Déjà vu: Repeated Risks of Unregulated Bitcoin and Cryptocurrency Exchanges

Since 2017, when Bitcoin came to fame on the global stage, exchanges found much opportunity in the prospect of servicing the booming industry. But short-cuts have been taken to quickly spin up trading venues in an arena fraught with problems from regulators to technical areas. We run down the long-list of debacles that have faced traders who sought opportunity in popular exchanges.

The US Department of Justice (DoJ) took its aim at BitMEX in 2020 for violations of the US Bank Secrecy Act. The news out of Washington sent traders looking to exit their positions and removing their Bitcoin from the exchange that has notoriously avoided a regulatory path. While the exchange did finally enact Know-Your-Client (KYC) procedures earlier this year, this was not enough to send markets in a short tail spin as the cryptocurrency exchange remains to have a large market share of the derivatives market. Within a day, over 32k Bitcoins had been withdrawn from the exchange. Most notably, is the fact that a majority of withdrawals found their way onto a regulated exchange, Gemini.

A well-orchestrated hot-wallet hack on Binance saw the loss of 7k Bitcoin in 2019. The major cryptocurrency saw markets react seeing a price fall of over 3%. While the hack did not affect users as the exchange leaned into its own insurance fund, the trading venue is now branded as one that has experienced a severe security breach. Troubles however are once again brewing for the behemoth exchange. Documents published by Forbes recently shows how Binance implemented a specialized strategy to overcome regulators and profit from traders in the US. While Changpeng Zhao (CZ) took to twitter to clear the company’s position, the infamous CEO of Binance was also quick to dismiss the hack on his exchange despite being true in his attempt to calm market nerves. The drama however did not end there with the exchange almost ready to execute a plan to fork/reorg the Bitcoin blockchain alongside major miners to reverse the hack. Fortunately, community uproar held back such a plan that could have very well spelled the end of Bitcoin’s decentralized nature.

The reported arrest of OKEx founder Star Xu in October 2020 left traders on the exchange in the dark as withdrawals were frozen. Weeks on, despite Star Xu being released by authorities, traders can do not much more than scratch their heads, wait or take a massive hit. With over 200k sitting on the exchange, the effects can be catastrophic for those who have their assets sitting on the exchange who has gained traction among derivative traders. While the exchange says that all funds are safe, the continuous withdrawal freeze then remains unanswered. And despite having a jurisdiction in Malta, the exchange remains at the mercy of Hong Kong authorities where the operation is headquartered.

Huobi is now the latest exchange to be facing a similar fate. Rumors of the arrest of a senior executive sent traders once again into a frenzy. And while this was denied, the latest out of Hong Kong is that all cryptocurrency platforms are set to face regulators. Meanwhile, Bitcoin withdrawals have once again increased on the platform.

KuCoin recently saw a hack that saw the exchange lose $275mn. Once again, traders headed for the exit. 

This list can continue. Major exchange Bitfinex is always at the forefront of Tether problems, the largest US Dollar stablecoin. FTX has launched a string of new products, including fractional stocks, that saw companies like Abra take a hit by the SEC and the CFTC for similar product offerings. Over $1.4bn have been laundered through such unregulated exchanges in 2020 alone, making them prime targets to the detriment of global Bitcoin markets.

Less Friction, Better for Bitcoin

All in all, only a handful of exchanges can really claim to be legitimate having addressed regulators and their security infrastructure. Coinbase, Kraken, Gemini, Bitstamp, remain clean as a whistle having to uphold the integrity set by regulators. Zubr also perserves this status having achieved the in-principle license by Gibraltar regulators, a feat only a handful of exchanges have invested resources to achieve.

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