Can you trust centralized exchanges with your funds?

The FTX collapse took 8 billion of customer funds with it. How can we be sure that your crypto is safe on a centralized exchange?

In November, FTX imploded, locking away billions of dollars in crypto in its custodial wallet. Since then, crypto traders have been on edge, wondering if – or when – this will happen again.

The criminality on FTX appears to be unprecedented. In January, we learned that Sam Bankman-Fried instructed FTX co-founder Gary Wang to create a “secret” backdoor so that his trading firm could borrow $65 billion from Alameda users. Since then trust in centralized exchanges (CEX) has never been the same.

Exchange FUD (Fear, Uncertainty, Doubt) is not just because of FTX. In the final weeks of the year, Binance triggered a period of panic with its patchy “Proof of Reserve” “audit”. (Spoiler: this was not true proof of the audit or reserve report. It also later emerged that the Big Four accountancy firms refused to audit the exchange.) Since then, the Big Four have distanced themselves from the entire crypto industry. have taken.

While the FUD has settled down, the question remains: How safe are your funds? Well, there are many things to worry about.

Poor security and transparency

As we have seen, one of the enduring risks of centralized exchanges is their lack of openness. Sometimes, transparency in centralized exchanges is like looking at a brick wall. The industry has responded and put a higher premium on proof-of-reserve. (Proof of stores is one way that exchanges verify that claimed assets are actually there.)

Industry has said this is not enough. “In the wake of the FTX incident, transparency and security are emerging as key differentiators for exchanges,” said Gracie Chen, managing director of BitGate. “Exchanges must be committed to guaranteeing value for their users’ funds, regardless of market value. Some of the features for customers to look for in a secure exchange platform are top-notch security and risk management measures including hot and cold wallets, including multi-signature wallets, zero-trust security architecture and proof-of-store.

There are many sites and third-party tools that you can use to help you evaluate whether an exchange is right for you. Many analysts will have rankings that you can compare. CoinGecko and CER are two examples, but there are many more. “Not all crypto exchanges are the same,” Chen continues. “The difficulty for customers lies in choosing a secure exchange that they can trust.”

The threat of exchange hacks is always there

Since the early days of crypto, hackers have been a major concern with centralized exchanges. Mt Gox, a Tokyo-based exchange launched in 2010, was the first to fall victim to a major hack. In 2011, the platform lost $8.75 worth of BTC, but failed to learn its lesson. The exchange was attacked three years later for $615 million, becoming one of the largest crypto exploits ever.

There are many examples of exchange hacks. Another Japanese exchange, Coincheck, founded in 2012, was hacked for $534 million worth of various coins and tokens. At the time, it was the largest cryptocurrency heist ever. Following the debacle, regulators in Japan were quick to mandate additional cyber security rules.

“Many crypto exchanges have suffered from hacking, which has resulted in the loss of millions in crypto assets,” says David Kemmerer, co-founder and CEO of Coinledger. “Exchanges are a huge target for hackers because of the value placed on their platforms. Hackers exploit small bugs and vulnerabilities to infiltrate their systems.

Non-custodial wallets are also not safe from hackers. But, unless you are technically inexperienced and don’t publicize your well-stocked wallet, the chances of your wallet being intentionally targeted are slim.

Tech-savvy users have less reason to worry

The level of security also depends on how technically advanced the user is. One of the advantages of a centralized exchange is that their wallet is relatively easy to use. Non-custodial wallets—where users control their own keys—carry many risks, but they are typically harder to master.

“I think that hobbyists and beginners are, in fact, safer when using centralized exchanges and not self-custody wallets, as cases of losing crypto stored in self-custody are extremely common, and they are caused by improper backups. There are reasons for technologies,” says Max Sapelov, CTO and co-founder of CoinLoan. “The main risk of keeping your crypto on centralized exchanges is encountering a situation like FTX where you don’t expect it.”

Events like FTX are freak events that don’t happen very often. However, when a similar event does occur, the chances are that it will not happen when you expect it. In the case of FTX, a report from CoinDesk’s Ian Allison prompted Binance to eliminate all FTX from its books. This was the first big sign of trouble.

On November 8th, only two days later, FTX froze withdrawals and millions of traders’ cryptos were stuck. That’s the problem—before you know your crypto is vulnerable, it’s usually already too late.

“To be honest, you can never be 100% sure that your funds are safe on the exchange, taking into account all the extremely bad events that happened in the industry last year,” Sapelov continued. “Self-custody is safe, but it requires knowledge and self-education… Experienced investors, however, are safer with self-custody over the long term.”


All information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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