Pros & Cons of Whitelabel Cryptocurrency Exchanges
Author: Danijel Pančić
Source: Lemur Legal
With claims of crypto-winter being over, there’s also been an increase in interest in owning or creating a crypto exchange. To avoid years-long development and ensure a swift and smooth market entry, we can always choose an existing solution, a white-label, and avoid dealing with the tech part of development completely. At the time of writing this, numerous white-label options for cryptocurrency exchange solutions have become available, so we’re not going to play favourites here, since different solutions make sense for different business cases. Rather, we’ll take a look at why and when a white-label strategy is a good or bad choice for new crypto exchanges.
If you want to tap into the market potential immediately, there is no faster way than a white-label. You find a suitable vendor, pay the entry price, and you’re off. Well, in reality, the process is not quite as fast, but the essence remains - you will save a lot of time and enter the market much faster than if you built the exchange from scratch. Since any exchange is nothing but a compilation of code that runs uninterrupted, barring any bugs, you can focus on other things you will need for your business. To make things even easier, the provider usually performs the installation and the whole operation can start quickly.
What most new exchanges don’t have is liquidity. Liquidity creates a positive feedback loop, where the exchange with most liquidity offers most opportunities and thus attracts most users. If you are buying a white-label, choose one that shares their liquidity pool with their white-label clients. Every such new purchase of a white-label just expands the combined liquidity pool.
Besides liquidity, tech is also a great barrier when deploying an exchange (or any other software) and by using white-labels, you can take that burden off of your shoulders. The price you pay is monetary, but you save a lot of time by not developing it from scratch. The other great time sink in tech is maintenance - far greater than development. Every bug the exchange has is now offset to the provider of the white-label solution, but it’s always smart to check their policy on bugs before making the purchase. You don’t want to buy a solution that doesn’t do maintenance, after all, you didn’t want to do this in the first place.
But then follows the coldest shower: tech is unavoidable. You will save a lot of money and even more time by buying a white-label, but you will not avoid having a tech team. What white-label solution providers usually offer is an exchange, not the whole operation (or they try to up-sell it), and that includes at least modules for KYC, compliance, verification, support, administration/CRM, and charts and trade view. None of these are simple to develop and are even harder to maintain (the exchange engine usually has far fewer bugs and needs a lot less upgrades compared to any other module). So beware of bare bone exchange solutions with awesome throughput, perfect trade engines, and other senseless features if core features are missing, since you will not be able to finish what you started. If in doubt, don’t hesitate to enlist the help of expert consultants who can help you make the right decision.
What you also don’t want to do is poor security and code review, regardless of marketing and testimonials (even if personal). It’s far smarter to hire an external security expert to perform tech due diligence in advance than risk getting a phone call in the middle of the night about missing or stolen funds. If the white-label solution vendor offers a shared liquidity pool, then there need to be shared custodian wallets as well - and those can present a tangible risk from the perspective of keeping the private key secure. In case of a breach, any users whose funds go missing will want to be compensated immediately, which can mean a deep hole in the exchange’s pocket and a lot of effort lost.
From my perspective, a white-label is like a time machine. You will still need to employ all of the personnel, just as if you had started from scratch back in 2011, except you will not need to spend as much time on development and can refocus on other aspects of your business (creating a better experience for your users, for example). Be wary of any solution that claims that you will not need a tech team. An in-house team is critical, even if it is small, since no product company can just outsource the development of its own product and succeed in the long term.