Everything You Need to Know About Payment Processing for Crypto Exchanges - DirectPayNet

Everything You Need to Know About Payment Processing for Crypto Exchanges


Cryptocurrencies caught the attention of the world back in 2017. In the space of 12 months, Bitcoin’s value rocketed from $921.35 to $13062.15. Suddenly the whole world was paying attention to blockchain-based currencies. While Bitcoin’s price has since tumbled and recovered to exceed its 2017 highs (such is its volatility), interest in cryptocurrencies has only been heading in one direction.

Today, interest in crypto has never been higher. And it’s not just in BTC. Ethereum, LiteCoin, and Ripple have all surged in value and interest during the 2020s thus far. In other words, there’s never been a better time to set up a crypto exchange. That is to say, a platform that accepts customers’ fiat currencies in exchange for cryptocurrency.

This article will walk you through everything you’ll need to succeed as a startup crypto exchange. But first, let’s dive a little deeper into why now is the perfect time to be in the crypto space.

The 2020s Mark the Decade of Cryptocurrency Acceptance

When Bitcoin first surfaced, it took a long time before knowledge of the blockchain currency’s existence spread beyond online forums. However, the early 2020s have rubber-stamped cryptocurrencies as mainstream financial instruments.

In late 2020, the world was in the grip of a deadly “second wave” of the COVID-19 pandemic. However, almost under the radar, it marked the first year that BItcoin went institutional. Hedge funds and investment firms had stopped fighting digital currencies and instead made investments worth up to half a billion dollars. With traditional financial institutions piling money into crypto, the values of BTC, ETH, LTC, and XRP all reached new all-time highs.

With crypto now normalized, there has never been a better time to operate a crypto exchange. Startups are flooding over to the so-called “Crypto Valley” based in Zug, Switzerland. The small town has built an ecosystem of crypto businesses that include billion-dollar businesses Ethereum, Dfinity, Polkadot, Bitmain, Libra, Tezos, Cardano, and Cosmos.

Banks in the same region (Leichstein) are also more accepting of crypto merchants and willing to take on the risks associated with cryptocurrency payments. Bank Frick and others have been helping to drive the acceptance of credit cards for crypto payments.

So if you’re thinking about setting up a crypto exchange, what do you need to know to secure a payment processor?

Are you new to the crypto space? Unsure of whether you can get an application for a merchant account approved? With the right plan, you can! Take a look at what you need for a crypto merchant account here!  

How to Secure Payment Processing for Crypto Exchanges

Even though crypto has now become mainstream, it’s still viewed by many acquirers and merchant account providers as high-risk. The association that crypto has with hackers, international criminal organizations, and money laundering has put many payment service providers (PSPs) off.

Having said that, customers can still buy digital currency with their Mastercard credit cards and Visa debit cards, for example. That means to compete as a successful crypto exchange, you’ll need to find a payment gateway, payment processor, acquiring bank, and a merchant account to process your e-commerce crypto payments.

But finding a specialist crypto payment gateway provider to accept a number of payment options for your business isn’t straightforward. Similarly, only a few banks are processing and acquiring crypto transactions at this moment in time. So you need to team up with high-risk payments experts such as DirectPayNet to help you secure the best possible combination of PSPs.

But before you reach out to us, there are plenty of steps you can take to ensure that you are in the best possible shape to convince banks of the merits of processing your payments. Let’s take a look at what they are.

Step #1: Register Your Business and Acquire Your Crypto Licence

While there is wrangling in the USA over how to regulate cryptocurrencies, Europe is proving to be a much more attractive destination to set up an online crypto exchange. The first step to obtaining payment processing is securing an operating license.

Since many of you may be looking at Zug, Switzerland, as your base, let’s give their licensing requirements as an example. Here crypto businesses are regulated by the Federal Financial Markets Supervisory Authority (FINMA) through regular publication of guidelines in one or another area of crypto business.

They require all crypto exchanges to apply for a Financial Intermediary License. under the terms of this specific license, the Swiss authorities require you to:

  • be entered in the Commercial Register as a commercial undertaking or be officially authorized to conduct business;
  • be able to ensure compliance with Anti Money Laundering Act (AMLA) requirements by having an appropriate organizational structure and internal regulations; and,
  • enjoy a good reputation and be able to provide assurance both of compliance with its duties under AMLA and of proper business conduct. These conditions apply both to the organization itself and to the individuals responsible for its administration and management.

For reference, to register as a business (of any description), you must have a business bank account with a minimum of 100,000 CHF in paid-up capital. The whole process from business incorporation to obtaining an operating license could take up to three months. However, there are many tax advantages of registering in Zug specifically. You can also benefit from the entire ecosystem of fellow crypto businesses and supportive banks.

Once you’ve registered your business, poured in the required capital into your business account, and obtained your crypto license, it’s time to convince banks to process as many payment methods as possible for customers looking to allocate more funds to their bitcoin wallets.

Step #2: Implement Compliance Processes to Convince Acquirers of Your Crypto Exchange’s Legitimacy

As highlighted above, there are many specific risks to operating as a business that sells cryptocurrencies. That means you’ll have to do everything you can to negate those risks to secure credit card processing without excessive transaction fees or strict sales limits placed on your exchange’s checkout.

Given the anonymity problems surrounding crypto payments, you will have to demonstrate your commitment to anti-money laundering (AML) procedures. You’ll need source of wealth verification on bank accounts and detailed Know Your Customer (KYC) processes that incorporate Combatting the Financing of Terrorism (CFT) checks.

For online payments, banks will also want to see processes such as ID verification and two-factor authentication at the checkout for merchants offering virtual currencies. Especially if you plan on processing bitcoin payments.

As interest and transaction volumes continue to soar, you need to have effective anti-fraud measures in place. Adding 3D Secure v2 (read more about 3DS2 here) to your checkout process is a great place to start with your fraud prevention measures. This software analyzes dozens of data points in real-time before deciding whether to approve or decline a purchase.

Implementing this software will also help to mitigate chargebacks by shifting the burden of proof to the customer. Finally, 3DS2 satisfies the Strong Customer Authentication requirements that came into effect in the EU on January 1st, 2021.

Step #3: Develop Your Own Crypto Exchange Software

Many crypto exchange startups want to shortcut their way to success. One fast way to set up an exchange is to piggyback an existing exchange via an API. But this is the wrong approach. Acquirers view white-labeling as a huge red flag. Once they realize that you aren’t in control of your own product offering, they will pass on the opportunity to provide you with their payment systems, website integrations, or associated plugins.

It’s the same problem that besets dropshippers. Those shouldering the risk of your payments need you to be in control of your products and services. After all, they cannot effectively evaluate a business to which they do not have access. Banks will also question your business’s ability to scale and increase in value, given that you don’t own any of your own software. Worse, the exchange you’re piggybacking could go bust overnight, presenting a huge risk to those underwriting your business.

Thus you need to build your own exchange software, no matter how time-consuming that may be. Leading providers such as BitPay, CoinGate, and Coinbase have all developed their own crypto exchange software. Today, they are reaping the rewards.

Step #4: Build Up Reserves in Fiat Currencies to Reduce Volatility Risks

As a high-risk merchant, you will most likely be asked to keep substantial reserves. This is to cover the costs of a number of eventualities, including fighting chargebacks and disputes. But keeping those reserves in volatile digital currencies will not be acceptable from an acquiring bank’s risk perspective.

Thus, you need to ensure that you build up reserves in one or several stable fiat currencies such as USD, EUR, or GBP. Building up cash reserves in multiple currencies has the added advantage of negating exchange rate fluctuations when receiving payouts of different currencies into your merchant account.

Step #5: Scale by Securing Access to Multiple Merchant Accounts

Once you begin to experience steady sales volumes, the next step is to secure multiple merchant accounts. However, you need to remember that until the “passporting” of crypto licenses comes into effect in 2024, crypto exchanges can only operate within countries in which they have licenses.

Let’s suppose you are based in Singapore (another crypto hotspot), and you want another merchant account in an EEA country (such as Switzerland). In that case, you would need to need to have an incorporated company, a company bank account, a local office with local employees, and a crypto license in the country of your choosing. Without those in place, you won’t be able to obtain multiple crypto merchant accounts.

With several merchant accounts, you can spread transactions across your separate accounts to lower the risks associated with chargebacks and e-commerce fraud. By keeping within acceptable ratios and building up a solid processing history, you can then return to acquirers and negotiate increased sales limits.

The Crypto Space is Booming – Start Your Crypto Exchange with a Winning Payments Strategy Today

Interest and transaction volumes in the crypto space have never been higher. There has never been a better time to launch a crypto exchange. But payment processing in this space is far from easy. Most traditional acquirers will shun you. And yet, accepting fast, safe and convenient credit and debit card payments for cryptocurrencies is vital to gaining new customers and boosting your crypto exchange revenues.

That’s why you need the help of the crypto payment experts. We’ve been helping high-risk businesses in the crypto space for over almost a decade! We have unrivaled expertise that can secure you the best payment processing outcomes for your crypto business – often when several other companies have failed before us.

So whether you’ve just launched or you’re in the process of scaling an existing crypto exchange business, contact our experienced team today! No other merchant services provider has a better track record in this industry!  

About the author

As President of DirectPayNet, I make it my mission to help merchants find the best payment solutions for their online business, especially if they are categorized as high-risk merchants. I help setup localized payments modes and have tons of other tricks to increase sales! Prior to starting DirectPayNet, I was a Director at MANSEF Inc. (now known as MindGeek), where I led a team dedicated to managing merchant accounts for hundreds of product lines as well as customer service and secondary revenue sources. I am an avid traveler, conference speaker and love to attend any event that allows me to learn about technology. I am fascinated by anything related to digital currency especially Bitcoin and the Blockchain.