What is a crypto exchange, and how does it work?

A crypto exchange in one paragraph

A crypto exchange is a business that runs a marketplace for digital assets. It takes buy and sell orders, matches them, records the result in each client's account and, in most cases, holds the assets on clients' behalf until they are withdrawn. It differs from a bank because the assets are crypto, and from a wallet because the exchange, not you, normally controls the keys. This guide is part of Backpack Learn and explains the mechanics in plain terms.

How a crypto exchange works

Most exchanges follow the same four steps: you open and verify an account, you deposit money or crypto, you place orders that are matched against other traders, and you withdraw. The details differ by firm and by country.

1. Account and verification. Licensed exchanges check who you are before you can deposit, a process known as know-your-customer (KYC). It exists because regulators require firms to guard against money laundering.
2. Deposit. You send fiat currency, such as dirhams or dollars, or transfer crypto from another address. The balance appears in your account once the exchange has received it.
3. Trade. You place an order, and the exchange's matching engine pairs it with an opposite order. A trade changes the balances in the accounts of both sides inside the exchange. It is not necessarily written to the blockchain at that moment.
4. Withdraw. You send crypto to an address you control, or fiat to a bank account. Withdrawal is where the exchange's custody and reserves are tested.

Order books, spreads and order types

The order book is the live list of buy orders (bids) and sell orders (asks) for a market. The highest bid and the lowest ask are the best prices on offer, and the gap between them is the spread. A limit order names the price you will accept and rests on the book until it fills or you cancel it. A market order fills at once against the best prices available, so you pay the spread and, in a thin market, may fill at several worse prices as the order consumes the book.

That difference sets the fee you pay. An order that rests on the book and is later filled is a maker order, and one that fills against an order already there is a taker order. Taker fees are usually higher.

Centralised and decentralised exchanges

Backpack is a centralised exchange. The rest of this guide refers to that model.

Custody: what you hold on an exchange

A balance on a centralised exchange is a claim on the exchange, not a coin in your own wallet. If the exchange fails, is hacked or suspends withdrawals, you may not recover the assets. For that reason, checks on reserves matter more than a polished app. A proof of reserves compares the assets an exchange controls with what it owes clients at one moment, and it is explained in the guide on how to verify an exchange's proof of reserves. It shows a point in time and is not a guarantee of future solvency. The Backpack security page sets out what is published and who verifies it.

What an exchange costs to use

There are three costs: trading fees, the spread and any deposit or withdrawal charges. The published Backpack fee schedule shows spot tier 1 at 0.08% for makers and 0.10% for takers, and no fee on USD wires in either direction, with tiers recalculated from 30-day volume. Spot fees are charged on the value of each trade, so a 1,000.00 USD taker order at tier 1 costs 1.00 USD in fees, before the spread. Rates can change, so read the page before you trade.

Spot, derivatives and stocks: not the same product

An exchange can offer several products from one account, and each carries different risks and may fall under a different licence. Spot means buying the asset itself. Derivatives such as perpetual futures are leveraged contracts on a price, which are covered in what perpetual futures are and how they work. Tokenised stocks are tokens linked to shares, and the guide on tokenized stocks, ownership and dividends explains the legal models. Treat each as a separate decision.

What to check in the UAE

In the UAE, the first check is which licensed company provides the service. Virtual asset service providers in Dubai are licensed by the Virtual Assets Regulatory Authority (VARA) and listed on its public register. Backpack's Dubai entity is Trek Labs Ltd FZE, licensed by VARA for Exchange Services, spot trading only, licence no. VL/23/07/001, as set out on the company and licence page. Backpack's licence disclosure says the licence does not cover futures or margin trading, so perpetual futures are not available in the UAE. Stock brokerage is not provided under the CySEC, MiCA or VARA licences.

No single licence covers every product in every country. Before funding an account, confirm the entity, the register entry and the products it covers. If you later want to move proceeds back to dirhams, see cashing out crypto to AED in the UAE. Account, deposit and support questions are answered in the Backpack FAQ.

Five checks before you use any exchange

1. Find the legal entity serving your country and look it up on the regulator's register.
2. Read what the licence covers and what it does not, product by product.
3. Read the fee schedule and test the spread on a small order.
4. Look for reserve evidence and how often it is published and by whom.
5. Keep only what you plan to trade on the exchange, and withdraw the rest to a wallet you control.

Sources

1. Virtual Assets Regulatory Authority, public register of licensed entities, last read by the research team on 12 October 2026; not re-read in full on the date this guide was published.
2. Backpack, VARA License Information, support site, accessed 12 October 2026.
3. Backpack, Trading Fees, support site, accessed 12 October 2026.
4. ESMA, Markets in Crypto-Assets Regulation (MiCA) register page, last read by the research team on 12 October 2026; not re-read in full on the date this guide was published.
5. Cyprus Securities and Exchange Commission, register entry for Trek Labs Europe Ltd, accessed 12 October 2026.