Are bitcoin exchanges safe?

~ 0 min
2019-09-03 02:39

Buying, selling and trading bitcoins can often times be difficult without the use of third party online bitcon exchanges. In the eyes of many bitcoin advocates this violates one of the basic tenets or features of bitcoin which is control of your own money. "Not your keys, not your coins!" is the mantra for purisits who belive that the only way to own cryptocurrency is to hold  the private keys which affords one total control of their bitcoins.

Trusting bitcoin exchanges is hard when one understands the risk of losing all your investment. If you consider cases like MtGox where as many as 650,000 bitcoins were lost and the years long fight to secure just a small percentage of those lost funds its easy to unjderstand why so many bitcoin users have lost fait in exchnages. 

Three Types of Exchange

There are effectively three different type of bitcoin exchanges based on what level of regulation each exchange takes part in. If a bitcoin exchane wants any form of legitimacy in the marketplace it needs to secure and MSB license from FINRA in order to operate in the U.S. markets and a more difficult to secure Bitlicense in order to conduct cryptocurrency business in New York City.

Tether Based Exchanges

Tether is a digital asset or cryptocurrency created to serve as a so called  stablecoin by having its value pegged to the U.S. dollar. The idea was to allow for easier trading of cryptocurrencies without the regulatory oversight of the U.S. Federal government and U.S. dollar regulated trade.

U.S. Dollar Regulated Exchanges

Bitcoin exchanges regulated for business in the United States that trade only on cash reserves held in U.S. regulated banks such as Coinbase and Gemini in the U.S. or Bitstamp in the EU offer a higher level and sense of securioty by having passed the higher standards required for full dollar trading in all US jurisdictions inclduing New York. As Bitlicense regulated exchanges these companies have passed the most stringent standards available to the primarily self regulated industry and are often consider the most trustworthy and stable exchanges with the lowest risk for commone exchange issues.

Hybrid Exchanges

Most hybrid bitcoin exchanges have some level of US Federal regulation  but may also offer unregulated stablecoins such as Tether for trading as well. These hybrid exchanges like Kraken or Bittrex are licensed MSB's but either failed to secure or chose not to apply for the additional Bitlicense requirements. Not applying for a Bitlicense on philisophical grounds like Kraken has been seen by many as more true to the bitcoin ethos. Critics of this view point to that being a dodge for the responsibiliyt to regulate bitcoin trading.

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