How safe is it to buy and sell cryptoassets ?

Market Insights Nov 18, 2020

Though cryptocurrencies are on their way to becoming a mainstream asset, the safety of  trading and the safekeeping of digital assets are still cause for concern amongst some investors.

The best way to alleviate these concerns and engage in the dynamic management of crypto assets is to find a reputable and secure exchange and ensure that your private keys are stored safely.  A private key is a sophisticated form of cryptography, similar to a traditional account passcode, that notably allows a user to access his or her cryptocurrency.  Typically, a cold wallet (off-line) offers a higher form of security versus a hot wallet (online).

When searching for a reputable crypto exchange, be sure you are being offered the best practices in terms of security and compliance.  You should, at a minimum, be offered::

  • Advanced Sign-in Security:  In addition to a strong password (minimum characters, letters numbers and symbol combinations, etc.), the exchange might require a 2 Factor Authentication (2FA), or a second verification step involving a code generated on an authenticator app on your phone such as Google Authenticator or Authy.
  • KYC/AML:  One of the main items to examine is the "KYC/AML” compliance processes (Know Your Client/Anti-Money Laundering).  An exchange that ensures the identification of its clients and follows AML procedures should substantially contain the regulatory risks.
  • Transparency of fee structures: It is important to know not only the direct cost of each trade, but  other related costs, or even trade volume benefits.
  • Regulated custody:  Custody and safekeeping of your digital assets is paramount.  Ensure the custodian is compliant with all regulatory requirements and offers maximum security for your assets. Wherever the information is available, check whether the custodian is a "qualified custodian", there is a Trust structure in place, and that the estate of the exchange are separate to those of its customers.
  • ‘Wallets”; Cold wallets would be safer with multi-signature Hardware Security Modules (“HSM”), Hot wallets are more secure with Multi Party Computation (“MPC”).

Which is safer- Centralised or Decentralised Exchanges?

A centralised exchange (“CEX”) is a trading platform where funds and assets are held by the exchange.  Therefore, the safety of those funds depends on the security systems of the exchange. CEX can accommodate fast transactions and high volumes and may be regulated.  CEXs operate most similarly to a traditional securities exchange and offer higher liquidity and advanced trading tools.

A decentralized exchange (“DEX”) is a platform with no central authority or intermediary.  The DEX is a peer-to-peer exchange and offers matching and routing services.  DEX can typically have a non-custodial approach so users on DEXs keep their assets in their own wallets and are thus responsible for the security of their own assets.  DEXs are less prone to hacking and can offer more privacy for traders.  However, trades usually occur more slowly than on CEX, as there is a time delay in the blockchain vailading transactions.  This, and the lack of intermediaries, make transactions less costly than CEX.

What makes CEX safer ?

  • The security of the funds is crucial: The safest exchanges hold most funds in cold storage with a regulated custodian and work with multi-signature wallets.
  • Is the exchange regulated or on the way to be regulated by a reputable regulator?  This can provide comfort for many new digital asset investors, as the regulator would typically ensure that the exchange offers a robust infrastructure (e.g. cyber-security, accounting system), is fair and transparent to all its customers (e.g. order book, trade reporting), has a good governance and a qualified management team, complies with anti-money laundering rules.
  • Reputations matter-Taking time to research the exchange can provide useful information- who are the main investors, clients, advisors?  Have they been vouched by traditional financial institutions, etc.?  What is their social media presence?  Have they received negative press?
  • Insurance policy of the funds under custody. Some custodians/ exchanges may offer some conditional insurance protection over funds in custody.  We recommend you research and enquire prior to investing.

In summary, we recommend that all digital investors research and choose their exchange according to their needs (CEX vs DEX), the security offered by the exchange, and the fee structure that benefits their expected trading volumes. How would you choose a traditional securities exchange?  Digital assets offer a new infrastructure but many parallels can be drawn.  Please call Trakx for additional questions and our team members will be glad to assist you.

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Carole Laizet

Senior marketing manager with 15+ years of experience in the Financial Industry (traditional Banking as well as Crypto Assets). Responsible for market research