Are my cryptos safe with exchanges? Never (and probably they never were).
If there’s any lesson from the fallout of FTX is that you cannot trust these institutions. It is a broken model. Estimates place altcoins and tokens no longer existing as a result of the failure of a crypto exchange, scams and everything in between, at almost 2,000.
This is a disturbing trend and Kenyans are likely casualties.
Yes, “hot wallets” - where your private key is stored in a web-based wallet, mobile wallet and/or desktop wallet - are good for making quick transactions but are proving to be poor safety boxes. On the other hand, “cold wallets'' - where your private key is stored in a hardware wallet, although less seamless, are promising to be the only safer bet.
To simplify this, you have not bought bitcoin until you have received it in a wallet for which you have control of the private keys.
Here is where I see the problem; (partly) structure. To commingle client funds while being unregulated has to be a real vulnerability.
Unscrupulous exchanges may elect to take risky bets with client funds (as in the case of FTX, a “no-no” in traditional markets) while some have been exposed to costly hacks.
Worse, some legal minds now argue that users in a “commingled structure” may likely be treated as “general unsecured creditors” meaning they would be at the back of the queue of creditors lining up for a payout from court proceedings.
If one gets lucky, we’re talking pennies on the dollar.
Being unregulated also means no insurance. This is because crypto exchanges don’t offer any protections for holdings such as with money in the bank or shares in a brokerage firm.
Another issue is the different standards. While some exchanges “claim” to hold customer assets one-to-one — if you deposit a Bitcoin with them, they’ll keep a Bitcoin in reserve — some do not.
So how can one protect their cryptos? Move your cryptos off-exchange into “self-custody” wallets instead. At least you’ll be solely responsible for your own private key - a secret password required for gaining access to a crypto wallet.
Of course, such a move comes with its own risks. If you lose your private key, you may never be able to recover your funds. Notwithstanding, a better option vis-a-vis relying on an exchange.
On that beat, you’re best served to ignore some exchanges currently doing media tours telling investors that it’s safe to store money with them. And please forget about “proof of reserves” being peddled around - so far a lot of that stuff is unaudited.
Going forward, the FTX saga has three likely industry outcomes. One; regulatory pressure, and two; regulatory pressure. Three; more regulatory pressure. Some exchanges may fold as a result. Some consolidation maybe.
Likely the winner in all this Binance (at least for now). However, with major exchanges falling like dominoes, no one is sure of anything. All that to say, keep your wallets “cold” as the crypto winter rages on.
The writer is MD Canaan Capital.