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.
