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Let’s look at how traders with clean capital pick the right cryptocurrency exchange. Read on and you’ll be a pro at finding places that fit safety demands.
Losing honest capital is more painful than losing grey money. Picking the right cryptocurrency exchange is essential in terms of self-protection against dirty capital. The less you mix your funds with unknown money, the fewer troubles you get.
Never submit fake documents or the IDs of your relatives to the exchange. Because the exchanges will notice and fight such tricks. You can use both local and international passports to pass the KYC check, as well as a driver’s license.
The exchanges have substantial resources to cover their main capital from dirty coins and illicit fiat money. This includes a team of people who will perform checks of new traders to identify that they are not laundering money for criminals.
For those who want to prove that they won’t do bad things, a couple of simple methods are in use by the cryptocurrency exchanges. For example, the staff may ask you to join a short video interview via Skype or Zoom with the representative asking questions about you. Not every cryptocurrency exchange has the legal right to perform such a check as it depends on the jurisdiction.
However, in most cases, you will have a brief chat with the exchange KYC department in English. If your language is bad, prepare some answers beforehand. Please, be polite: they first look at how you behave, and only then – at your answers.
Sometimes an exchange is temporarily seizing the funds because they suspect a user in illegal activity. If your deposit got banned, immediately write to the support. They will respond with clarifications about what is the cause. The possible reason behind the ban is that they may want to doublecheck the results of the AML software analysis.
Companies like Chainalysis, Crystal Blockchain, QLUE, CipherTrace, and others help exchanges identify the connections between addresses and coins. You may not be involved in some scam operations, but your donators or employers could have received coins from anywhere. When withdrawing cryptocurrency, be sure that your coins are from known sources. In case the exchange asks where did you get the money from, send them a proof that you received payment for legal work, trading (or whatever reason) and that should be enough.
To avoid the headache, check the funds that you receive on a personal wallet. Do it before sending coins on the exchanges by yourself. Use the checking tools available for free. For instance, Ethereum block explorer Etherscan.io allows checking the address reputations using a built-in scanner.
More than that, Huobi exchange has recently launched ‘Star Atlas’, a tool that checks crypto addresses regarding illegal funds origin. You can also search for bitcoin addresses via oxt.me, which is a free tool with the extensive data feed.
Many of the exchanges don’t perform an external audit. The external audit helps traders understand that the exchange indeed stores the funds it claims to have.
In case they lose your money after a hack, or because of the inside job, you won’t be able to return the funds. Mt.Gox, QuadrigaCX, and BTC-e investors didn’t receive any compensation despite time-costly legal proceedings. Years are passing, and people spending more and more money on judicial matters without a fair result. This is what you may accept via license agreement when signing up.
On January 30, 2019, American crypto exchange Gemini declared a full check by Deloitte auditors. They checked the integrity and privacy of the mechanisms according to System and Organization Controls (SOC) Type 2:
“SOC 2 examinations are specifically designed to address controls at a service organization relevant to the systems at the service organization used to process users’ data. …This included a review of Gemini’s exchange application, infrastructure, and underlying customer database, as well as its institutional-grade cryptocurrency storage system that custodies the private keys of Gemini’s online and offline wallets.”
Before the mentioned audit, Gemini asked the auditing firm BPM to check the backing of Gemini Dollar (GUSD), which is a stablecoin issued by the exchange.
As of December 31, 2018, the exchange did hold the promise. The Gemini dollar bank accounts hold sufficient funds to back GUSD. It makes the stablecoin safe to use instead of the usual U.S. dollar and some other stablecoins.
Here’s another case. The Kraken exchange allowed European Fidor Bank executive Edward Stadum to look under the hood of the exchange’s inner workings. He was so impressed with the crypto accounting that he left Fidor to join Kraken as General Counsel. Kraken offered the users to independently verify that their holdings are safe. Here’s some information on how they did an audit called “Proof of Reserves” with the help of cryptography. Worth noting that no official reports are released after the audit.
Before doing business with an exchange, please take some time to verify that the creators are known persons. They must have a long history of doing business in the banking or crypto industry. Legitimate exchanges will only onboard people with great roots in finance or IT. Surprisingly, many of the exchanges are still run by anonymous people or someone who has connections with fraud.
Type the names of the founders in the Google search field and add “scam”, “financial fraud” or “investigation”. Also, check some of the Telegram crypto channels specializing in crypto industry scam busting. Many of those channels keep unofficial information about the exchanges and their founders. Mainstream media will not publish that information until the emergence of official documents and major press pieces that confirm the allegations. Unofficial sources are useful in due diligence and OSINT efforts, yet must be taken with caution.
Please, look for the domain name information for the exchange too. Is the domain registered in 2018-2020? Maybe the exchange has low traffic per Similarweb, Alexa, Google? It’s better to avoid using it. Established exchanges are much better in terms of novice trading. After you gain more experience, proceed to less known exchanges (if needed).
Take note that registration in Estonia may be a red flag. Any crypto company that is registered in Estonia may have shady operations behind. Estonian government canceled more than 500 crypto licenses in June 2020. Too many fraudsters were using the official registration in the EU to fool investors (and to launder money). Per Andre Nomm from the Estonian Financial Supervision Authority (EFSA):
“[Estonia was] probably giving out those permits too easily to God knows what companies.”
They are reconsidering their licenses to make the registration harder. It is a measure advised by the big EU regulators a long time ago.
Analytics by The Tie found that some exchanges may fake up to 90% of their trading volume. The data was gathered via a calculation of expected volume per trader in regards to the total trade volume reported by the exchanges:
“If each exchange averaged the volume per visit of CoinbasePro, Gemini, Poloniex, Binance, and Kraken, we would expect the real trading volume among the largest 100 exchanges to equal $2.1B per day. Currently, that number is being reported as $15.9B.”
Analysts from the Blockchain Transparency Institute (BTI) and Bitwise came to similar conclusions. However, CoinMarketCap CTO Mauris Ledford did not agree with Bitwise regarding their findings. During an exclusive interview for Coinspeaker, he calls the wash trading study “incredibly slippery slope”.
Whether the researchers provide accurate data or not, try using the exchanges that represent less of a risk.
There are many websites where you can look up feedback from traders and even exchange workers. Those include Reddit, Bitcointalk, Twitter, Glassdoor, TrustPilot, and more. Please take into consideration that some of those websites allow any person to leave a comment under any company’s profile. So the competing exchanges can simply emulate negative sentiment to gain market share.
However, in the case of Reddit and Bitcointalk threads, there is a clear need to respond to allegations. People usually post under nicknames with rich posting history. It’s hard to maintain an army of bots without anyone noticing.
So the exchange representatives and even CEO’s are posting replies to negative comments on Reddit, Twitter, and Bitcointalk. Usually, traders are angry because the exchange froze their withdrawal request for compliance reasons. For instance, here’s the comment with a claim that Kraken is forcing the user to buy crypto and to withdraw his $312,000 balance in 24 hours.
CEO Kraken Jesse Powell responded in the thread, and if you look at the details, the exchange did help the user to save his money. Because it was not the exchange’s problem, simply the bank refused to process transactions for this person.
But sometimes exchanges ignore such threads, which may indicate that they won’t listen to you in case of trouble. Look close at any responses from the exchange staff. Was it helpful? Did the user get his funds back? Exchanges are not government agencies, they don’t have the right to freeze the accounts of the users for months. Even if the user sent so-called tainted coins to the exchange, they should return the money within a few days.
Unfortunately, some of the exchanges and coin swap services confiscate cryptocurrencies and not give them back even after the trader submits proof of legitimacy. Only after he creates a ton of complaints across crypto forums, the staff may show up to answer and return the money. Please note that legitimate critics tend to post the ticket number or transaction IDs in the claim.
Many of the exchanges are creating the stablecoins to compete with Tether (USDT). Tether is the first stablecoin in the history of cryptocurrency. It enjoys wide usage by the exchanges and other companies but has certain problems with backing. Tether is supported by Bifinex exchange, and there are more than 9.2 billion tethers now in circulation.
Stablecoins are a convenient way of storing wealth at the times of Bitcoin’s extreme volatility. Pegged to fiat money, they help reduce the volatility of a portfolio. Exchanges are using Tether to transmit money without losing in price and speed. When it comes to stablecoin security, the cryptocurrency exchange must confirm that the coin has full backing. However, not every exchange do so.
You must check whether the Web has any reports regarding the stablecoin backing. In general, try to avoid mainstream stablecoins such as Tether. Because there are certain concerns about the backing and minting mechanisms.
Always check that the cryptocurrency exchange is not participating in stealing the forked coins. The most famous examples are Ethereum Classic (ETC), Bitcoin Cash (BCH), and Bitcoin SV (BSV). Since those projects appear as a result of a chain split, the only way to claim your new coins is to possess the original private keys. Exchanges, OTC desks, other custodians who control the keys on your behalf may refuse to distribute forked coins citing maximalist ideology or some other reason.
Even despite some people may hate new coins, those are still money. It is highly recommended to withdraw the coins from a cryptocurrency exchange in case you have read the news about the upcoming chain split. After the split happens, you can send the original coins back to the exchange, while leaving the forked coins for yourself.