The New York State Attorney General has published a report evaluating the security of various cryptocurrency exchanges. If you have any interest in cryptocurrency at all, you’ve heard about crypto exchange hacks. And while there’s no way to create a hack-proof cryptocurrency exchange, there are methods that exchanges can use to protect their users who wish to buy Bitcoin.
Cryptocurrency investors are most often threatened during times of market manipulation and exchange theft. The AG report analyses how the world’s popular exchanges deal with both of these issues, and there’s a wider variety of findings than you might expect.
Coinbase, Binance, Bittrex, etc.: How to Buy Bitcoin Safely
Perhaps you are a veteran in the crypto trading markets. If you’ve been trading for many months or even years, perhaps you don’t have an expectation for crypto exchanges to be secure. You’ve survived countless hacks, and you know that your coins are only safe when they are under your direct control.
This might work well for you, but people new to the industry are very hesitant to invest using platforms that are not secure. Many see the ongoing vulnerability of centralized cryptocurrency exchanges as a major impediment to widespread adoption.
Market Manipulation Prevention
Published in the Virtual Markets Integrity Initiative, the NY AG identified only 4 digital token exchanges with anti-market manipulation policies: Coinbase, Bittrex (see our Bittrex review), Gemini, HBUS.
Market manipulation most often occurs when wealthy traders on a single exchange cause prices to rise suddenly by buying up large quantities at high prices in a short period of time. Seeing prices shooting up, other traders assume that some good news is causing the action. FOMO (fear of missing out) sets in, and soon new traders are driving up the price even further.
The original manipulators have only to sell their tokens at the new higher price for quick profits. It’s a classic “pump and dump” scheme, and the aforementioned four exchanges are the only American brokers who get the New York AG seal of approval.
Insured Crypto Exchanges
Conventional stock exchanges are heavily regulated and are subject to many of the same insurance requirements as international banks. Most crypto exchanges are not regulated, and few insure user funds. In response to the AG’s request, only Coinbase exchange (speaking of their custody service) and bitFlyer USA were able to satisfy insurance queries. Other exchanges were unresponsive or simply did not insure user funds.
Again, if crypto investment is to spread into the broader culture beyond what we’ve seen in the past, new investors must have confidence that their money cannot simply be stolen away.
While exchanges like Kraken are complaining about the scrutiny, the report indicates that lawmakers are taking cryptocurrency seriously. Crafting consumer protections into the industry’s early stages will build legitimacy – a major ingredient for any future bull market we hope to experience once more.