After Sam Bankman-Fried’s FTX stopped processing withdrawals and soon thereafter collapsed in November 2022, it is not a surprise that crypto exchange customers have become increasingly wary and vigilant about prolonged or halted withdrawal processes.
And although there might be multiple reasons why crypto exchanges freeze fund withdrawals or even customer accounts, there are ways to mitigate risks and ensure that your digital assets are safe.
Red Flags
As in any other situation, we need to ensure our funds will be safe before trusting someone with our money. The same is true of crypto exchanges.
Since many of these platforms are young and evolving, they are often susceptible to potential vulnerabilities and risks. This is why it is important to do your own research and watch for warning signs or red flags on cryptocurrency platforms before opening an account and placing your funds.
Negative Feedback
Reputation is a fundamental factor of trust in the world of finance. Crypto exchanges also care about their reputation and do their best to avoid negative feedback.
To find the right exchange for you, start by exploring user reviews and feedback about certain platforms. Look for any history of user complaints.
Reputable exchanges should have a positive reputation, favorable reviews, and a proactive approach to addressing user concerns.
Security Breaches
Crypto exchanges, as well as their clients, are often a target of hackers and scammers.
Before entrusting your funds and identity data with a platform, prioritize exchanges with robust security infrastructure and proactive incident response capabilities.
Exchanges with similar track records may be considered more trustworthy than ones with a history of repeated or unaddressed security incidents.
Customer Service Quality
Reliable and helpful customer support contributes to the overall reputation of a crypto exchange.
Users may encounter numerous issues and problems; responsive, prompt, and effective assistance builds trust and confidence in the exchange’s services.
A lack of responsiveness or poor customer service can indicate otherwise. So does a lack of varying communication channels to approach the platform’s customer service. Email communication, without a live chat option, might not be enough for cases that require immediate action.
These points are the initial steps to consider before opening an account on a crypto exchange. But other factors are critical in keeping your assets safe from suspension if you have already set up your account.
Let’s look deeper into a personal story of a customer of one popular crypto exchange.
A Cautionary Tale of a Suspended Account
The customer, who prefers to remain anonymous, recently sent DailyCoin his private communication with Blockchain.com’s support team.
The dispute revolved around why the customer’s custodial account was temporarily suspended after he opened a new one and completed the required verification process.
The correspondence shows that the platform asked to open another custodial wallet after it spotted unusual logins from different geographic locations on their client’s custodial trading account.
According to Blockchain.com, the initial custodial account was confirmed compromised, and the new one was necessary to transfer their client’s funds into it safely.
However, a week after the verification was completed, the funds were still frozen, and Blockchain.com’s client received a request to pass through a “routine source of funds and wealth check” procedure.
And then the exchange made an unexpected U-turn. After the client refused to provide additional documents, Blockchain.com removed the restriction on the suspended account five days later.
Understanding Security Procedures on Crypto Exchanges
This unusual story led DailyCoin to dive deeper into how crypto exchanges operate and when they apply additional security measures to their customer accounts. Here is what we found out.
Why Withdrawal Bans Happen
Reports about withdrawal bans applied by crypto exchanges have popped up regularly since early 2022. After Terra LUNA and its UST stablecoin crashed, Celsius went bankrupt. Later on, FTX collapsed, and numerous other crypto platforms placed withdrawal restrictions on their client’s accounts.
All major exchanges like Binance, Crypto.com, Huobi, and KuCoin have done this at some point. Although the suspensions were temporal and quickly lifted, the arguments behind them usually led to extreme market downtimes, heavy traffic volumes, or technical issues. However, in the Celsius and FTX cases, the real reason appeared to be deeper financial troubles.
But massive suspensions are only the tip of the iceberg. Cryptocurrency platforms restrict their users from accessing their funds every day. And although there are no official statistics about the number of suspended accounts on crypto exchanges or the reasoning behind these suspensions, one of the common arguments is “unusual or suspicious activity.”
The term, however, is relatively broad and not always explained by exchanges. So, what hides behind it? What causes the unusual and suspicious activity, and why do crypto exchanges take days to communicate with their clients?
VPN Usage Raises Suspicions
One of the most confusing factors when dealing with crypto exchanges are Virtual Private Networks (VPNs).
Theor usage is generally not permitted for clients of financial institutions that are subject to stringent regulatory requirements, including Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
These institutions must have accurate information about their clients’ identities and locations. When clients use VPNs, their location and IP address are hidden, making it difficult to ensure compliance with regulations. The platforms can’t see whether their clients connect from banned or sanctioned countries.
However, many crypto exchanges allow their clients to use VPNs at their own risk. And following the above-mentioned case of Blockchain.com’s client, whose funds were suspended after numerous log-ins from different jurisdictions, DailyCoin’s team contacted the crypto exchange to explain their VPN policies.
After emailing the company, its spokesperson, Alexandra LaManna, explained, “Blockchain.com complies with all regulations and laws in the jurisdictions where we operate. That includes whether users can access our platform through VPN.”
This means crypto platforms or entities established in different jurisdictions provide customer services based on local regulatory laws.
However, the legal permission to log in through VPN does not guarantee it won’t raise suspicion.
Blockchain.com’s reply shows that log-ins from random IPs outside your residence country will be treated as an “out of pattern” activity. Users will be asked to confirm their VPN usage and name the countries of VPN access.
“VPN alone is not a reason to suspect unusual activity. If an IP out of pattern is identified, the user is asked if a VPN is used and the country selected to ensure full control of the account,” explains LaManna.
DailyCoin first attempted to reach out to Blockchain.com’s European subsidiary in person. However, their physical office could not be found at the registered address. The sole contact number provided seemed to have nothing in common with the Blockchain.com crypto firm. DailyCoin treats this as one more warning sign regarding the exchange, which requires their clients to stick with their physical locations.
Larger Transactions Require Greater Attention
Apart from VPN usage, another untold factor falls under the broad “unusual or suspicious activity” wording. This refers to the size of transactions.
Crypto exchanges are financial service providers that deal with various risks like any other financial institution. But contrary to traditional financial institutions, crypto platforms apply different risk management techniques.
Financial institutions classify their clients into risk categories based on their Anti-Money Laundering (AML) risk assessment.
Low-risk clients typically have well-established reputations and straightforward sources of income. Medium-risk clients come with more complex financial structures or are involved in higher-risk industries. High-risk clients include individuals or businesses involved in industries with complex ownership structures susceptible to money laundering and clients with a history of non-compliance. Due diligence measures vary for each of these categories.
Meanwhile, cryptocurrency platforms often do not differentiate clients based on risk level. They focus more on the size of the transfer their clients are operating, says DailyCoin’s AML consultant.
“The larger the transfer, the more scrutiny it attracts. Thus the platform may ask for additional actions, like for source of funds or source of wealth proofs. Everything depends on the individual platform and its own AML and risk management methodology.”
Each cryptocurrency platform sets its own threshold for the amount at which transactions will be monitored more closely. The same goes for their due diligence measures and timeframes of the investigation.
“Like all financial institutions, we are required by law to investigate certain kinds of issues and file a suspicious activity report with the responsible Financial Intelligence Unit. (…) Upon detection of unusual activity in certain scenarios, we are obliged to perform enhanced due diligence checks on our users, explains LaManna.
According to her, if the platform suspects illicit funds or users falling into scams, it restricts withdrawals and follows regulatory requirements to release the funds.
The official Blockchain.com website states that even the ID verification process may take up to five business days on their platform.
The Law Forbids Revealing Investigation Information
The numerous social media records reveal that suspended accounts are not the only reasons for crypto platform user complaints. Another common narrative is poor communication and a lack of explanations of why accounts are restricted.
However, DailyCoin’s consultant explained that such silence comes with a reason. The primary concern for the platform during an AML investigation is to maintain its integrity and to prevent any potential interference or compromise.
This results in limited communication and disclosure of details to the customers whose accounts are under investigation. Depending on the jurisdiction where the platform is operating, the local law may simply forbid platforms from informing their clients about the ongoing AML investigation.
“During this period, which can vary depending on the case and jurisdiction, we are prevented by law from informing the customer about the reason for potential restrictions, nor can we disclose further information or offer a set timeframe when the functionalities will be enabled again,” stated LaManna.
On the other hand, the lack of communication may sometimes be explained as the outcome of poor customer service. Some crypto platforms offer email communication as the only way to contact them. Their customer support teams are not available 24/7. Sometimes these teams consist of an insufficient number of employees to serve millions of customers properly.
So, How Can You Ensure that Your Assets Stay Safe?
Certain crypto exchanges operate in different jurisdictions, comply with different rules and apply their own terms of service. Yet, to ensure that your assets stay safe on crypto exchanges, there are some essential steps any user should follow:
- Select well-established and reputable crypto exchanges with a strong security and customer trust track record.
- Research and read reviews about their security measures, user experiences, and any past security incidents. Stay informed about any policy changes.
- Understand transaction limits and reporting requirements: Familiarize yourself with the limits set by the exchange and ensure that your activities stay within the permitted thresholds. Otherwise, be prepared to provide additional information or documentation for large transactions.
Read more on cryptocurrency exchange fees:
Crypto Exchange Fees Comparison: Who Has the Lowest Trading Fees?
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Source link: https://dailycoin.com/how-to-stay-safe-on-crypto-exchanges/
