Whether you’re just exploring Web3 and decentralized finance or you’ve been involved for a while, engaging with online exchanges is nearly unavoidable. However, remember the crucial advice: without control of your private keys, you don’t truly own your cryptocurrency.
As background information, online exchanges in Web3 are platforms where users can buy, sell, and trade cryptocurrencies and other digital assets like tokens and NFTs (Non-Fungible Tokens). These platforms leverage blockchain technology to facilitate secure and decentralized transactions. They are crucial for the liquidity and accessibility of digital assets within the Web3 ecosystem. Those kinds of exchanges mentioned, like KuCoin, are centralized exchanges (CEXs). They operate under a central authority that facilitates cryptocurrency trading, unlike decentralized exchanges (DEXs) that allow direct peer-to-peer transactions without such intermediaries. So again, while on CEXs, not your keys, not your coins.
Many cryptocurrency exchanges are however subject to regulation (2023 PWC Report), depending on their location and the services they offer. Regulations vary by country and are designed to protect consumers, prevent money laundering, and ensure financial stability. Some exchanges operate under specific licenses that comply with local financial regulatory bodies, while others might operate in jurisdictions with less stringent regulations. The degree and nature of regulation can significantly impact the operation and offerings of these platforms.
Some of the main global cryptocurrency exchanges include Binance, Coinbase, Kraken, and KuCoin. These platforms are recognized for their large trading volumes, wide range of available cryptocurrencies, and services like spot trading, futures trading, and more. Each has its own set of features, security measures, and regional availability, making them popular choices among crypto traders and investors worldwide.
But it is not because you are in the top 5 that you are safe. FTX, while being a top 3 cryptocurrency exchange at the time, faced a liquidity crisis and filed for bankruptcy in November 2022. The collapse was due to mismanagement of customer funds and risky financial practices. This event highlighted the need for more regulatory oversight in the crypto industry and raised concerns about the stability and security of other exchanges and crypto entities.
On March 26, KuCoin and its founders were charged with operating without a license and violating anti-money laundering laws in the U.S. They allegedly failed to implement necessary KYC procedures and falsely claimed to have no U.S. customers, despite actively serving them. This lack of compliance led KuCoin to be used for laundering criminal proceeds. The charges highlight the importance of following U.S. regulations for companies engaging with U.S. customers in the financial sector.
The safety of using online exchanges varies widely and depends on the security measures each platform implements. While many reputable exchanges have robust security protocols, including two-factor authentication and cold storage for assets, risks remain. It’s essential to research each platform’s history, security features, and user reviews. Ultimately, while exchanges can offer convenience and liquidity, the principle of “not your keys, not your coins” emphasizes the importance of personal control over your digital assets for the highest security.
Even when technical safeguards are in place, the governance, operation, and management of systems are ultimately handled by humans. This leaves room for potential corruption or deficiencies, highlighting the importance of oversight and ethical conduct in managing technological systems.
Users can foresee risk by conducting thorough research on platforms, understanding the technology behind projects, and staying informed about common scams. Utilizing security practices like using hardware wallets and being cautious with smart contract interactions are also key steps for risk mitigation in Decentralized Finance.
Written by Lorena Billi
