Do I trust my crypto exchange?

When I first got serious about buying crypto, I had to figure out how and where to do it. Initially I simply bought a few dollars’ worth of Bitcoin from friends but when the price started going up, no-one wanted to get rid of their Bitcoin anymore and the HODL-era was in full swing (everyone held on to their coins for dear life).

I soon discovered that there are exchanges, very similar to the stock exchanges where I buy my Apple shares, which do the exact same thing, only they sell crypto. They even have the same look and feel, I can sign up with my email and create an account, and before I want to start buying, I need to verify my address and identity. By all accounts it was exactly the same thing I’ve seen a hundred times over. But there was something different, something I hadn’t experienced before – doubt.

A few questions came to mind: Can I trust them with my money? Can I trust them to store or custody my Bitcoin??Can I?trust?them?

THE RESEARCH

This led me to doing something I’ve never done before. I researched the exchange. I started looking at how the exchange is structured, where my money and my crypto would be held, how safe it is, whether I’d be insured, and general reviews on the internet to see if anyone had previously had a bad experience.

I learned for example that the exchange I was looking at had a custodian (someone who safeguarded my funds or tokens, which was not the exchange) and then investigated the custodian. I also learned that neither my money nor my crypto would be insured if somehow it went missing (this was long before we heard the name Sam Bankman-Fried). I came to terms with the risks I’d be taking, selected this exchange and decided to take the plunge. For clarity “the plunge” was sending a $100 test transaction to see if it works.

WHY HAD I NEVER DONE THIS BEFORE?

All of this brought up a very interesting question. Why had I never done this before? For as long as I can remember, I have had opened accounts online with various banks, stock exchanges and other financial institutions and I never did a single second of research on them.

My entire salary, all of my savings and all my investments are with such institutions, and I have no idea what insurance I have there (as it turns out, my personal bank balance isn’t insured either). The “test transaction” I did with my last new bank, was to have my entire month’s salary paid in and I never even thought of doing any further research. Why is that? Does it really all come down to trust?

In the olden days when banks were built, they were these larger-than-life buildings with big marble columns and a huge steel vault in the back of the building and this was done with the intention to instill a sense of trust. It looked safe. But very few of us would’ve ever seen such a building, they don’t really exist anymore, and the online broker through which I buy my Apple shares doesn’t even have a building. Yet still I blindly trust them.

DECENTRALIZED TRUST

The reason this point of trust is so interesting is that the entire driving factor behind creating the first Bitcoin and the whole ethos of the crypto and blockchain community, is trust.

More to the point, the lack of trust, and even more specifically, it was developed to counter the lack of trust in centralized organizations. True crypto believers are of the opinion that no central person or entity can be (or should be) trusted with that much power. They believe that having all the information public and controlled by everyone is the only way to really have trust. In essence they believe that most of us are good, trustworthy people and putting the power in the hands of the community would result in many good people having the power, which would stamp out the one or two bad actors.

So, crypto is built on trust and the crypto exchange has the look of a traditional online financial institution, and if you’ve ever had to take a selfie with your passport to open an account with a crypto exchange, you’d have realized how far ahead they are, compared to the systems at your local bank (where you prove your identity by providing a PDF). So why the doubt?

THE FAILURES AND FRAUDS

A lot of the news and hype around crypto is focused on attention grabbing headlines such as:?Did a Crypto CEO Fake His Own Death to Abscond With $190 Million?;?Sam Bankman-Fried ran FTX as a fraud ‘from the start,’ SEC charges?and?Silk Road: The Dark Side of Cryptocurrency. After all, it’s not fun to read an article entitled, “Millions submit KYC and transact successfully with crypto on a daily basis”.

Perhaps all these failures and frauds leave a mark and make me question how much I trust this space (and I’m someone who actually believes in this!).

The funny thing is, there are just as many, and in fact more, banks, stockbrokers and traditional finance houses which have failed or committed fraud. Think about Lehman Brothers, Bear Stearns, Stratton Oakmont (The Wolf of Wall Street) and HSBC and their exceptionally long list of fines. In fact, websites like bankrate.com even track bank failures and state that since 1933, the longest period without a US bank failure was a mere 951 days. (https://www.bankrate.com/banking/list-of-failed-banks/)

FINAL THOUGHTS AND DEXs

It’s clear from the above that those attention-grabbing headlines in crypto, relate to fraud more than failures and the frauds happened as a result of a handful of bad actors in powerful, trusted, centralized positions. But this was never what the original creators and true blockchain believers intended. They wanted decentralization. FTX and QuadrigaCX is just more of the same, a centralized exchange with a CEO.

The answer may then lie in a Decentralized Exchange (or DEX) where my trust can be placed in the good of humanity and where no single individual has to be trusted with my hard-earned savings and investments.

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In part 2 of this article, I’ll explore what a Decentralized Exchange (DEX) is, how they work and whether that may be the solution. Don’t worry, it will be in the usual, easy-to-understand format.