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What do crypto exchanges really do with your money? – Cointelegraph Magazine

Key Points:

  • Crypto exchanges may not always hold your funds in your name and may not have safeguards in place to ensure you can withdraw them.
  • Some exchanges have misused customer funds for their own purposes, leaving clients with no assets to withdraw.
  • There are different models used by exchanges and brokers, with brokers having a higher risk of misusing customer funds.
  • Exchanges generally use a combination of hot and cold wallets to store customer assets, with cold wallets being more secure.
  • Security measures, such as multi-party computation technology, are being implemented by exchanges to protect customer assets.
  • Due diligence is important when choosing an exchange, including researching the exchange, checking for licenses and physical addresses, and reviewing customer feedback.

When depositing funds into a crypto exchange:

  • In an exchange model, your money goes directly to the person you’re buying from and the assets stay within the exchange.
  • In a brokerage-type model, the money goes into the broker’s trust account first and then the broker acquires the assets for you.
  • Assets are held in hot wallets (connected to the internet) or cold wallets (offline and more secure).

Security measures being implemented by exchanges:

  • Exchanges are using self-custody infrastructure platforms, such as Fireblocks, to securely store and manage customer assets.
  • MPC technology, similar to multisig wallets, is used to split private keys and minimize the risk of fraud and attacks.
  • Rules and authorizations are set for transactions, requiring multiple approvals and reducing the risk of unauthorized actions by exchange employees.

Conducting due diligence on an exchange:

  • Research the exchange and check for licenses and physical addresses.
  • Check social media and independent review websites for customer feedback.
  • Review the exchange’s terms and conditions, paying attention to how they handle client assets.
  • Be cautious of exchanges promoted by influencers and celebrities.
  • Authentic word of mouth from friends and family can be a valuable source of trust in exchanges.
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