Keeping Your Crypto Safe In The Hands Of Others Simply put, you can’t let the cat guard the milk, Mashinsky said." The idea of separating custodian share trading and so on all derived from the fact that if you look at the collapse of the Lehman Brothers, all of this goes back to why the federal reserve bank was created. Due to the lack of transparency and regulations, there is a lot of stuff happening that would be illegal if it happened on the NYSE, for instance. We are seeing a lot of conflict of interest concentrated most with exchanges where people don’t understand that these entities don’t act in their best interest.
Still, according to Mashinsky, “A lot of what the crypto community is seeing in traditional crypto markets is just a rebirth of bad ideas from the 1800s, all being used to take advantage of the fact that regulations don’t cover loopholes.” This insurance comes on top of the Federal Deposit Insurance Corporation-insured dollar deposits that the exchange holds.
The Gemini Trust Company, co-founded by Cameron and Tyler Winklevoss, said in a press release that its insurance will be provided through a consortium of insurers arranged by global professional services firm, Aon. However, it is notable to point out that last month crypto exchange, Gemini, obtained insurance coverage for digital assets it holds in custody. This means that if an exchange gets hacked, users will not be able to get their assets back. Moreover, unlike banks regulated under The FDIC (Federal Deposit Insurance Corporation, an independent agency of the United States government that protects against the loss of your insured deposits if an FDIC-insured bank or savings association fails), many centralized crypto exchanges do not provide insurance for digital assets being held. Like a bank they can lend out user funds, but unlike a bank they are largely unregulated and they do not provide interest payments,” Matsumura said. “Like a bank, a custodial exchange is empowered by their onerous user agreement to use user funds for whatever purpose they see fit. Who knows what other abuses are taking place behind closed doors,” Matsumura continued.Ĭentralized Exchanges Remain Highly UnregulatedĪnother problem facing centralized exchanges that act as custody holders is the lack of regulations. Recently, Huobi used user EOS tokens to get payments to vote for their own block producers. “The problem is that once crypto exchanges take custody, everything they do is hidden from view. Instead, they own the right to trade or withdraw it, leading to a number of issues. Custodial exchanges are like the fox guarding the henhouse, Matsumura told me."Īccording to Matsumura, when digital assets are stored on a centralized exchange, users no longer own their crypto. Instead of having the custodian working for the customer, they have their own interests at heart. The biggest exchanges like Binance, OKEx and Huobi take control of user funds and use them for market manipulation. While it’s clear that custodial solutions (products offered by third party providers of storage and security services for cryptocurrencies) have become one of the latest innovations to emerge within the cryptocurrency ecosystem, a number of problems tend to occur when major crypto exchanges also serve as custody holders for users.Ĭentralized exchanges are subject to a tremendous number of problems simply because they contravene one of the cardinal laws of cryptocurrency - the owner of the private key is also the owner of the asset.