. Albeit dangerous, these risks can be avoided through proper measures.
Let’s talk about all these risks and how to counter them in detail:
Risk 1- Data Loss
Data loss is the most common risk and can happen due to natural and unnatural reasons. Most of the times data is lost because of server failure or a virus attack.
It might not be that big of a deal for normal files you store on your systems. But, in crypto world where everything is digital, the only proof of you having digital assets is present on such servers and systems, so it is quite a big deal.
A secure backup protocol with data storage in a location independent of the operation of exchange servers is the best practice to follow.
It is useful to store the data in different locations to level the risks. In addition, ensure to make backups in advance and update them at regular intervals. Encrypt the data and ensure password-protected access to data. Monitor backup protocols regularly and make sure that the data can be recovered quickly.
Risk 2- Loss of Exchange Money and User funds
Hacking has been the biggest challenge for crypto exchanges. It leads to unauthorized access to infrastructure and users’ funds, eventually resulting in loss of money.
Build a white label cryptocurrency exchange software that is free from vulnerabilities. System administrators should monitor the exchange and track all unusual activities happening on the exchange. An external audit can be carried out to ensure proper and secure working of the exchange. Additionally, two-factor authentication can be leveraged for extra protection of users’ funds.
Distribute funds between hot wallets and cold wallets to safeguard users’ funds against theft. Hot wallets can be used to store funds that have to be traded. Cold wallets, on the other hand, can be used to store the assets that your users want to hodl.
Risk 3- Infrastructure Failure
Increasing number of users increases load on servers and if the infrastructure is not strong enough it can lead to infrastructure failure.
It further results in a whole trail of vulnerabilities and increases the risk of exchanges getting hacked.
A simple solution is to strategize your scaling process and perform regular testing of the system with high server loads. The ideal time to run these tests is during crypto winter when the number of users grows gradually.
Risk 4- Inability to comply with regulatory requirements
Problems with local and international regulators/ regulations and the non-compliance with AML and KYC requirements generally lead to site blocking in various countries. It even leads to big problems with banks for exchanges that accept fiat currency.
Cryptocurrency exchanges should comply with the laws of country in which they operate, in addition to adhering to international standards and requirements like -control, safety and investor protection.
To operate within the law, an exchange needs manual verification of users’ identities, suspicious transactions and adherence to other standards. Furthermore, the exchange should also comply with tax laws of jurisdictions in which it operates.
Besides the risks aforementioned, other risks associated with white label cryptocurrency exchange software emerge while dealing with liquidity, balance management, and integration with third party services.
In this article we tried to cover some of the major risks, if we missed out on something do let us know in the comments.
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