As cryptocurrency gains momentum in the modern economic system, the need to exchange well, and to speculate, increases exponentially. That leads to a constant popularity growth for crypto-asset exchanges, since for now, they have become the main forum in which to buy and/or sell coins and tokens.

Cryptocurrency exchanges present a very appealing opportunity to make money through trading, not least because the industry is still largely unregulated and constantly available, unlike traditional capital and currency markets. Of course, there is a trade-off in the form of various frauds, scams, and malicious manipulations, not to mention the extreme volatility of the cryptocurrency market as a whole; but the profits still cover the cost for most of the professional players, and offer great hope to wannabes too. Exchanges are often dubbed crypto market gatekeepers, hinting at their enormous influence over the realm.

Like it or not, crypto exchanges are here to stay, a permanent fixture of the investment and trading landscape with a strong tendency to grow. Thus, we need to study the landscape better. The gains are quite obvious, so for the sake of better and more objective understanding, let’s dive deeper into the industry’s pains.

Common problems of crypto-asset exchanges

Every crypto asset exchange has its own advantages and disadvantages, but most of them still face common issues. Let’s review these one by one.

Liquidity problem

Liquidity is one of the main issues, especially for the middle and small-size player in the market. But even top crypto exchanges face it at least for particular trading pairs. Crucially, it’s the smaller players who typically have a hard time solving this problem.

“Some challenges for exchanges nowadays concern building liquidity. Recent announcements have shown that obtaining liquidity is not an easy task for new entrants to the market”, says Marisa Yoshikawa McKnight, Global Business Development & Sales Manager at Liquid. She added:

“We’ve been able to develop liquidity over-time in the JPY market which has proven to attract more traders. Another challenge is building new products to get the next billion users. As an exchange we’ve attracted lots of trading users, but the next step is to create products to enable people to use crypto in everyday life.”

Custodian problem

Most (if not all) top crypto asset exchanges are centralized nowadays, with DEXes only just emerging. That’s natural because of technical issues with different blockchain systems that still lack seamless interoperability. Moreover, they have insufficient transaction speeds while transaction costs remain too high for efficient and reasonable peer-to-peer trading. Thus, the need for centralized platforms that can create the proper environment for trading and fast exchange remains.

This means that an exchange must elicit funds from customers and store them in a safe place, all the while providing operations with some kind of internal asset equivalents on its own system.

And that raises a number of issues related to the security of acquired funds, prevention of hacking, theft, misbehaviour of your own personnel, etc. In other words, it poses a question in terms of the trust a customer has in the exchange itself.

Fiat / Regulations problem

Since the cryptocurrency market as a whole is still in its infancy, the problem of fiat-to-crypto exchange remains a major issue. One that especially affects those exchanges located in highly-regulated regions (like the US or EU).

Marina Khaustova, CEO at Crystal Blockchain of Bitfury Group, says:

“International compliance will continue to grow in importance for cryptocurrency exchanges. The recent guidelines from the Financial Action Task Force only strengthen this trend. Following the new “travel rule” coming into effect in June 2020, cryptocurrency exchanges will have the added task of logging details for any transaction over $1,000. We believe blockchain analytics tools will be critical for exchanges to better track these transactions, helping to visualize fund flows across entities and borders.”

The fiat problem, which is closely coupled with the regulation issue, presents a much bigger issue for the exchanges than for any other crypto market entities, since exchanges are centralized, so the authorities have an object they can directly influence and easily exercise their power over.

Thus, according to Eric Benz, CEO at Changelly and Senior Advisor at BlockEx:

“Crypto Exchanges are going through that “A-ha” moment and realizing that in order to reach the masses and service a global customer base, they have to do what is required in order to operate in a legal manner. The only way exchanges will grow and reach new markets is to provide the security and trust customers demand, and this comes with complaint procedures and regulation.”

Okay, but how to find solutions?

Of course, every exchange tries to find its own way of dealing with each and every one of the problems described above. Some of them even posit some solutions.

However, the best way forward is to pool experience, discuss common problems and perhaps try to figure out some industry-wide solutions. That is why representatives of the industry are having meetups like this one.

Cryptocurrency exchanges, as well as the whole crypto industry, still have a long way to go before solving all of the vital issues. Effort and cost will be two key ingredients if they are to successfully wrestle these problems into solutions.