What it means
If a customer wants to buy a cryptocurrency with dollars, or convert it back into dollars, they usually need a DCE. The exchanger quotes a price, takes the customer's payment and delivers the digital currency, or does the reverse.
Some operate through websites and apps, while others use physical machines or over-the-counter desks for large trades. Exchangers make money in two main ways.
They charge a fee, often a percentage of the transaction, and they earn a spread, which is the gap between the price they buy at and the price they sell at. For high volumes, the combined income can be significant.
Because exchangers connect digital currency to the banking system, they are an important focus for regulators. Many countries require them to register, verify customers' identities and monitor transactions to prevent money laundering and terrorist financing.
These checks are known as know your customer, or KYC, and anti-money laundering, or AML, controls. Finance teams dealing with exchangers should check that the business is properly registered and regulated in the places where it operates.
They should also ask how customer assets are held, whether they are kept separate from the firm's own money, and what happens if the exchanger fails. Several exchangers have collapsed over the years, leaving customers unable to recover funds.
For businesses that accept payment in digital currency, an exchanger can convert receipts into regular currency quickly, reducing price risk. The company should compare fees and spreads among providers, since small percentage differences can add up on large volumes.
Record keeping matters a great deal. Each exchange creates a taxable event or an accounting entry in many jurisdictions, so the finance team should keep clear details of dates, amounts and rates used.
In practice
Real-world examples.
Example
An online retailer accepts cryptocurrency from customers and uses an exchanger every week to convert it into dollars. The finance manager compares quotes from three providers to keep fees as low as possible. She also checks that each provider is registered and holds customer money separately from its own.
Example
A freelance developer paid in a digital currency uses an exchanger to convert it to cash for her rent. She records the exchange rate on the day for her tax return.
Example
A regulator reviews a small exchanger that has been processing large transfers without identity checks. It issues a fine of $250,000 and requires the firm to introduce proper compliance procedures.
Formula
Calculation
Net proceeds = Amount sold x Exchange price x (1 - Fee rate)
Suppose a business sells 2 units of a digital currency at an exchange price of $10,000 each, and the exchanger charges a fee of 1.5%. The gross value is 2 x $10,000 = $20,000, and the fee is $20,000 x 0.015 = $300. Net proceeds are $20,000 - $300 = $19,700, which is $20,000 x (1 - 0.015).Case study
Seen in the real world.
Harbourlight Exchange is a fictional digital currency exchanger used here as an illustrative example. It charges a fee of 1% and earns a spread of 0.5%, and it handles about $8 million of trades a month.
Monthly revenue is therefore about $8 million x 1.5% = $120,000. Its largest cost is compliance, which includes software, staff and audits, totalling about $45,000 a month. The finance director also holds a reserve of $500,000 to meet customer withdrawals during busy periods.
When a regulator introduces stricter reporting rules, the firm adds two compliance staff and spends an extra $150,000 on new software. The cost lowers its profit for the year by about 10%, but the finance director considers it a necessary price for keeping its licence. Because it has planned for these costs, it continues to operate while less prepared competitors withdraw from the market.
Watch out
Common mistakes.
- Choosing an exchanger on price alone. Regulation, security and financial strength matter just as much.
- Forgetting the spread. The quoted fee may be low, but a wide spread can add a hidden cost.
- Failing to keep records. Each exchange may have tax and accounting consequences.
Questions
People also ask.
Is a digital currency exchanger the same as a bank?
No, it is a specialist business that converts between currencies, and it does not usually offer the full range of banking services. Customer protections may also differ from those at a bank, so it is important to check what happens to your funds if the exchanger fails.
How do exchangers make money?
They charge fees and earn the spread between buy and sell prices. Larger exchangers may also earn income from other services, such as custody of customer holdings or lending against digital assets.
Why are exchangers regulated?
They connect digital currency to the banking system and can be used to hide illegal money. Rules require them to know their customers and report suspicious activity, and firms that fail to do so can face heavy fines or lose their licence.
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