Blockchain might be one of the safest new technologies out there but the question remains, are crypto exchanges safe?
There is a feeling of uncertainty around cryptocurrency trading in general and you probably still don’t know if your exchange is safe at all? To answer this question you need to know what to look for.
This article will cover what you need to know about cryptocurrency platform safety in a simple checklist form, followed by an explanation.
Quick answer
No crypto exchange is completely safe. Many lack the important safety infrastructure, insurance, or governmental regulation that regular stock exchanges have. This makes most crypto exchanges vulnerable to hacks and also loss of funds from personal operating errors. The majority of exchanges can’t be trusted and needs further safety development.
This article will start with a checklist illustration as a quick safety explanation.
If you are in a hurry to deposit or trade cryptocurrency, use this safety checklist to test your cryptocurrency platform.
If you want a more in-depth explanation, keep reading to find out if your platform is safe enough.
I will go through each point of the checklist and teach you how to get this information on your own.
It’s not complicated at all.
Crypto exchange safety checklist
- Regulated and Licensed
- Digital asset storage
- Size
- Location
- Age
- KYC
- AML
- Customer Support
- 2FA Verification
- Reported volume
1. Regulation and Licenses
Without regulations or licenses, your crypto platform can’t ensure that they operate by the highest standards.
By not being a regulated cryptocurrency platform means they are not registered as a Money Transmitting Business.
A Money Transmitting Business or “MTC”, is a company that handles money transfer services. Such as deposits and trading of cryptocurrency.
To be registered as an “MTB” there is a security capital requirement on your bank deposits.
In this case, cryptocurrency deposits or digital assets.
This is a way for governments to ensure that companies in money services or money transfers have enough capital in safety storage to cover any problems that might occur.
For cryptocurrency exchanges, this would mean hacks or theft.
As you can understand, a bitcoin investment site without these specific regulations is not a safe bet.
These exchanges will not be able to ensure that your money will be paid back in case of a loss from a hack.
How to find this information:
You will generally find information about this in the footer at the bottom of your cryptocurrency platform’s first page.
It might say something like Legal or User Agreement.
Here is a screenshot of Coinbase’s MTB license and regulation operating as a cryptocurrency platform to give you an example.
2. Digital Asset Storage
If a cryptocurrency day trading platform is licensed as a money transmitter it’s fair to say they have your digital assets covered.
But you also need to know that your deposited cryptocurrency is in a safe place.
Without Digital Asset Storage, your cryptocurrency and altcoins might be sitting on a USB stick in the back of a car.
How to find this information:
To make sure your cryptocurrency exchange is safe and has your digital assets stored properly, visit the Legal or User Agreement page again.
Here you will find how and where your digital assets are stored.
It might require some digging on your part since there is often a lot of information on these pages.
But trust me, it’s worth all the time when you are researching how safe your cryptocurrency platform is.
This is a screenshot from Coinbase where they explain how your assets are stored.
Both for customers from the US and foreign countries.
Coinbase even separates Cash balances from Digitial Assets. They also let you know that 98% of their digital currency is kept in cold storage.
This is a huge plus when it comes to crypto platform safety.
3. Crypto Exchange Size
You might ask what size has to do with the security of a cryptocurrency exchange.
It matters, trust me.
To be able to operate on a large scale, dealing with high transaction volumes every day takes a lot of capacity from an exchange.
To be able to handle millions of dollars in deposits and withdrawals leaves clues that a cryptocurrency platform has a good infrastructure.
Something else to think about. With size comes popularity and with popularity comes reputation. You can’t have one without the other.
If a cryptocurrency site can stay popular. It will most certainly grow and establish a better reputation as time passes.
So size is a good measure of success in one way, but don’t solely rely on this as a security feature.
With size comes trust as well.
So far I haven’t seen a large-scale cryptocurrency exchange grow to a multi-million dollar organization without some level of trust.
So make sure you scan this point from the checklist before you start depositing.
How to find this information:
Exchanges normally explain something about their organization on their About page.
This is a screenshot from Coinbase’s About page.
- Here they explain very clearly how many customers they have.
- They also explain how long they have been operating
- As a bonus, they have added their total trading volume.
Huge plus!
4. Crypto Exchange Location
One thing to watch out for when you are choosing a cryptocurrency exchange is where it is located.
This matters a lot in two ways.
- Some countries have gotten a bad reputation in the cryptocurrency space and you should probably avoid doing business with these countries.
- Taxation might be a problem.
I would trust most of the cryptocurrency exchanges located in the USA, Europe, and some Asian countries like China and Japan.
Countries outside of these jurisdictions are in the grey zone.
Very little is known and this raises some red flags about their trustworthiness.
Regarding taxation, there is not much to say.
If you feel unsure about how to tax your cryptocurrency profits from an exchange in a different country you should probably avoid it.
How to find this information:
Navigate to the About page and read the description of the company profile. Here you should find what you are looking for.
This is a screenshot of the Bittrex About page.
5. Crypto Exchange Age
How long a company has been operating builds the trust of the business.
This holds for any kind of company.
The longer the better.
This is something you should investigate to judge how safe your cryptocurrency platform is.
A company that’s only been up and running for a few years is not a bad thing. The company might be a great start-up with a lot of potential.
But I would almost always recommend signing up for a trading account with an exchange that has some history.
First of all.
You can establish some trust by knowing the company has been running for several years without suffering from any hacks. That’s a huge plus when it comes to the safety of a crypto exchange.
You can also find more information about an established platform online.
Cryptocurrency traders are great at posting reviews and potential warning signs of exchanges.
Another aspect that builds trustworthiness is reputation from staying in the game for a longer time.
Most of the trading I’m doing is through safe cryptocurrency exchanges with years of experience and no hacks recorded during this period.
How to find this information:
Most crypto exchanges will let you know how long they have been operating on their About page.
You will generally find the About page at the bottom of the first page.
This screenshot is taken from the Kraken About page:
6. Crypto Exchange KYC
KYC stands for Know Your Customer.
It is very straightforward.
Any financial institution, as well as cryptocurrency platforms, should require you to file a KYC document when you sign up for an account.
They will ask you to send in specific details about yourself to identify who you are.
These documents might be:
- Picture of your driving license
- Passport picture
- ID-card
- Utility bill of some kind ( water bill/electricity bill )
- Your home address
- Date of birth
- Identification number ( social security number )
This information is pretty much a personal scan to see that you are not a wanted criminal or a terrorist.
They use this information to make sure that the account belongs to a real person as well.
Why is KYC good for you as a crypto investor?
KYC tells you that the cryptocurrency platform is very serious. They will review all their customers and they have trained staff members to do this.
If your new exchange doesn’t ask for KYC documents you should think twice about depositing money.
Related: Top crypto exchanges without KYC
How to find this information:
Usually, this information will be found on the Support page in the footer at the bottom of the first page.
Here is a screenshot of the verification requirements from the crypto exchange Bitfinex.
7. Crypto Exchange AML
AML stands for Anti Money Laundering.
It is a procedure to detect suspicious trading activities on the cryptocurrency platform.
The staff members are also trained to scan and detect activities that might not be normal.
When this happens they raise a red flag and the trading account is put under more surveillance or suspended.
This is a regulation that most financial institutions must have. It confirms the trustworthiness of the company.
AML usually goes hand in hand with KYC and should be a requirement for your next sign-up on a new cryptocurrency exchange.
How to find this information:
Navigate to the footer at the bottom of the first page.
Locate the Legal section.
Some exchanges have their AML policy clearly visible at the bottom of the page.
This is a screenshot of the AML policy from the crypto platform KuCoin.
8. Customer Support
Weird you might say, but Customer support can play a very important role in an exchange’s safety.
I know traders who have had their accounts hacked. Not due to the exchange, but through their laptop or mobile devices.
They were lucky if they were trading on a platform where they could contact a customer support agent straight away.
Customer support agents can try to immediately cancel or revoke the withdrawal made by the hackers. Or send an express ticket to a security manager.
I hardly ever consider a crypto exchange to be safe if they can’t provide me with decent customer support.
Without the help of a support agent, your cryptocurrency will be long gone before you can gain control over your account again.
When you are evaluating the safety of your new cryptocurrency platform make sure to look for customer support.
How to find this information:
Scroll down to the footer at the bottom of the first page and look for the Support page.
Here is a screenshot of the Support page taken from the crypto exchange Binance.
9. 2FA Verification
2FA Verification stands for Two-Factor Authentication.
This is a must-have security feature to protect your cryptocurrency from hackers.
Are crypto exchanges safe without 2FA?
They can be, but this is a very easy tool to take extra safety measures to protect your trading account.
The 2FA verification acts as an extra security layer to your login procedure.
When you log in to your crypto trading account using a 2FA verification you are asked to type in a separate code.
To generate this code you have to use your mobile phone or a physical key.
Only you can generate this code from your mobile phone.
Side note: Make sure you protect your mobile phone with a security code or face recognition in case you lose your phone.
Where to find this information:
The 2FA Verification is usually connected to the login form of the crypto exchange.
This is what the 2FA verification looks like on the cryptocurrency platform Bitmex.
10. Reported volume
This is not really a security feature that makes a crypto exchange extra safe.
What this information tells you is how much volume is being traded on the exchange.
How this adds credibility is simple.
The greater the volume the greater the following. And this is good because the more people engaged with an exchange adds trustworthiness.
I would not let this factor be a deciding factor before I choose a new place to transfer my crypto trading funds.
But it definitely helps to add extra trust to an exchange if it has a lot of processed volume.
How to find this information:
Head over to Coinmarketcap and click the Exchange button and then sort with Top 100 By Adjusted Volume.
Here is a screenshot of where to find it.
Should you leave crypto on exchanges?
I would strongly advise against leaving crypto on any exchange.
This has proven to be somewhat risky over the years.
You are not only vulnerable to an exchange hack but also vulnerable to someone hacking your computer or mobile phone.
If any of your devices are compromised your crypto trading account is definitely in danger.
Only keep the amount of money you are willing to use on any platform at the same time.
I would recommend you store your cryptocurrency in a cryptocurrency wallet instead.
Cryptocurrency wallets or cold storage as they are called provide much better security for your precious coins.
Conclusion
The next time you are doubting the safety of your crypto exchange make sure you go through this safety checklist before signing up.
To avoid any loss of digital assets, follow the steps I’ve laid out in each step of the crypto exchange safety checklist.
This article also shows you where to find all this information with very simple explanations.
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Coinbase is one of the safest Crypto Exchanges. I feel safe leaving some of my cryptocurrency on the exchange.
I would say Coinbase is one of the safest Crypto Exchanges.
If you keep your cryptocurrency on a platform with these safety features you should feel rather safe to do so.