Traders with clean capital use different strategies to ensure that they choose the ideal crypto exchange. Losing honest capital stings more than losing grey money. Thus, getting the right crypto exchange is important for self-protection against dirty capital. The less you integrate your money with unknown funds, the fewer hiccups you will encounter.
Know Your Customer Check Strictness
It is always advisable to never submit fake documents or the identification cards of relatives tot he exchange. Most of the reputable exchanges are designed to notice and fight such tricks. But, you are allowed to use local and international passports to pass the KYC checks. Most of these platforms also accept a driver’s license.
Crypto exchanges have enough resources to cover their cumulative main capital from dirty coins and illicit fiat money. It features a team of individuals who perform various checks of the new traders to identify that they are not in any way involved in money laundering activities for criminals.
Any investors who are ready to prove that they are not into bad things, several simple strategies are used by the crypto exchanges. For instance, the staff may ask you to join in a brief video interview through Zoom or Skype. The representative asks questions to determine the real identity of the investor.
But, not all crypto exchanges have the legal right to perform these checks since it depends on the jurisdiction. Nonetheless, in many cases, you will have a short chat with the crypto exchange KYC department in English.
In the case that your language is terrible, prepare some of the answers beforehand. Ensure that you are polite since they first look at how you behave, and only then – at your answers.
Deposit Freeze Is Possible
At times an exchange seizes funds momentarily when they suspect users of illegal activity. If your deposit is banned, it is advisable to contact support. They then respond with clarifications about what is the cause. The probable reason behind that ban is that they may want to double-check the results of the Anti-Money Laundering software analysis.
Companies like Crystal Blockchain, QLUE, Chainalysis, CipherTrace, and others enable exchanges to determine the authenticity between coins and addresses. You might not be involved in some scam or criminal activities, but your employers or senders may have received coins from anywhere.
When you are withdrawing cryptos, ensure that your coins are from reputable sources. If the exchange asks where you got your money, send them proof that you got money as payment for legal work which should be enough.
To avoid hiccups, check the funds that you got on a personal wallet. Do that before sending coins on the crypto exchanges by yourself. Utilize the checking tools available for free. For example, Ethereum block explorer Etherscan.io enables you to check the address reputations using a built-in scanner.
On top of that, Huobi exchange has recently launched ‘Star Atlas’ which is a tool that checks cryptocurrency addresses about the origin of illegal funds. It is also possible to search for bitcoin addresses through oxt.me which is also a free tool with an extensive data feed.
Crypto Exchange Review By Independent Auditors
Most of the exchanges do not perform an external audit. External audits help investors understand that the exchange stores the money it claims to own. If money is lost after a hack or due to an inside job, you may not have the opportunity to return the funds. QuadrigaCX, Mt. Gox, and BTC-e investors are yet to get any compensation despite the time-costly legal activities.
Years are passing, and people spending more money on judicial matters without a fair result from the proceedings. That is what you might accept through license agreement when you are signing up on a platform.
American crypto exchange Gemini, on January 30, 2019, declared a full-blown check by Deloitte auditors. They reviewed the integrity and privacy of the mechanisms based on 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 that audit, Gemini requested the auditing company BPM to check the backing of the Gemini Dollar (GUSD), a stablecoin issued by the crypto exchange. By December 31, 2018, the exchange held its promise. The Gemini dollar bank accounts hold adequate funds to back GUSD. Thus, the stablecoin is safe to use instead of the normal US dollar and some of the other operating stablecoins.
External Auditors
In another case, the Kraken crypto exchange let European Fidor Bank executive Edward Stadum to review extensively the crypto exchange’s inner workings. He was quite impressed with the cryptocurrency accounting that he left Fidor to join Kraken in the capacity of the General Counsel.
Kraken let the users to independently guarantee that their holdings are safely stored. Here the firm provided some information on how they did an audit called “Proof of Reserves.” The audit was conducted with the use of cryptography. It is worth noting that no official reports are released after the audit was conducted.
Crypto Exchange Founders And Reputation
Before you engage in any business with a crypto exchange, ensure that you take your time to authenticate that the founders and creators of the platform are reputable. First, they must have a long history of doing business in the crypto or banking industry. Ideal exchanges incorporate people who have great links in the finance or IT space.
Interestingly, most of the exchanges are still managed and operated by anonymous people or individuals who are linked with fraud. Research by typing the names of the founders in the Google search space or any other search engine and add ‘financial fraud,’ ‘scam,’ or ‘investigation.’
Additionally, look at most of the Telegram cryptocurrency channels that specialize in the crypto sector scam busting. Most of these channels keep a lot of the unofficial information about the exchanges and their founders. In most cases, the mainstream media avoids publishing such information until they find official documents and major press pieces that confirm such allegations.
Unofficial Sources
The unofficial sources are useful in due diligence and OSINT efforts yet they must be taken with caution. It is advisable to look for the domain name information and data for the crypto exchange. Is the domain registered in 2018-2020? Does the crypto exchange have low traffic according to Alexa, Similarweb, Google? It is better to avoid such platforms.
Established exchanges are better in terms of novice trading. After gaining more experience, shift to the less popular exchanges if necessary.
Any registration in Estonia might be a red flag since most of the crypto companies registered in this country have had shady operations in the past. In June 2021, the Estonian government canceled over 500 crypto licenses.
Too many criminals were exploiting the official registration in the European Union to fool investors and engage in money laundering activities. According to 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 now reconsidering their licenses to ensure that registration is stricter. It is a measure that is advised by the big European Union regulators a long time ago.
Trading Volumes: How To Identify Fake Statistics And Wash Trading
Analysis from The Tie discovered that some of the crypto exchanges may fake a staggering 90% of their trading volume. The data was acquired through a calculation of the expected volume per trader subject to the total trade volume that is 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.”
Bitwise and the Blockchain Transparency Institute (BTI) experts came to the same conclusions. Nevertheless, Mauris Ledford, CoinMarketCap CTO, disagreed with the Bitwise findings. In an exclusive interview, he calls the wash trading study ‘incredibly slippery slope’.
Whether these researchers offer accurate data or not, it is advisable to go for the crypto exchange that poses less of a risk.
How To Determine The Authenticity of Feedback
Many websites exist where you can look up feedback published by traders and crypto exchange workers. They include Bitcointalk, TrustPilot, Reddit, Glassdoor, Twitter, and many others. Please note that some of these sites let anyone leave a comment under a company’s profile. Therefore, competitors can emulate a negative sentiment to gain more market share.
Nevertheless, in the instances of Reddit and Bitcointalk threads, they provide an opportunity to respond to accusations. Individuals normally post under nicknames and pseudo names that have rich posting history. It is quite hard to maintain an army of bots without anybody even noticing.
Thus, the exchange representatives and high ranking officials can post replies to all the negative comments on Twitter, Reddit, and Bitcointalk. In normal cases, the investors are angry since the crypto exchange froze their withdrawal request for compliance issues.
How Exchanges Respond
For example, here’s the comment with an allegation that Kraken exchange is forcing its users to acquire crypto and withdraw his entire $312,000 balance within 24 hours.
Jesse Powell, the Kraken CEO responded in the thread, and in that incident, the exchange helped the trader save his money. Since it was not the crypto exchange’s problem, the bank refused to process any transactions from this individual.
At times the exchanges ignore some of these threads which mostly means that they will not listen to your issues in the case that you encounter troubles. Review keenly all the responses made by the exchange staff. Did they help the user recover their funds? Since the crypto exchanges are not government agencies; they do not have any rights to freeze the accounts of the users for several months.
Even if a user sent the so-called tainted coins to the exchange; they should reimburse the frozen money within a few days. Sadly, some of the exchanges and coin swap services hold onto cryptos and refuse to give them back even after the investor submits the required proof of legitimacy.
The crypto exchange’s staff may show up to answer questions and return the money only after the investor publishes many complaints across crypto forums. Please note that the legitimate critics post the ticket number or even transaction IDs in the claims.
Hedging Risks: Exchange’s In-house Stablecoins
Most of the crypto exchanges are developing the stablecoins to compete with Tether (USDT). The first stablecoin in the history of cryptos is Tether. It enjoys wide usage of utilization by the exchanges and other firms but has several challenges with backing. This stablecoin is supported by Bitfinex exchange and there are over 9.2 billion tethers currently in circulation.
Stablecoins are a convenient way of storing wealth when Bitcoin undergoes extreme volatility. These are pegged to fiat money which helps reduce the volatility of a portfolio. Many exchanges are using Tether to transmit money without any losses in speed and price. In the matters of stablecoin security, the crypto exchange should confirm that the coin has total backing. Nonetheless, not every exchange does that.
Check whether the Web has any reports about the stablecoin backing. Generally, ensure that you avoid mainstream stablecoins like Tether since there are various worries about the minting and backing mechanisms.
Other Things To Look At When Selecting A Crypto Exchange
Always conduct thorough background checks to ensure that the crypto exchange that you want to put your money in is not involved in any criminal activities like stealing the forked coins. The most famous examples are Bitcoin Cash (BCH), Ethereum Classic (ETC), and Bitcoin SV (BSV).
Since these projects appear as a result of a chain split; the only way that you can successfully claim your new coins is to possess the original private keys. OTC desks, crypto exchanges, and other custodians who control these keys on your behalf may refuse to distribute forked coins citing maximalist ideology or some other reason.
Even despite some individuals may hate the new coins, these coins are still worth something. It is highly advisable to withdraw the coins from a crypto exchange in the scenario that you have read news about the upcoming chain split. After that split happens; you can then send the original coins back to the exchange while at the same time leaving the forked coins for yourself.
