Understanding peer-to-peer currency exchange

Anyone who has studied or worked, or even done business abroad, has probably encountered the problem of how to exchange and send money abroad. Banks and brokers usually charge a premium on the total amount traded as well as a transfer fee. But over time, a new niche has developed in the market to meet this need. A new wave of Internet-based peer-to-peer (P2P) currency exchange services is taking banks, not to mention their fees, out of the exchange.

Through an online P2P platform, individuals can securely find and trade currencies with individuals in other countries at much lower costs. Most online P2P companies claim to offer customers up to 90% savings on international exchange and transfer fees. Read on to learn more about how this part of the industry works.

What is a P2P currency exchange?

Peer-to-peer currency exchanges provide users with an online platform where they can trade currencies. P2P networks depend on digital transfers rather than the exchange of physical currency. Users rely on an internet connection, which means they can use desktops, tablets, and smartphones to trade.

These services essentially eliminate intermediaries – banks, foreign exchange (forex) services and other institutions – by allowing users to transact with each other. Since there are no dealers involved, users may be able to get a better rate on their trade-in.

Exchanges are especially convenient for common currencies like the dollar, pound, euro, and yen where there are always a lot of people looking to trade. Since the platforms depend on individual users logging in in different countries, users of smaller currencies may not immediately find a good match. Some users may find that some platforms do not deal in smaller currencies at all, either due to low liquidity or due to certain regulations that prevent these exchanges from obtaining a license in the relevant country. Additionally, users who want to exchange a very large amount of money may also have a hard time finding a match.

How P2P Exchanges Work

Using an exchange is quite simple. Users register with a P2P exchange service for an online account to make deposits. Depending on the sites, users can accept a given exchange rate or bid on an exchange rate of their choice. The site then matches, shows a change in ownership of the funds, and delivers them within one to two days through a simple domestic transfer. No currency ever leaves the country but is simply exchanged between users. Users can send money to any personal or business account, even to their own account in another country.

For example, suppose Mary is an American working in Paris for a year and earning euros. She must convert them into dollars and place them in her US bank account in order to pay her US mortgage. Meanwhile, John in Los Angeles wants to convert dollars into euros to send to his son who is studying in France. Instead of going to a bank, Mary and John open accounts on a P2P currency exchange website. Mary deposits euros into her P2P account and John deposits dollars into his. The P2P website tells Mary and John how many dollars or euros they will receive for their transfers, and they each confirm the transfer. In a day or two, the P2P exchange service will have John’s dollars transferred to Mary’s US bank account. At the same time, Mary’s euros will be transferred to John’s son in France.

But what if there is a shortfall or if there are no good currency matches? The provider steps in to provide liquidity. In these situations, the user may be charged additional fees. For example, if there is no suitable currency match, Fair currencycharges between 0.4% and 0.6% to make the exchange with its own funds, slightly more than the platform’s 0.25% to 0.3% for peer-to-peer matches.

Significant savings

The most attractive feature of P2P currency transfer is cost reduction. By bypassing banks and brokers, these platforms offer currency exchange at much lower rates. The average savings rate on international transfers for P2P users compared to banks varies between 75% and 90%. Naturally, the savings depend on bank charges, which in most cases range between 2 and 5%.

According to the P2P currency exchange platform Fair currency, a typical bank would transfer £2,000 for a fee of £100, or about 5% of the exchange: £40 for the international transfer fee plus £60 for the exchange rate margin. For the same £2,000, CurrencyFair only charges £8.50, or around 0.5%, or £2.50 transfer fee plus £6 exchange rate margin.

Another benefit that these marketplaces offer is convenience. Users can access it anytime and from anywhere. They are easy to use for small and large sums and transactions settle quickly, usually within one to two days, but users can pay extra for guaranteed same-day or next-day transfers.

P2P currency trading is not just for the everyday consumer. Indeed, these exchanges also target companies. Kantox is an online marketplace specializing in transactions with mid-cap companies, as well as small and medium-sized companies. According to the exchange’s website, it has more than 800 corporate clients.

Choosing the Right P2P Currency Exchange Service

Before choosing and using a P2P currency exchange platform, do some basic research. Here are some tips to help you get started:

• Look for a company that does high volume – the more transactions, the more cash. This is essential for better rates, fast conversions and smooth transfers. Check the number of currencies offered by the exchange as well as the time it takes to complete the transfers.
• Verify that the company exchanges your specific currencies.
• Compare exchange rates and fees from different companies.
• Check that the company is registered with the national authorized agency and has all the necessary licenses.
• Use a company that keeps customer money in separate accounts rather than joint accounts. Segregation offers the consumer better protection in the event of financial difficulty for the company.

Regulation

P2P currency exchanges move incredible amounts of money. The CurrencyFair website displays a count of the funds transferred by the company. In March 2020, it amounted to 9 billion euros. And there are many other services on the market, including:

But have financial regulators got it right and, more importantly, are consumers safe?

Many P2P currency exchange companies are based or have headquarters in the UK. As registered money services businesses, they are administered by Her Majesty’s Revenue and Customs (HMRC) and must comply with the Money Laundering Regulations 2007. As payment institutions they are also subject to the supervision of the UK Financial Conduct Authority (CIF).

There are two categories within the FCA – Registered Businesses or Small Businesses and Authorized Businesses. Authorized businesses, which are larger, must separate customers’ money from their own at the end of each day in a process known as ring-fencing. This provides better security for the user and a greater chance of recovering money if the company falls into financial difficulty. You can check the Financial Services Registry for the FCA status of the company.

Some companies are regulated by more than one country. Fair currency in Australia is regulated by the Australian Securities and Investment Commission (ASIC). The company also has a registered office in Ireland where it is regulated by the Central Bank of Ireland. Another company, money exchange is licensed as a Hong Kong Money Services Operator and is further regulated by the FCA in the UK as a Small Payment Institution. Foreign Exchange is authorized by the FCA in the UK while its operations in Dubai are regulated by the Dubai Financial Services Authority.

In the US, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) oversees P2P exchange companies such as VenStar Exchange. Companies are authorized to transmit funds by their respective banking departments and must follow anti-money laundering (AML) policies.

The essential

Peer-to-peer currency exchanges allow for fast transfers and significant cost savings compared to banks. P2P exchange companies are growing at a rapid pace providing a lower cost alternative to individuals and small businesses. In contrast, the P2P forex market does not fully protect customers. Users should choose an established and fully regulated company for currency exchange.