Digital Currency Exchanges
A digital currency exchange (DCE) allows customers to trade digital currencies (such as Bitcoin or Ethereum) for other digital currencies, or traditional currencies, FIAT1. Digital currency exchanges offers different services.
Most commonly they provide a platform for setting buy or sell orders and charge a small fee for the service. Trades are instant and the exchange stores the digital currency until withdrawal. GDAX, Gemini and Poloniex are among the biggest digital currency exchanges and offer this service.
Another less common business model is connecting the buyer and seller and by providing a platform for P2P trading. A seller creates an ad on the platform and specifies accepted payment methods and price. A P2P trading platform enable the buyer to accept a wider range of payment methods. P2P trade typically requires more time as the exchange does not store both parties funds. As the price of digital currencies is highly volatile2, the spread is usually bigger in P2P-trades. The exchange charges may charge a fee for advertisement or a transaction commission. Localbitcoins and Paxful are two well known P2P digital currency exchanges.
Digital currency exchanges may also hold funds themselves. The exchange buys and sells from their own stock of digital currencies and FIAT. Commonly exchanges profit from the spread between the buy and sell price. Because the trade only involves 2 parts, this method enables the exchange to set any price they want. This kind of exchange is the most expensive one, but is often very simple to use. Without a third party, exchanges can offer better customer service and guarantees. CEX and Coinbase are the biggest digital currency exchanges that hold funds themselves.
Interest for digital currencies have drastically increased in 2017. Developers introduce new digital currencies daily and actors on the exchange market have seen a need for niched digital currency exchanges. As the business multiples in size, new regulations are necessary to control it. At this moment, legislators focus on transactions from FIAT to digital currencies and digital currencies to FIAT3. It is difficult to regulate transactions between digital currencies because of their decentralised nature. Transfers require no third partner and thus governments are unable to track transfers efficiently as banks usually provide records of transfer.