You’ve probably reached some Jedi level at crypto trading and now want to jump onto the next level — from a trader to a cryptocurrency broker.
So you might wonder: Where to start and how to get there?
If this is precisely what’s on your mind, stick with me.
Today I will cover three (3) alternative ways to become a cryptocurrency broker and dissect the PROS and CONS.
Spoiler: one of them is the best from the effort/revenue ratio perspective.
Let’s dive in!
What is a crypto broker, and how is it different from a stockbroker?
Let’s start with a stockbroker.
A stockbroker is a securities market professional who executes orders in the market on behalf of clients (retail or institutional ones). Stockbroker functions are usually carried out by brokerage firms that are regulated, insured, and subject to regulatory body scrutiny.
A stockbroker is a mandatory middleman between buyers and sellers. The latter simply can not transact with each other through a broker. A trader must first set up an account with a broker to access markets and deposit some bucks. When a trader wants to do some shopping, he has to instruct the broker on what orders should be placed on his behalf.
Now, for a crypto broker.
The idea behind crypto brokerage is the same — intermediation in trades. But with crypto, however, unlike traditional stock brokerage, using a broker is optional. As we know, crypto exchanges allow users to transact directly. All you need to do is open an exchange account (no broker required), make a deposit, and there you go!
Here comes a question:
Since crypto enables kinda DIY trading, what’s the point of crypto brokerage then??!
To answer this, let’s make some “crypto exchange vs. broker” comparisons.
Cryptocurrency exchange vs. Broker
Spoiler: Both are brokers but solve different tasks.
Here is the thing:
Most existing crypto exchanges are brokers.
Look at the key range of services they offer:
- matching buyers and sellers
- having custody of clients’ funds (save for decentralized crypto exchanges), and
- transactions clearing.
The similarities to brokerage are undeniable, don’t you agree?
Of course, there are some examples that operate differently. I mean a few “blue chips” major crypto exchanges that align themselves more closely with the conventional stock exchange model. In particular, they segregate brokerage, custody, and clearing functions and outsource them to strategic partners. However, in today’s crypto market, such a “classical” exchange set-up is more an exception than a rule.
Now let’s get back to our favorite “standard” "grey-type" crypto exchanges. Those are exchanges and brokers' all-in-one packages. And usually, they operate under a broker or a broker-dealer license, save for the exchanges registered somewhere in a free-trade offshore paradise. Those don’t bother with any licensing.
What’s the sense of having two brokers at a time?
Short answer: for better liquidity and convenience of trading.
I bet you’ve already noticed that the crypto industry has a siloed structure.
On the one hand, we have multiple stand-alone trading venues: CEXs, DEXs, hybrid exchanges, and semi-exchanges (those that aggregate liquidity but do not execute orders on their sides). All live according to their unique rules and act like independent sovereign states.
On the other hand, there currently exist more than 18k cryptocurrencies and hundreds of blockchain protocols, most of which are heterogeneous (i.e., different in design and not interoperable).
To get better exposure to global crypto liquidity, a trader must open several accounts on different exchanges, deposit them with funds, and manage them all simultaneously.
It’s extremely inconvenient.
In today’s crypto finance paradigm, this problem, known as crypto liquidity fragmentation, is the biggest challenge and bottleneck, preventing crypto from mass adoption.
I detailed this in my article “What is Web3 Liquidity Aggregation” — highly recommended.
So a crypto broker’s job here is to help clients overcome this problem and give them one-gate access to deep and diverse crypto liquidity consolidated from multiple exchanges and providers. It is essential for professional and institutional traders.
Another killer feature of brokerage could be providing clients with the possibility to get into crypto trading using their fiat funds only and without bothering with fiat/crypto conversion on their own. Institutions highly demand it.
Who can become a crypto broker?
Apparently, not anyone. Only high-powered professionals in this industry can, as brokerage implies responsibility for other people’s money.
So here is the basic MUST-have package:
- prominent expertise/qualifications/good years of experience in trading
- top-notch fast and secure infrastructure
- sophisticated team
- impressive trading capital
- high-ROI network: established and trust-based relationships with clients, exchanges, liquidity providers, payment gates, and the like
- killer marketing and business development capabilities.
What about a cryptocurrency broker license? Is it required?
Non-trivial and pretty nuanced question.
If you plan to play in some white-glove jurisdictions, you will be required to get authorized or licensed. For example, in the US, as a “money transmitter” or as a CASSP (crypto asset secondary services provider) in Australia.
However, it’s worth noting that even in those jurisdictions, there are also no clear, holistic policies that directly regulate crypto brokerage and licensing.
Whether you need a license for your crypto brokerage business or not — shall be determined individually by your lawyer.
And, of course, obtaining a license is not a fast-speed process. You must be patient for a year or two before getting there.
How to become a cryptocurrency broker?
Finally, we got there! 🎉
So far, there are three actionable ways to do it:
- To kickstart a regulated stand-alone crypto broker
- To get a crypto broker franchise, and
- To become a liquidity network broker.
Let’s dissect each briefly.
1. Launching a regulated crypto broker
It’s the toughest way. Especially if you plan to target users from “first-world” countries.
As with any professional intermediation dealing with 3rd parties money, you must comply with multiple regulatory, technical, financial, HR, and reporting requirements to keep your business going. I’ve briefly outlined some of those above.
The path to obtaining the license will depend on the products you want to offer (spots or derivatives) and the geographics you plan to serve. As you might have guessed, there are no universal guidelines for that.
In an overgeneralized way, here are the boxes you will have to check:
- capital sufficiency (usually a large amount of capital c is required)
- office presence, i.e., you will need to relocate some of your team members to the country issuing the license
- the core team having relevant professional qualifications (especially applies to CEO, Head of Trading, Assistant to Head of Trading, etc.)
- reliable and secure infrastructure
- sufficient AML/KYC/financial monitoring policies implemented, etc.
Now let’s assume you’ve successfully passed all that — what’s next?
I bet it won’t be mind-blowing for you that the license is just a part of the deal. It won’t automatically bring you clients and generate revenue.
Along with being authorized, you also have to be a killer marketer and seller to bring high-dollar clients on board. It’s not easy to convince them that it’s safe to entrust you with their money.
Additionally, you will need to be a kickass business developer to get profitable, sustainable partnerships with exchanges (for 0 fees, preferably), liquidity providers, banks, payment gates, and the like. You have to have the ability to persuade clients.
It sounds like a hell of a job, doesn’t it?🤯
Now I anticipate a Quora-type question here:
Can I set up a non-regulated crypto broker without bothering with all this license thing?
Well, there is always a workaround. It's crypto, baby!
For example, you can register your broker somewhere in a free-trade zone like Seychelles or Saint Vincent and the Grenadines and cut off the US and other markets with powerful securities watchdogs.
However, this approach is far from being wise and sustainable.
First, you are always at risk of legal punishment for such experiments.
Second — which is IMHO even more important — you will have a hard time attracting clients and strategic partners.
No license — no trust. That’s it.
Reasonably saying, even a pseudo-license obtained somewhere in Mauritius will make a difference.
Summing it up, here are the pros and cons of this way.
Let’s start with the CONS.
- It’s a long, sweaty, and expensive way — while you’re dealing with all this legal complexity, you can easily miss out on the market opportunities. It’s easy to end up “ideally compliant” but unable to earn. Because while you’re putting all your efforts into the paperwork, your potential clients are already with your competitors.
- After everything is done with the license, only heaven knows how long it will take you to pass the break-even.
- It is a cash-burning business — especially at the beginning — most of your spending will go to marketing and sales and meeting license “continuing” obligations. Make sure you are resilient and funded enough to take such a brutal challenge.
- With time, it can turn into a cash-generating machine. Because a white-glove regulated brokerage is precisely what professional big guys need in trading. You have all the chances if you are diligent in sales, marketing, business development, and fortune. Everything just needs to click.
Summing it up, the complexity of kickstarting a regulated crypto broker is pretty similar to launching a regulated crypto exchange. That means it’s BRUTALLY HARD. Think twice to make sure you can handle it.
2. Crypto Broker Franchise (Crypto Sub-Brokerage)
Compared with the regulated crypto broker, a broker franchise is a much easier and quicker way to get into the crypto brokerage business. However, it’s not quite a brokerage in its classical sense.
In the conventional market, a broker franchisee, also called a sub-broker, is someone who enters into a partnership with a broker (a franchisor) to bring them new clients. Essentially, a sub-broker is an agent of a broker, selling their products and services to clients.
In other words, while a broker is a middleman between buyers/sellers and exchange, a sub-broker is the middleman between a broker and an investor.
Why is it easier to get started as a sub-broker?
- less legal complexity and qualification requirements. You just need to have some certificates on hand (each time depends on the jurisdiction).
- no extensive investment is needed.
- no requirement on being registered as a trading member of an exchange, etc.
While being a broker requires extensive permissions and certifications, being a sub-broker allows you to carry out similar functions much smoother and worry-free.
What about the crypto broker franchise?
In crypto, the concept of a sub-broker has not been widely introduced so far.
In most existing examples (PayBito, PCEX, etc.), crypto exchanges offer franchises, not brokers. Though we remember that crypto exchanges are, in fact, brokers, do we?
So the same logic here:
- a crypto sub-broker brings new leads to a franchisor crypto broker for a cut.
PROS: it’s a relatively easy way to enroll in this business — see above why.
CONS: it’s hard to find clients. Most crypto traders prefer to buy-sell crypto on their own or through brokers rather than seek the assistance of a sub-broker franchise.
3. Crypto Trading Network Broker (or a Network Broker)
It’s the most optimal way of doing crypto brokerage, implying the best effort/outcome ratio.
To be clear, a network broker is not an established term. I just crafted it for the convenience of explanation. I hope you like it.
So here is what it means.
Remember, we earlier touched upon the problem of crypto liquidity fragmentation — the biggest bottleneck of the current crypto finance paradigm?
Nice if you do. So.
As we know, where there is a challenge, progress occurs.
A few prominent and well-funded projects are currently working on solving the crypto liquidity fragmentation problem. Instead of launching yet another killer crypto exchange with siloed trading, the best minds look towards creating trading networks that aggregate crypto liquidity from various desynchronized sources and enable instant, safe, and cheap cross-blockchain transactions. Each of those projects offers its unique solution for different types of users.
In general, the concept of a crypto liquidity network implies:
- one-account access to crypto liquidity consolidated from exchanges and other liquidity providers participating in the network
- aggregated price feeds
- instant and low-fee cross-chain transactions, suitable even for HFTs
- interconnection between all types of participants, and
- interoperability between heterogeneous blockchains.
If it sounds too nerdy or boring, here is the end benefit of a trading network in simple words: fast, diverse, and cheap global crypto trading from one account.
How can a trading network be beneficial for crypto brokers?
I’ll explain it, taking Yellow Network as an example.
Yellow is a decentralized Layer-3 peer-to-peer trading network that enables
- global cross-chain trading with real-time settlement and
- communication and financial information exchange between crypto exchanges, brokers, trading firms, and other network participants.
Have you ever heard about ECN (electronic communication network)? If not, it’s a computerized system that automatically matches buy and sell orders for securities in the classical stock market. So think of Yellow as a decentralized ECN for digital assets.
With Yellow Network, a broker can:
- Quickly start brokerage without the need to fit extensive qualifications — all you need is to pass through some KYC verification and integrate with Yellow Protocol.
- Get one-gate access to global aggregated crypto liquidity.
- Peer liquidity from other brokers through B2B (Broker to Broker) liquidity channels. A broker peering with another broker on the market will display orders from the other broker in his order book. It will allow a broker to extend his offer and increase the overall liquidity available for his users.
- Choose a custodian or operate in a non-custodial manner.
Comparing network crypto brokerage with other types previously covered above, it turns out that:
- network brokerage is way easier and faster to kickstart than a regulated stand-alone brokerage business, and
- unlike crypto sub-brokerage, network brokerage is scalable, independent, and has unlimited revenue-generating potential.
For more detailed information on how to jump into the brokerage business with Yellow and what perks you will get — check out Yellow Network Whitepaper.
And traditionally pros and cons here.
PROS: easy, profitable, and scalable.
CONS: honestly, I see no cons here. But if you spot some, please let me know about them in the comments.
There are three alternative ways to become a cryptocurrency broker, including a non-conventional one that is purely “crypto native” — i.e., liquidity network brokerage. The last seems to be the most time-/cost-effective shortcut to this activity.
One important fact here: crypto brokerage is not crowded yet. You will definitely find your perfect spot in this market if you act fast.
Choose the best way for you, and see you in crypto trading!👋