Florida-based exchange Cryptsy trades in over 130 cryptocurrencies, and cryptocurrencies alone. There are no government-denominated currency trading pairs on the exchange. At least, not yet.
Cryptsy regularly exceeds 2,300 BTC in volume on a 24-hour basis. That makes it the largest crypto-to-crypto exchange, at which people routinely trade altcoins for bitcoin, and vice versa.
So, where did the idea of a cryptocurrency-only altcoin exchange come from? How does Cryptsy decide to add new coins? And will the company take compliance seriously when it adds fiat into its enormous mix of digital currencies?
CoinDesk sat down with Paul Vernon, CEO and founder of the exchange, to find out.
The accidental exchange
Vernon started the exchange because of the demand that arose from mining various altcoins.
He started a number of mining pools for alternative cryptocurrencies, first with litecoin, then with feathercoin and so on and so forth. Vernon eventually amassed a host of different pools, mining a numerous array of altcoins.
“I had like 20 pools I was running. And people had all these various coins that you couldn’t trade anywhere.”
Vernon was accruing fees in coins associated with running each pool. The problem was, there wasn’t an exchange for him to sell many of these cryptocurrencies. So the next logical step was to start one.
“Initially [the exchange] was just for those users. I probably had a couple thousand users in those pools. And it was just going to be a small thing for the users of the pools so they could trade,” he said.
“It organically grew into something much larger.”
Cryptsy now has over 200,000 users registered and over 70,000 are active, having logged in within the past seven days, according to Vernon.
Voting for altcoins
Vernon says that, for a time, Cryptsy just added coins that looked technically sound from a source code perspective. Now, however, the exchange is using a voting system to introduce new cryptocurrency trading pairs.
Iceland-based Auroracoin was an example of this process. Said Vernon:
“Auroracoin was one of the first coins that we chose from the voting list, where people can vote on coins.”
The system is a mix of incentivized voting ballots. Every user gets a free vote for a coin. Also, users can spend Cryptsy points, which are accumulated through trading on the exchange.
Voting with bitcoin donations is also another method for Cryptsy’s users to voice an opinion on which altcoins should be added. User input is important to this process being open:
“We have to listen to the majority; try to get a sense of what people like. I wanted to add some transparency of how we added coins.”
Coins with volume
Adding new altcoins for trading can be exciting for Cryptsy’s users, but Vernon says that sometimes doing so can cause problems.
One coin that unexpectedly caused issues was dogecoin, where trading volume jumped immediately on the new Cryptsy DOGE/BTC trading pair. Said Vernon:
“When I initially added [dogecoin], I had no idea the kind of volume it was going to have. And I’ve actually had to swap out wallets because the wallet got so huge, like 2.5 GB.”
At the time, the Cryptsy dogecoin wallet got so large so quickly that withdrawals and deposits were briefly delayed.
Vernon has also noticed relatively high trading volume for something called devcoin, which is a foundation that pays developers to create things:
“Devcoin gets quite a bit of volume. It’s one that’s been around for quite some time. We get people who have received the coins, and they exchange them for bitcoin.”
In the early days of altcoins, many were pre-mined in order for the developer to reap the financial rewards if a coin should become successful.
Charlie Lee’s creation of litecoin changed that. Lee believed there needed to be a silver to bitcoin’s gold, and when he created litecoin, he didn’t pre-mine it.
“Well, originally it was one of those kind of things that turned you off, the word ‘pre-mined’. You’re like, I don’t want anything to do with it.”
Cryptsy’s stance is that, if the pre-mining is carried out not to benefit the developer, but to benefit something else, it’s acceptable.
“Maybe we shouldn’t even call it pre-mine, just because of the word. Maybe we should call it pre-allocation.”
The fact that Cryptsy currently has 157 cryptocurrency trading pairs means that Vernon has a lot of experience in comparing different types of cryptocurrencies.
Because of this, the idea of a proof-of-work algorithm that actually works to solve a problem is of interest to him:
“Primecoin is pretty cool. They’ve actually found quite a few primes that nobody knew about. But what are we going to do with those [prime numbers], I don’t know.”
So far, Vernon hasn’t come across a proof-of-work system other than primecoin that does something substantial from a computational standpoint. But he has thought of something that might be useful for humanity:
“Protein folding. That would be something that would be really nice to have: a proof of work where the work is really doing something, solving problems,” he said.
Vernon pointed out with the hashing power that the Bitcoin network has, it could be considered, “the biggest supercomputer in the world.”
Preparing for fiat
Cryptsy does not deal with fiat money, but it will sometime in the future. Vernon started the exchange without the use of government-backed money as a method of exchange because it was an easier business to get off the ground:
“Mainly I didn’t want to get into fiat because of the regulatory issues. And so [cryptocurrency-to-cryptocurrency] seemed like a good entry point.”
Crypsty has been working through a lengthy process to be in a position to accept fiat money on its platform, but it is taking a lot of time.
Some of the delay is down to working with accountants that have to get used to the concept of cryptocurrencies; some of it is because Vernon wants to set an example of diligence:
“It’s a long process, and we want to make sure we do it right. It’s not something I want to do without knowing that the way we do it is the right way.”
With this in mind, he has sent four of his employees to become CAMS certified. This is a credential offered by the Association of Certified Anti-Money Laundering Specialists that, the associations says, “denotes proven knowledge in the detection and prevention of money laundering”.
Vernon says that he expects Cryptsy to be one of the only exchanges to have that number of people with CAMS certification on its staff.
Crypto-to-crypto was a way to get Cryptsy off the ground, but Vernon wants to set an example for how to do things the right way to ensure long-term stability of the exchange.
He discusses this at conferences, and was a on a panel at San Francisco’s recent CoinSummit event talking about alternative cryptocurrencies.
Vernon shares the government’s uneasiness about decentralized money being used in nefarious ways. As he sums it up:
“Our concern is, and the government’s concern is, money laundering. So we need to kind of be the poster children of how to do [compliance] correctly. So I’m not going to launch [a fiat currency option] until I’m ready to be on the poster.”