White Label Exchanges Part I

Even people familiar with trading and cryptocurrencies may be unaware of a smattering of strange websites that offer a product called white label exchange software. To understand the concept, it may be best to familiarize yourself with other examples of legitimate white labeling first.

White Labeling

Despite the fact that you may not recognize white labeling, you’ve definitely seen it in your life. A perfect example is generic cereal knock-offs that sit next to name brand stuff at all supermarkets.

These cereals are likely made by a singular developer who then sells unlabeled bags to every supermarket in your area. The supermarket company, whether it be Walmart or Kroger, will then take on the task of rebranding and relabeling the cereal. This means the knock-off you buy at either store, be it called “Silly Circles” or “Fruity Floats,” is composed of the exact same ingredients. The only difference is the box.

On the surface, there’s absolutely nothing wrong with this behavior. The supermarkets don’t want to vertically integrate an entire industry (cereals), and a developer who can’t compete with name brands still has a market to sell into. It’s a win-win-win, insofar as it provides the supermarket a cheap alternative to premiere brands and higher margins, customers with a cheap version of an oft purchased good, and a developer the ability to compete with much larger entities.

White Labeling In Fintech

White labeling in Fintech has been around for a very long time. Many well-known online brokerages once utilized white label exchange software to begin, and that tradition continues to this day in the realm of cryptocurrencies. What does white labeling look like in Fintech?

Not enticing or enthralling, that’s for sure. To create successful white label exchange software a developer likely has experience with trading engines and both back end and front end development. This means they know what traders desire, how to create a welcoming UX and UI (user experience and user interface), and how to realize a server that won’t fail under congestion. The software is, more often than not, not going to be open software, but proprietary, aka paid for by a third party and kept secretive so they can charge every user.

Again, this isn’t inherently wrong or illegal. The idea, more or less, is to “democratize” the brokerage landscape and allow individuals who may not be tech savvy or programming-language literate the ability to run an online exchange and cater to customers, without all the upfront costs. But therein lie the problems.

The Bad and the Ugly

Online brokerages and consumer-tier Forex (foreign exchange) markets began to create a nasty name for white label exchange software in the late ’90s and early ’00s. Why?

Not only were these white label exchanges simple to create and run, they were equally easy to dismantle and destroy — which meant more ill-intentioned creators entering the marketplace and more consumers left with emptied wallets. This became a real concern for regulators and law enforcement, who now had to monitor multi-trillion dollar markets (compared to the roughly ~$300 billion valuation of cryptocurrency markets as of typing this) where everyone with *any* wherewithal believed they could be their own brokerage firm.

So through utilizing old laws (like the Bank Secrecy Act) and new (KYC/AML standards), the government clamped down on numerous exchanges and made it increasingly difficult to both operate these exchanges on American soil and to transact with the exchanges as a customer. While plenty of forex and alternative white label exchange software is still available online (24 pages of Google results for “forex white label”), the requirements for running an exchange in America are onerous and mean dotting every i and crossing every t.

Enter Cryptocurrency

After white label exchange development came to a sluggish resolution in forex markets, Bitcoin and cryptocurrencies entered and spurred new life into an otherwise dead scene. Particularly after MtGox and BTC-e went down, having alternatives consistently available was a must, so devs who had worked on software for forex or Liberty Reserve or other equity markets were now seeing demand to revamp the software to be compatible with cryptocurrency trading.

And develop they did. “People like to think that developers have rules they follow,” says Nixops, a developer who’s been working in and out of Fintech for nearly two decades. “There is no Hippocratic Oath for software developers, they work for money. If you won’t write the software, someone else will.”

Despite the fact that white label exchange software is “a scammers’ wet dream,” as Nixops so eloquently put it, developers flooded the scene and by late 2017 a new exchange was appearing everyday. Many of the largest cryptocurrency exchanges in existence today were founded with white label exchange software, only to later bring on a team of devs so they could integrate new coins and take on more volume.

This sums up the well-intentioned or neutrally-intentioned reason for white label exchanges to exist. In part two, we’ll be delving further into how white labels have persisted, how they make scamming easier, how to spot them, and whether you should ever trust an exchange that is using white label exchange software.

Until then, stay skeptical, friends.

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Fraud. Fraud everywhere.

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Cas Piancey

Cas Piancey

Fraud. Fraud everywhere.

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