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Tether Stablecoin: Can the Crypto Market Live Without It?

Tether’s influence is high despite numerous controversies, but it may pose a threat to the crypto asset market…

There is perhaps no other crypto asset more subject to scrutiny and accusations of impropriety than the Tether stablecoin. The startup behind the coin has been blamed for market manipulation while its business dealings and accounting practices have stirred up many concerns. Critics argue that Tether lacks transparency, possibly engages in criminal activity and does not have the financial backing that it claims. 

These accusations are somewhat vindicated by the current case by the New York Attorney General (NYAG) against the business and its owner, iFinex, which is also the owner of the Bitfinex cryptocurrency exchange. Potentially adding fuel to this, which Cointelegraph has covered in detail, was the news that Bitfinex has recently repaid $100 million to Tether that the exchange took as a loan. Simultaneously, over the past 18 months, several alternative stablecoins have emerged — and seemingly with far stronger fundamentals. Despite this, Tether remains the dominant stablecoin. So, why does Tether continue to be successful in light of the threat it allegedly presents to the industry?

Problems abound

There is an abundance of stablecoins available on the market. Each one comes with its respective trade-offs and is competing based on several variables. The most important of these are liquidity, volatility, security, trust, transparency, legality, censorship-resistance and privacy. Tether lacks several of these, according to various sources and experts.

Audit history

The main accusation leveled at Tether is that it does not have the United States dollars backing the outstanding number of Tether tokens (USDT) on the market. Detractors believe that the stablecoin is operating on a fractional reserve basis, whereby it only holds a fraction of the dollars that it should in order to back the currency 1:1 with USD. This accusation has been partly vindicated. Tether recently disclosed that, while it still has 100% of the reserves needed, it is not 1:1 collateralized with fiat currency — let alone 1:1 with USD. Problematically, the true extent of Tether’s collateralization can only be unveiled through a physical audit by a reputable third party.

Related:Will PwC’s New Software Solve the Cryptocurrency Auditing Problem?

Tether has had a dogged past with auditors, however. In January 2018, Friedman LLP abruptly ended its audit after initially being hired in response to community concerns. Tether subsequently responded, laying the blame with Friedman for its “excruciatingly detailed procedures.” The company expanded, saying that, due to this complexity, the audit could not be finished in a “reasonable time frame.” These rather opaque explanations did little to alleviate concerns.

Prior to this, Friedman had confirmed that Tether did have the required USD balances, although it did not disclose where these funds were held and explicitly stated that it could not guarantee that it was not being used for other purposes.

Reliance on the banking system

The repeated issues surrounding a satisfactory audit have been further compounded by Tether’s banking relationships. Tether is reliant on the traditional banking system to hold its reserve assets. On account of the 1:1 peg, Tether should be using full-reserve banking, where none of the collateral is lent out. Since the birth of fractional reserve banking, full-reserve banks are now quite rare. As such, Tether has a limited number of banks that can deliver the required services. Added to this problem is that most banks are wary of serving a business that is both in the crypto space and is subject to so much controversy. 

The project has had a chequered history with banks. Its relationship with the Puerto Rican-based Noble Bank came to an end in October 2018, and it has since changed partners multiple times. Defenders of the company have claimed that, by disclosing its banking information, it would make the bank subject to intense scrutiny and investigation by regulators, and likely result in the termination of any relationship.

This is indeed a compelling argument, as Tether seems to be involved in a catch-22 situation. By failing to disclose its banking situation, it fuels concerns and conspiracies. Conversely, in being transparent, it runs the high risk of losing its banking support as well as undermining the security and stability of the cryptocurrency.


Tether’s reserves and banking relationships, while concerning enough, have been scrutinized far more on account of the business’s overall lack of transparency. It has long been speculated that both Tether and iFinex were one and the same. This was confirmed by the leak of the Paradise Papers in November 2017, which showed that the chief financial officer and the chief security officer of Bitfinex were also senior partners of Tether. 

According to Bitfinex’s and Tether’s websites, Tether’s CEO, J.L. van der Velde, its CFO, Giancarlo Devasini and its General Counsel, Stuart Hoegner all currently hold the exact same positions at Bitfinex. While it appears clear that the same top management controls both businesses, it is less clear which company takes precedence in terms of decision-making. The NYAG’s case against iFinex, as well as the inferred profitability of each project, would imply that iFinex is at the top of the hierarchy, in which Tether and Bitfinex are most likely branches of iFinex. The fact that these disclosures were forced — rather than a voluntary decision — raises questions as to why iFinex’s leadership wanted to conceal this dynamic. 


Until recently, all the suspicions and allegations surrounding Tether had little authority. That was until the New York Attorney General unveiled its case against the project, including accusations of commingling funds and abandoning the 1:1 USD to USDT peg.

The NYAG has stated that Bitfinex lost $850 million in funds and covertly attempted to plug the loss with funds from Tether. The judge presiding over the case claimed that Tether essentially undermined the entire validity of the stablecoin by the admission that it no longer maintains its 1:1 peg. The case has forced Tether to admit that the coin has only been backed by 74% of the reserves it should be. Furthermore, it has been revealed that this 74% includes assets other than USD and even includes a small amount of Bitcoin (BTC). By using Bitcoin in its reserves, Tether undermined of its collateralization, given that the coin is intended to be used as a hedge against the volatility of crypto assets. 

It does, however, appear that iFinex is trying to amend these problems. Just this week, Bitfinex announced that it had prematurely repaid $100 million of an outstanding loan to Tether. Notwithstanding this recent announcement, the case by the NYAG has legitimized many of the claims critics have had over the past few years. There is no underestimating how important this case is, according to founder of Weiss Ratings Juan Villaverde, who told Cointelegraph:

“It has confirmed every suspicion we’ve had with USDT for some time now. Namely that the stablecoin isn’t backed 100% by USD and other fiat currencies. It also confirmed this money was being lent out to third parties for a profit, and even that part of the funds was used at times to buy crypto assets such as Bitcoin. All of these things already seemed obvious to us, but we had no hard evidence. Now, the NYAG has exposed all of these practices to the public at large.”

Waiting for a punch?

Tether is centralized in almost every part of its system. The company is subject to government action, as are its fiat reserves — so long as they are held in banks. Furthermore, while many assume that the Tether currency itself is decentralized, the company has shown that it can reverse transactions and force hard forks

Of course, the above criticism is equally applicable to the majority of other stablecoins. However, it does not undermine the validity of the threat to USDT holders. Given the current legal problems the company is facing, compounded by the concerns of solvency and trustworthiness, Tether is a far larger target for law enforcement than its other centralized competitors.

Conversely, decentralized stablecoins — such as DAI and Reserve — are in a position to capitalize on this weakness and offer a much more robust option in the true censorship-resistant spirit of crypto assets. Nevin Freeman from Reserve, in an interview with Cointelegraph, highlighted the current problem:

“Right now, centralized stablecoins like USDT, USDC, TUSD, and so on are handling the need for stability in crypto. Decentralized stablecoins like Dai and Reserve aren’t really needed. But when the centralized coins start getting more restricted or all-out shut-down, decentralized stablecoins will be much more important. Libra is another instance of a centralized asset-backed coin. As long as governments allow it, it will be great. But if they decide to shut it off, they can do that.”

The response from governments to the announcement of the Facebook-promoted Libra stablecoin is a testament to this threat. Libra is not particularly different from Tether. The sheer size and power of Facebook right now appear to be the only factors making it a target. These recent responses highlight that it is only the relatively small size of Tether that is guarding it against a full-on conflict with regulators.

Competitive advantages

In contrast to Tether’s many deficiencies, there are a plethora of stablecoin competitors with multiple advantages.


Virtually all competing stablecoins can boast superior transparency to Tether. Projects such as USD Coin (USDC), True USD (TUSD) and Paxos Standard (PAX) have clear records of their management and contact details and in the case of USDC, for instance, are involved with major legacy institutions like Goldman Sachs. Communications are frequent, complaints are responded to and operations are conducted in a highly professional manner.

Proper backing

This transparency crucially extends to the collateralization and backing of the coins. Consider USDC, which conducts frequent audits with a reputable firm, Grant Thornton LLP. Some stablecoins like PAX go a step further and segregate clients’ funds, ensuring a higher level of transparency and security, as Chad Cascarilla, CEO of PAX, told Cointelegraph:

“PAX offers customers a simple guarantee: their dollars are always there and always safe. We’ve made it easy for people to create or redeem PAX almost instantaneously without any fees, maximums or minimums. And we’ve done it as a regulated Trust company. As a custodian and fiduciary, our customers’ assets are their assets alone, held segregated and bankruptcy remote, which is different from all other stablecoins.”


Given the proven fragility of centralized infrastructure in the crypto ecosystem, as the countless exchange hacks have shown, the centralized framework of Tether provides greater risk. This risk is compounded by its link to Bitfinex. As shown, the exchange is more than happy to compensate its losses with Tether’s reserves. Most of the other stablecoins share much of the same problem, and there are still just a few decentralized stablecoins. However, decentralized stablecoins arguably present the ideal solution for the market, assuming they can scale, as well as provide the requisite liquidity and a high level of user experience. The benefits of such projects are undeniable, as Villaverde of Weiss, told Cointelegraph: “DAI, in particular, offers no counterparty risk as it’s based on algorithms rather than a centralized custodian model.”

Resilience of Tether

Despite the countless issues with Tether and the apparent advantages that its competitors can boast, the business still dominates the stablecoin market. The most recent data from Stablecoins War, a stablecoin data aggregation site, shows that Tether accounts for 97.5% of all stablecoin volume and 81.1% of the entire stablecoin market cap. The only real competitors with any significant volume are TUSD, USDC, and PAX, with only TUSD accounting for over 1% of total volume. This raises the question: Why?

Network effects

Aside from compounding interest, there is perhaps no more powerful force in economics than a network effect. A network effect refers to the growing value of anything that is used by an increasing number of people. All crypto assets are subject to this force, and stablecoins are no exception.

Once a critical mass of users starts using an asset, usage tends to increase in an exponential or nonlinear manner. This is exactly what happened to Tether. Launched in 2014, Tether’s usage did not begin to explode until 2017. The project benefited from the growing bull run and the total lack of competition, becoming the single benefactor of all traders who wanted price stability.

Virtually all of Tether’s competitors emerged in 2018, by which point Tether had already sunken its teeth into the market. It is likely that, at this point, it will take something of immense force to unseat Tether’s dominance, such as a seizure of funds by an aggressive government agency or a serious breach of Tether’s OmniLayer.

Overall, the growing network effect has resulted in improving liquidity and reduced volatility, in turn making it more desirable for traders. The effect then becomes self-perpetuating, whereby the results fuels the original effect. This is the principal reason why, despite its numerous failings, Tether continues to dominate the market.

Blockchain agnosticism 

The company is augmenting its existing momentum by utilizing other blockchains aside from Bitcoin. Until recently, almost all of Tether operated on top of the Bitcoin blockchain via the Omni Layer. Aware of the congestion a serious bull run could place on Bitcoin, as happened in December 2017, the project is introducing support for EOS, Tron and the Lightning Network.

By transitioning toward blockchain agnosticism, Tether can cement its superiority and prevent Bitcoin congestion from hindering its success. Such a response is likely due to the increased pressure its competitors are applying. While the project might not be prepared to offer the level of transparency some might like, it hopes that this increased interoperability will compensate.

Impact on liquidity and volatility

Tether’s lead and network effect have allowed it to gain immense liquidity. Larger traders and institutions depend on high liquidity to move in and out of positions without experiencing slippage. As such, Tether is still the most attractive stablecoin for larger players, who do not require regulatory compliance or who are not worried about Tether’s other issues. The first mover advantage has proven invaluable, as Villaverde told Cointelegraph:

“The reason this asset has been so successful is none other than the fact it was the first. It’s inferior to its competitors in every other way, yet it maintains a solid lead over all other stablecoins.”

East Asian demand

The usage figures are heavily skewed by demand from East Asia. Indeed, competitors such as USDC, TUSD, and PAX have gained significant traction in the U.S. and other Western markets, but this adoption has been dwarfed by Tether’s popularity in the East. Crypto and global macro trader Alex Krüger told Cointelegraph that “Tether continues to dominate the stablecoin market due to demand from Asia.”

Research from Diar, a crypto asset newsletter, recently showed that Chinese exchanges are responsible for 60% of USDT trade volumes. While these exchanges have accounted for $10 billion in USDT trading so far in 2019, U.S. exchanges have accounted for just $450 million of this. The remaining volume has come from Binance and Bitfinex, both of which cater to East Asian clients. Diar stressed that these figures are accurate and do not represent fake volumes.

This dynamic is peculiar, given that Tether is denominated in USD. Perhaps part of the reason is its lack of oversight and opaqueness that may be attractive to Asian investors and traders wishing to avoid surveillance and action from their respective governments. This is further compounded by the absence of a highly liquid or viable stablecoin denominated in Chinese yuan, Japanese yen or Korean won.

Chinese and Hong Kong crises

Tether has also likely benefited in recent months from the escalating Sino-American trade war. The escalation of tariffs by the Trump administration has coincided with and arguably contributed to a worsening economic picture in China. Major players in the industry such as the founder of Digital Currency Group, Barry Silbert, and chief market analyst at ChiefMarkets, Naeem Aslam, previously told Cointelegraph that the escalating trade war is contributing to the current crypto bull run. 

Simultaneously, the Hong Kong protests and implications of the proposed Chinese extradition treaty may have Hong Kong nationals weary. Kyle Bass has pointed out that the banking system in Hong Kongis nearly at 900% leverage. He believes that the potential fallout of these protests could and already is resulting in significant capital outflows. This could in turn trigger a banking crisis in the region, resulting in further outflows. It is quite possible that Hong Kong nationals are, in part, driving Tether volumes, as the stablecoin presents a way to purchase crypto assets without going through Know Your Customer (KYC)-compliant, fiat-to-crypto exchanges or over-the-counter (OTC) desks.

Crypto assets present one of the easiest methods to both hedge risk and get capital out of vulnerable and less liquid assets, such as real estate. Also, there is currently a near-total absence of stablecoins pegged to East Asian currencies. 

Systemic risk to the market

The problems concerning Tether are now better understood and formalized than ever before, due to the NYAG case. Considering this, Tether has continued to grow stronger and plays a pivotal role in the markets. This fact also highlights the risk the business may present to the entire crypto sphere. We spoke to experts to gauge the risk they perceived from Tether. Mati Greenspan, a senior market analyst at eToro, told Cointelegraph, “My feeling is that each exchange already has a contingency plan to cope with any Tether related issues that may arise.” Villaverde largely agreed with this position, telling Cointelegraph:

“We do not think USDT represents a systemic risk to the crypto-asset space in the long term. Let’s not forget that the rally we’ve seen in Bitcoin accelerated around late April, precisely when the market was concerned about the sustainability of USDT as an asset class. The same thing happened in October when Bitcoin shot up by more than 10% intraday on fears that things are not as they seem when it comes to the Tether stablecoin. The bottom line here is that the market has already spoken on this issue: It’s telling us that, even when in doubt about the sustainability of USDT, the markets are liquid enough to absorb that capital flight.”

It seems fair to assume, given the cost otherwise, that the major exchanges are actively working to mitigate much of the threat that a Tether collapse might cause. The resilience will likely also be partly dependent on the ability of rival stablecoins to compensate. 

Stablecoin substitution

We may not know the readiness of USDC, TUSD, PAX and others until the situation is forced upon them. However, it appears relatively simple for investors to exchange their USD for these major stablecoins. Notwithstanding KYC and Anti-Money Laundering tests, there is nothing preventing investors from adopting these coins. In a crisis situation, if Tether theoretically collapses in a matter of days, it would be a question of whether these projects have the systems — technical and otherwise — to support the huge inflows of fiat currency that would happen. Cascarilla from Paxos assured Cointelegraph that PAX could take up this slack quite easily, sayingt:

“Since launching PAX in September 2018, we’ve built up liquidity and are able to create and redeem PAX easily. Currently, more than $1 billion in PAX is transacted weekly, and there is nothing limiting our ability to be 10x that size.”

It is of course equally possible that such an event may simply result in a surge in Bitcoin prices, as Villaverde believes, whereby USDT holders prefer to simply trade for BTC rather than a less liquid stablecoin. He told Cointelegraph, “The money moves to Bitcoin and stays in crypto, regardless of any short-term fluctuations that may be experienced.”

Broken but undefeated?

It seems that there is evidence to say that Tether is a business with several major deficiencies, particularly in regard to its transparency, trust, legality and centralization. Regardless, the market clearly sees the benefits it offers in terms of liquidity, price stability and usability as outweighing the notable risks.

The evidence clearly shows that it is Tether’s longer history and resulting network effects that enables its continued supremacy among stablecoins. This runaway network effect, recently bolstered by East Asian demand, has lent the project the high levels of liquidity and low volatility that traders and investors desire.

At this stage, it appears something monumental will be needed to dethrone Tether. Whether that capacity can be absorbed by its competitors remains to be seen. However, in the short term, it is equally likely that Bitcoin and other major crypto assets would benefit from such a crisis. Perhaps rather than presenting a systemic risk to the markets, a Tether collapse may present yet more bullish momentum for the markets.

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‘Welcome to the 2019 Bull Market’ – BitMEX Trades Record $16 Billion in One Day

Trading reached $16 billion across the platform for the first time as bitcoin passed $13,000.

BitMEX, the world’s largest cryptocurrency trading platform, saw record volumes across its operations as bitcoin (BTC) hit $13,000. The company reported the figures on Twitter on June 26.

On Wednesday, BitMEX, which is the world’s single biggest bitcoin derivatives provider, reported more than $1 billion of open interest on the market. Trading topped $13 billion, with the number topping $16 billion across the platform’s product range. 

Volume had swiftly risen above $10 billion in previous hours, leading CEO Arthur Hayes to declare any signs of the previous cryptocurrency bear market were officially gone. 

“XBTUSD perp swap open interest is now in the 3 comma club. Welcome to the 2019 bull fucking market YeeHaw!” he excitedly summarized.

BitMEX’s successes follow on from records across bitcoin trading, with bitcoin futures provider CME Group similarly reporting all-time volume highs this month and last. 

While analysts remain divided over which investor segment – retail or institutional – is propelling the current bull market, Hayes is gearing up to defend the newly-bullish bitcoin against one of its arch rivals. 

As Cointelegraph reported, July’s Asian Blockchain Summit will feature a showdown with academic and infamous crypto naysayer Nouriel Roubini, known as ‘Doctor Doom.’

Long a thorn in the side of many an industry business, Roubini’s ongoing Twitter rants have now become a talking point of BitMEX’s own publicity material.

“Yet, (Roubini) still believes that cryptocurrencies are a farce,” the tweet containing the trading figures added.

The event will precede another meeting with a mission, this time featuring blockchain network Tron’s CEO, Justin Sun, and many others as they try to convince Warren Buffett of crypto’s merits.

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LocalBitcoin Loses Traders After Cash Trading Ban: ‘Not Very Local’

Peer-to-peer bitcoin trading platform LocalBitcoins removes in-person cash deals — what does that mean for the future of cash trades?

On June 1, Finnish peer-to-peer (p2p) bitcoin (BTC) trading platform LocalBitcoins quietly removed in-person cash trading from its service. Three days later, the company publicly confirmed the ban on Twitter. As per the accompanying statement, LocalBitcoins had to renounce local cash trading to “adapt to the current regulatory environment.”

The removal of the option has angered users, who seemingly began looking for decentralized platforms with more room for anonymity. However, as the Wild West-like unregulated days of crypto might be coming to an end, the more p2p services might have to apply Know Your Customer (KYC) and Anti-Money Laundering (AML) efforts in order to stay compliant with the watchdogs.

Brief introduction to LocalBitcoins and p2p trading

Founded in June 2012, LocalBitcoins is one of the crypto industry’s longest-standing veterans. It is headquartered in Helsinki, Finland.

Unlike Coinbase — which was established the same month — and other conventional cryptocurrency exchanges, LocalBitcoins positions itself as a decentralized service that matches people who are willing to trade bitcoin. In that sense, it is easy to compare LocalBitcoins with similar p2p services like Craigslist or eBay.

Imagine a marketplace where people post their offers to buy or sell bitcoin on a bulletin board, specifying the exchange rate and location (among other things). Interested users reply to those advertisements, choosing to either meet in person and exchange bitcoin for cash, or trade remotely using online banking.

The world turned upside down

That is what LocalBitcoins was until June 1, when the cash option was suddenly removed from the platform. Now, users can only trade via online payment options, or deposit their cash directly to the seller’s bank account.

Predominantly, people choose to meet up to buy and sell cryptocurrencies with cash for anonymity reasons, since no personal information was required in the process.

It is also irreversible, Michael Foster said, who co-founded a similarly-named p2p platform, LocalEthereum, which caters to Ethereum (ETH) users. He explained to Cointelegraph:

“There is a zero possibility of chargeback fraud, which is the hardest scam to avoid when trading P2P. Chargeback fraud is when, for example, somebody sends you money via PayPal, only to reverse the transaction after receiving the goods.”

So, this is how an in-person, cash-based crypto transaction normally happens: After being matched online, both parties arrange a meetup at a public place with Wi-Fi. Then, after receiving an envelope of cash along with a wallet address, the selling party transfers the cryptocurrency on-the-spot, using their laptop or mobile phone.

“It’s best to meet in daylight, in an area with lots of people and cameras. For extra security, bring a friend, or make the exchange inside an airport or a bank,” Foster added.

While it is difficult to call this option a safe one in the conventional sense, financially wise, it is the most secure scenario, a representative of p2p exchange Bisq told Cointelegraph:

“I see the choice as a trade-off between physical safety, financial safety, privacy, and convenience. If it’s financial safety someone prefers, then cash is king. Nothing beats obtaining cold hard cash and depositing it in your bank yourself. There’s zero chargeback risk. But that financial safety comes at a risk to physical safety. […] Non-cash payment methods get around this physical safety risk, but require a person to reveal information to a counterparty that they might not want to reveal. And these methods are usually a lot more convenient too. Which one is better or ‘safer’ is a personal judgment.”

LocalBitcoins ban was dictated by Finnish and EU AML laws

LocalBitcoins started applying KYC measures in April 2018, when a trader proved on Reddit that a personal ID was now required to buy and sell bitcoin for some trade volumes.

“Error! Your trade volume has been significant in the past 12 months. Please verify your ID to continue trading,” the screenshotted message displayed.

Expectedly, the reduction of anonymity on one of the oldest marketplaces in the industry angered decentralization pundits. “RIP localbitcoins. Hi, another centralized exchange,” read one of the top comments on the thread.

The peer-to-peer exchange kept silent until May 9, 2018, when it finally announced that updated terms of service were coming into effect closer to the end of the month. Notably, the changes were performed in accordance with General Data Protection Regulation (GDPR), a European Union decree on data protection and privacy.

Thus, starting from May 25, 2018, LocalBitcoin users were asked to verify their ID on several occasions, including “trading over certain volume limits,” as well as fraud investigations, among others. They also had to be older than 16 and register only one account per person.

Almost a year later, on March 25, 2019, LocalBitcoins announced it will soon become supervised by the Financial Supervisory Authority (FSA) of Finland, soon after the Finnish parliament approved new legislation that will provide a legal status for cryptocurrency assets.

Around the same time, LocalBitcoins banned users living in Iran, presumably due to sanctions previously imposed by the United States.

On June 1, users started reporting that cash-in trading was removed from LocalBitcoins. Again, crypto traders preferring the meetup option were displeased. “It’s time to no longer recommend LocalBitcoins, EVER,” the top response to the original Reddit report reads, while the following comment contains a list of alternative platforms.

Similarly to last year, LocalBitcoins did not issue a public announcement for several days. On June 4, a statement was finally released explaining that the removal was dictated by the local regulatory framework:

Note on the removal of Local Cash Ads

Some portion LocalBitcoins users moved to rival platforms, others attempted to bypass the ban

Four different p2p platforms approached by Cointelegraph confirmed that they have seen an increase in local cash trades ads on their platforms since LocalBitcoins removed the option.

However, in-person meetings accounted for 0.5-2% of all trades on three of those platforms, based on their answers, with one exchange reporting 16%, meaning that the general demand is quite low. A representative of the p2p bitcoin exchange Hodl Hodl told Cointelegraph:

“It [local cash trading] is not really popular, but we’ve seen an influx of traders who used to trade on Localbitcoins coming to our Telegram group and actively discussing various options on how to trade cash and suggesting improvements, which we think is great, helps us improve the workflow and we’re expecting to see more cash trades soon.”

Ray Youssef, CEO and co-founder of Paxful, another popular platform for p2p exchanges, told Cointelegraph that there was an increase in cash transactions “throughout the month of May.”

A representative for Bisq also said that it has seen more offers in the USD market lately. “Less than 2% of the trades on Bisq so far in June have been cash trades,” the spokesperson specified.

LocalEtehreum, in turn, reported “a huge uptick” in face-to-face exchanges since LocalBitcoins removed the option, in an email conversation with Cointelegraph:

“Cash exchanges made up 0.6% of LocalEthereum’s volume last month. Since the announcement, cash has climbed to 16% of volume — a 26-fold hike. We’ve never seen this level of activity for cash before.”

However, some LocalBitcoins users are not switching over, yet. Now that the “cash in-person” options are not available on the platform, some traders list those offers under the “cash deposit” tab, specifying that they are only looking for face-to-face meetups.

A United Kingdom-based trader, who has posted a similar advertisement, told Cointelegraph, “I tried to post again and it didn’t work so we tried cash deposit but that’s also kind of useless now as people want to use cash deposit service”

That trader is now considering moving to other p2p platforms. “What defeats the point of BTC anonymity is transferring funds from your own bank account through a centralized company and then purchasing BTC,” he told Cointelegraph via Telegram.

“Not very local anymore,” he said of LocalBitcoins.

Another seller based in Thailand, who prefers to stay anonymous, also confirmed to Cointelegraph that he or she was trying to bypass the local cash trades ban by listing their offer under the cash deposit tab:

“I have no idea why localbitcoins stopped the cash trades, but if they don’t make them come back in the near future, I will use other platforms. I am already looking at alternatives.”

Nevertheless, LocalBitcoins might curb those kind of ads in the near future, according to what the spokesperson for LocalBitcoins told Cointelegraph via email:

“It is not possible anymore to create local buy/sell ads for cash money, all the existing ads are being removed.”

LocalBitcoins declined to comment on how popular cash trading was on their platform prior to the removal. Also, when asked whether any other KYC-related changes should be expected from LocalBitcoins in the light of local or EU regulations, the spokesperson said it “will inform our users as soon as possible,” if something should happen.

Will other p2p platforms keep cash trading option?

Now that LocalBitcoins had to abandon the cash in-person trading, its rival p2p platforms are picking up a fraction of its traders. But will they remain pro-anonymity amid the increasing pressure of compliance in the industry? Hodl Hodl representative told Cointelegraph:

“As for us, we’d rather shut down and stop operations than subject our users to KYC/AML. There’s simply no market for a P2P exchange that does KYC/AML. The only reason LocalBitcoins is still making money is because the majority of their volume is from jurisdictions where the KYC/AML info that users provide is not yet affecting said users.”

The Hodl Hodl spokesperson agreed that it is possible that all p2p platforms will be forced to ban cash trading in the future, but argued that, since its exchange is noncustodial and doesn’t hold any bitcoins or fiat money, it might have a better chance of being cleared to operate.

LocalEthereum brought up the same argument in its conversation with Cointelegraph, arguing that its platform is noncustodial as well, and hence might be exempt from certain regulations.

Youssef of Paxful also told Cointelegraph that its service is determined to keep the cash option:

“As the Age of Compliance begins to dawn, many P2P exchanges may need to ban cash transactions as they will not have the compliance resources to handle the anti-money laundering, safety, and regulatory issues, but not at Paxful. We have a top tier legal and compliance team and we are growing our compliance efforts immensely, keeping the door open for the unbanked and underbanked worldwide.”

Thus, it is unclear if there will be another crackdown on p2p exchanges, as it largely depends on the jurisdiction in which such services are based. As previous examples from the crypto industry have shown, a company might choose to move to another country when faced with extensive local regulatory difficulties.

As for now, the p2p exchanges segment seems puzzled by the sudden crackdown, according to what the Bisq representative told Cointelegraph:

“I don’t see how buying bitcoin with cash is any different from buying bananas or bullion with cash. Neither person knows the other person, and it doesn’t matter.”

However, he added, exchanges (even peer-to-peer ones) need to follow the laws of their jurisdictions — and traders should too.

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U.S. & Japan Top Traffic For Cryptocurrency Exchanges

US Japan Top Cryptocurrency Exchanges 2019

The United States and Japan have ranked as the top two countries contributing traffic to cryptocurrency exchanges.

According to research compiled by The Block and published on May 31, the US and Japan account for the vast majority of web traffic going to crypto exchanges. The study showed that 24.5 percent of all exchange traffic originates in the United States, with Japan coming in second place at 10 percent of total traffic. South Korea rounded out the top three, bringing in 6.5 percent of exchange web users.

However, while the US and Japan may have taken the top spots in the published results, The Block reports the data being skewed against certain countries. China, whose population has proven a strong desire for investing and trading in crypto–despite the nation’s attempts at banning–could account for a larger percentage of the proceeding.

Given the government’s crackdown on crypto investing, a majority of Chinese users operate through Virtual Private Networks (VPNs), masking the calculated web traffic. Because of this, China may account for a larger percentage of exchange users that are being falsely attributed to other countries through the VPN.

Interestingly, the data compiled by The Block was able to determine a direct correlation between a country’s gross domestic product per capita and the number of users contributing to crypto exchange traffic. While developing and impoverished companies have been shown to benefit the most from the adoption of crypto, particularly in situations of fiat hyperinflation, these countries have contributed a disproportionately small number of exchange users.

The Block concluded,

“Data shows poorer countries aren’t trading crypto as much as wealthier countries.”

Ultimately, The Block reports that crypto is a global phenomenon, even with the US accounting for one-quarter of all exchange web traffic.

Adoption throughout 2019 has been on the rise, even though it appears few users are actually using bitcoin and altcoins for transactions. Nonetheless, exchange-driven growth has proven cryptocurrency to be a viable digital asset, capable of speculation similar to traditional markets.

However, unlike securities, crypto is in need of more use cases and transactions to increase liquidity. At present, the vast majority of bitcoin and altcoin use in concentrated on exchanges, making the entire industry feel somewhat paradoxical. Prices continue to rise not because of proven use or established intrinsic value, but the belief that they will be worth more in the future.

Despite the lack of usability, crypto is in a much better position than during 2017, when the markets reached an all-time high before plummeting. Facebook’s globalcoin and J.P. Morgan Chase’s JPM have given a vote of confidence for the industry, proving that crypto has a role to play on the global stage even if the widespread adoption has yet to be achieved.

With the US and Japan trailblazing web volume for crypto exchanges, developed countries have set the standard for crypto that could trickle down to broader use cases in regions such as Brazil and India. Ripple and the third overall cryptocurrency XRP have targetted remittance as a potential accelerator for crypto adoption, highlighting the need for poorer countries and the unbanked to have access to secure payments.

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G-20 Progressing on Registry for Cryptocurrency Exchanges to Stop Money Laundering

The Group of 20 major economies grouped together as the G-20 is progressing with its aim to understand and find space for cryptocurrencies within the world economies. Their latest drive is a push for a registry for cryptocurrency exchanges to help curve potential money laundering.

It is expected that the G-20 will soon come to an agreement on this registry after formally recognising and taking head of the cryptocurrency market place only about a year or so ago.

Finance ministers and central bankers from the bloc will discuss challenges surrounding digital currencies, including money laundering and customer protection, at a meeting in the Japanese city of Fukuoka, Japan, in early June.

Concerns for central banks

There is no getting away from the fears that central banks have over digital currencies which operate decentralised and thus with no control point. They are borderless and mostly unregulated pushing those in the G-20 to try and get a regulatory framework in place for the exchanges.

It is also the anonymous nature, and the fact that the banks are cut out of knowing what transactions take place, that make digital currencies a potential hot bed for money laundering.

Japan, this year’s meet up host, has taken the lead in restricting these instruments trough their own controls of exchanges.. The country became the first to create a registry for cryptocurrency exchanges in April 2017, and it also has experience enforcing regulations, as it did after hackers stole over $500 million from Coincheck, and previously from the infamous Mt. Gox hack.

Meeting of the minds

Since cryptocurrencies and their related ecosystem has come under regulatory scrutiny there has been a swath of different approaches taken. Some, like China, have banned them out right and block access to exchanges.

This causes conflict as to how a body like the G-20 should regulate them, but also pushes further for an agreed upon standpoint as the banning of cryptocurrencies in China is an easy work around when other neighbouring companies have less stringent rules on how to operate the borderless digital currencies.

In order to help countries work together to curb illegal activities, the Financial Stability Board, an international body of financial regulators, published a directory of cryptocurrency regulators in April, which will be submitted to the G-20.

The Financial Action Task Force had said in October 2018 that virtual asset service providers ought to be subjected to anti-money laundering regulations.

“They should be licensed or registered and subject to monitoring to ensure compliance,” the policymaking body said.

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DATA Ultimatum: CoinMarketCap Requests More Information From Exchanges to Make Market More Transparent

More on CoinMarketCap’s plan to fight fake volume reporting.

Recently, CoinMarketCap (CMC), arguably the industry’s best-known cryptocurrency market data service, announced an initiative to provide “greater transparency, accountability, and disclosure from projects in the crypto space.” The move followed recent reports on fake volume data and wash trading among cryptocurrency exchanges that were published last month.

Now, all exchanges are required to provide mandatory application programming interface (API) data to CMC by June 2019. Those who fail to do so risk getting delisted from the platform. So, can this brand new scheme cleanse the market from untrustworthy data?

Fake volume is one of crypto market’s chief problems: two reports

Recently, a number of researches highlighted the problem of fake volume among crypto exchanges, suggesting that the majority of platforms claim to handle unrealistic amounts of transactions. As explained by Changpeng Zhao, the CEO of Binance, some exchanges alter their volume to get ranked higher on popular trackers like CMC, and hence get exposure and attract new clients.

The Tie: 90% of the volume is fake, 75% of crypto exchanges look suspicious

While the problem of fake volume isn’t particularly new to the crypto market, at least two recent reports have stirred up a new wave of discussion. First, on March 18, trading analytics platform the Tie reported that almost 90% of cryptocurrency exchanges’ reported trade volumes may be fake, and that as much as three-quarters of those platforms have suspicious volumes.

To conduct the research, the Tie took the reported trading volume for the last 30 days of the top 100 exchanges. They subsequently divided that data by the exchange’s website visits over 30 days estimated by SimilarWeb to determine the volume per visit.

As a result, Binance reported $750 traded per visit, Bittrex reported $138 traded per visit, Coinbase Pro $341, Bitfinex $862 and Poloniex $63.

Thus, to calculate the expected volume, the researchers used a weighted average of the trading volumes per website visit across Binance, Coinbase Pro, Poloniex, Gemini and Kraken — resulting in $591 — and multiplied this number by the web views. The Tie explained that it picked these exchanges “because of large usage among institutions, reputation within the market, and because their web viewership appeared consistent with their reported trading volumes.”

“In total we estimated that 87% of exchanges reported trading volume was potentially suspicious and that 75% of exchanges had some form of suspicious activity occurring on them,” the organization tweeted at the time, adding that it affects the larger picture:

Notably, on March 21, two exchanges featured in the research as having questionable figures — LBank and Bit-Z — dethroned Binance in terms of the adjusted trade volume on CMC. According to research presented by the Tie, LBank’s estimated reported volume per website visit amounts to $65,850.

However, the Tie admitted that its research had certain limitations: Specifically, the website views didn’t take into account API, mobile application trades and desktop client trades.

Because of that, the data could, in theory, just mean that either a much more significant than average portion of LBank users use the API, desktop or mobile clients, or that an LBank user trades over $65,000 per session on average. The Tie notes:

“There were limitations to this report including some of the aforementioned, but the point of the exercise was to show those exchanges that appear most suspicious and to start a greater conversation around wash trading, transaction mining, and liquidity.”

Bitwise: 95% of bitcoin trading volume on unregulated exchanges appears to be fake

On March 20, another substantial report on fake volume surfaced. Issued by cryptocurrency index fund provider Bitwise Asset Management, it argued that 95% of bitcoin trading volume on unregulated exchanges appears to be fake or noneconomic in nature.

Notably, Bitwise sourced its data from CMC, which it claims includes a large amount of this suspect data, “thereby giving a fundamentally mistaken impression” of the actual size of the bitcoin market.

Bitwise ultimately wrote that the real market for BTC is “significantly smaller, more orderly, and more regulated than commonly understood” — amounting in reality to $273 million instead of the $6 billion reported on CMC.

To prove its point, Bitwise first analyzed Coinbase Pro as an example of a regulated exchange to outline trustworthy trading patterns, including an “unequal and streaky” mix of red (sell orders) and green (buy orders) trades, whose distribution fluctuates considerably at any given time.

Further, Bitwise studied spread as a parameter, noting:

“It’s [the spread is] $0.01. At the time this screenshot was taken, bitcoin was trading at $3,419. That means bitcoin was trading at a 0.0003% spread, making it amongst the tightest quoted spread of any financial instrument in the world.”

Coinbase Pro reported around $27 million in daily traded volume of BTC at the time of Bitwise’s analysis — as compared with $480 million reported by Coinbene. The latter was used by the index fund provider to demonstrate the patterns typical of what it characterizes as “suspicious exchanges.”

Suspect signs included an unlikely perfect alternating pattern of green and red trades, as well as a lack of trades with round numbers or small values. On Coinbene, buy and sell orders also appear in timestamped pairs, with one compensating the other. Moreover, the spread on Coinbene at the time of Bitwise’s analysis was $34.74: “that compares to $0.01 on Coinbase Pro. It is surprising that an exchange claiming 18x more volume than Coinbase Pro would have a spread that is 3400x larger.”

Additionally, as per the Bitwise paper, suspect exchanges showed consistent volume throughout the day, while on regulated exchanges, volume corresponded to waking and sleeping hours.

CMC’s response: the DATA alliance

On March 25, Carylyne Chan, global head of marketing at CMC, told Bloomberg that concerns over fake volume “are valid,” which is why more information will be added to the website to help users make better decisions.

“For instance, if an exchange with low traffic has $300M volume and just 5 BTC in its wallet, users will be able to draw their own conclusions without the need for us to make arbitrary judgment calls on what is ’good’ or ’bad.’ We want to state that our philosophy is to provide as much information as possible to our users, so that they can form their own conclusions and interpretations — and not introduce our own bias into that mix.”

On May 1, CMC announced that it will require all crypto exchanges to provide mandatory API data, which includes their live trading data and live order book data, as part of a new transparency initiative titled “the Data Accountability & Transparency Alliance” (DATA).

The alliance was originally announced in CMC’s sixth anniversary blog post. The company explained that it has to deal with regular requests to delist crypto exchanges based on unverifiable information — such as screenshots of chat logs and emails — which is why CMC chose to empower its users to make more informed decisions and “provide a means for projects to differentiate themselves through enhanced disclosures” instead of applying harsh censorship:

“We are paying close attention to the growing discourse surrounding ‘fake volumes’ of exchanges. This is not a trivial problem to solve, as seemingly innocuous decisions can carry unintended consequences. To add to the complexity, we need to be mindful of the numerous use cases for our data – what some deem to be ‘fake data’ is information in and of itself that can yield interesting analyses, and it is important not to throw the baby out with the bathwater.”

Indeed, CMC seems to aim for a softer approach after removing a number of South Korean exchanges from its platform “due to the extreme divergence in prices from the rest of the world and limited arbitrage opportunity” back in January 2018, when it caused a major drop in the market.

Stressing that the new condition will be compulsory, the tracker stressed that any exchange that does not provide the data will be not be included in the price and adjusted volume calculations on the site. The changes will come into effect on June 14, 2019, CoinMarketCap noted.

Specifically, the required data includes exchange hot/cold wallet addresses (“indicative numbers to enable users to determine solvency of selected exchange”), live market-pair trading status (“more granular trading data at the market-pair level for further analysis”), live wallet status (“summary status of all possible deposits and withdrawals across currencies”), and historical trade data (“all time-stamped historical trades for tracking, and in some cases, compliance”).

“Our stance is that we do not censor any information, but rather will present all the information to users so that they can make their own judgments and decisions on the data presented,” Chan told Cointelegraph. “This philosophy of providing all the information rather than making our own judgment calls or censorship/curation is the same for data submitted by DATA members.” The global head of marketing at CMC added:

“As with all API endpoints submitted to us from exchanges (of which we now have 257 on CoinMarketCap) we work closely to ensure that the endpoints are up and running effectively. This constitutes the reported volume information that is presented on the site. The adjusted volume metric excludes those exchanges with fee rebates or transaction mining, and with the new mandatory data requirements, those that do not provide their live trade and orderbook data.”

When asked whether players have enough time to gather and submit the required information, Chan replied that the data “should not be technically hard for exchanges to provide,” and that the 45-day notice should ensure that there is enough time for everyone to join. According to her, no exchange has explicitly declined to join DATA so far:

“We carefully evaluated the requirements so as to make sure they are reasonable and not unnecessarily onerous for the majority of exchanges to provide. In fact, about 150 exchanges already submit this data, and we are simply waiting for the other exchanges to come up to speed on these data points.”

Exchanges’ comments

At this point, DATA is comprised of 12 exchanges: Binance, Bittrex, OKEx, Huobi, Liquid, UpBit, IDEX, OceanEX,, KuCoin, HitBTC and Bitfinex.

Michael Gan, CEO of KuCoin, told Cointelegraph that CMC approached them about one month ago:

“After they introduced the whole idea, we soon decided to join DATA, as one of the early members. We are still communicating with CMC in terms of all the data submission and it will be done before the deadline.”

Starry Liu, head of marketing at OceanEX, told Cointelegraph that they were the only Initial Launch Partner of DATA that exists for less than one year. According to Liu, OceanEX approached CMC earlier this year to discuss “the idea of setting up an alliance to improve transparency across the whole industry,” and soon joined the initiative:  

“We found out this is also CMC’s goal. They actively asked about our feedback and acted really fast during the preparation of DATA.”

Liu specified to Cointelegraph that OceanEX integrated its data to the DATA project in less than one month. The information is collected, but not monitored by CMC, she confirmed:

“We prepare and stream raw data from OceanEx to them and CMC is taking a role more of collecting and disclosing data to the public, instead of monitoring. We may have different roles in this program, but we share the same vision and the ultimate goal, that is to benefit the community and the users.”

The KuCoin CEO, however, told Cointelegraph that CMC “mentioned that they will have a team to check all the data submitted, ensuring its accuracy as the DATA project expected.”

A representative of Exmo, the United Kingdom-based exchange that has applied to join DATA but has not been added to the official roster yet, told Cointelegraph that, while the new alliance is “a considerable step to the formation of the sustainable market,” the industry needs more solutions for the deep-rooted problems such as fake volume. Maria Stankevich, head of business development and communications at the exchange, wrote in an email:

“The fact that the data from the trading platforms will be collected in real time will expand the possibilities for studying the market and analyzing it and improve the understanding of the characteristics of various exchanges — that’s for sure. But this does not mean that the data provided by the websites will be completely objective.

“The same thing applies to the additional information about the exchanges, that is supposed to be submitted by the projects and exchanges by themselves. We don’t doubt the fact that it will be really useful for users — as it will be gathered in one place. But in general, we see it as an extension of the functionality of the CMC itself, an increase in its competitiveness in comparison with the other similar data aggregators.”

Cointelegraph has reached out to more exchanges currently listed in the top-50 by adjusted volume on CMC that are not part of DATA at this point — including Kraken and Coinbase Pro — but has yet to hear back from them.

Matthew Hougan, the author of the aforementioned Bitwise report, told Cointelegraph that he “admires CoinMarketCap for staring down the barrel of systemic fake volume in the crypto market.”

“We’ve seen a number of really robust responses to the problem of fake data, including from OpenMarketCap, Messari and Nomics, and I love that there is a diversity of smart people looking at this problem and driving towards solutions,” Hougan said. However, the researcher also suggested that the data gathered by CMC might still be unsubstantiated in the end:

“Ultimately, given the limited nature of regulations, the globally distributed nature of crypto trading, and the perverse incentives to exaggerate volume, the best approach is going to be ‘trust but verify.’ But CoinMarketCap has taken a good first step and is putting some teeth into its reporting requirements, and I’ll be interested to see what develops from their efforts.”

Meanwhile, CMC plants to extend its initiative even further in the future. “Collecting the data is just the first step,” the tracker wrote. “With a larger dataset, more analyses can be run, and enable the introduction of new, meaningful metrics.”

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Crypto Exchanges Bitfinex and Ethfinex Jointly Launch Initial Exchange Offering Platform

Major cryptocurrency exchange Bitfinex and its spin-off Ethfinex have launched a new initial exchange offering platform dubbed Tokinex.

Major cryptocurrency exchange Bitfinex and its spin-off Ethfinex have launched a new initial exchange offering (IEO) platform dubbed Tokinex. The news was revealed in a press release shared with Cointelegraph on May 21.

As reported, IEOs have recently emerged as an alternative model of token offering wherein a centralized crypto exchange acts as a form of underwriter. The exchange, besides operating the sales, ostensibly vets both the projects themselves and prospective investors.

Tokinex will reportedly use Know Your Customer (KYC) checks powered by the Blockpass mobile app for each sale completed for the IEOs hosted on the platform. The press release notes that Tokinex will not store personal data after token sales’ completion.

Bitfinex and Ethfinex users will reportedly be able to participate in the sales using funds from their personal exchange wallets, and the platform pledges to provide transparency and adequate due diligence —  providing prospective investors in its IEOs with independent third party research information for each project.

According to the press release, Tokinex does not plan to charge token issuers for listing their tokens, and plans to list their tokens post-sale on both the Bitfinex and Ethfinex marketplaces.

The first token sale slated for the platform will reportedly be announced on May 23, with customer verification checks using BlockPass to open the same day. While the token project selected for the offering has not itself been disclosed, the token sale date is currently planned for June 13 at 13:00 GMT+1, the press release notes.

As recently reported, Bitfinex has recently unveiled its own native exchange utility token, “UNUS SED LEO,” which is designed to be used for a range of exchange-based activities and is tradable against the tether (USDT), bitcoin (BTC), ether (ETH), USD and EOS pairs.

Plans to issue a native Bitfinex exchange token had first surfaced in late April, with the exchange eventually ostensibly raising $1 billion in both hard and soft commitments for the token in a private IEO, removing the need for a public offering.

The exchange has in parallel been mired in a legal controversy, with the New York Attorney General’s office (NY OAG) accusing Bitfinex of having lost $850 million in user deposits, and subsequently secretly covering up the shortfall using funds from Tether — the latter of which has itself come under renewed criticism for being backed only 74% by USD reserves.

Rebuffing the allegations, the co-defendants have recently secured modifications to the NY OAG’s injunction order.

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What Crypto Exchanges Do to Comply With KYC, AML and CFT Regulations

Top fiat-to-crypto exchanges are adopting market surveillance technologies. Of all crypto-to-crypto exchanges, only Binance has one.

While it’s possible to buy top cryptocurrencies like bitcoin (BTC) and ether (ETH) in the over-the-counter (OTC) market, most people will need an exchange in order to buy other altcoins. Exchanges are simply an important component of the system that makes the crypto market tick. Regulators around the world have identified this, which is why regulatory moves have primarily targeted exchanges. Regulators want to be sure that exchanges employ the best security practices as well as measures — Know Your Customer (KYC), Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT), for instance — that discourage illicit transactions and improve account/wallet security.

Some exchanges do take their compliance to those measures seriously. For example, in the aftermath of the Binance hack on May 7, when around 7,074 bitcoins (worth $40 million on the day) were stolen, the company’s founder and CEO, Changpeng Zhao, announced that a significant security update will be conducted that will also include an upgrade to the KYC measures:

“We are making significant changes to the API, 2FA, and withdrawal validation areas, which was an area exploited by hackers during this incident. We are improving our risk management, user behavior analysis, and KYC procedures.”

So, let’s break down if such a stance over compliance with measures like KYC, AML and CFT is common among top cryptocurrency exchanges, and how much of an effect they have on the market and its participants.

What are KYC, AML and CFT

Each country has its laws governing KYC, AML and CFT measures. However, these laws do not come with specific standards, mainly because regulators want financial institutions to do all they can to reduce risks.

“The reasoning seems to be that if banks get clear guidelines on what constitutes adequate KYC they will never look any further than the minimum requirements,” John Callahan, chief technology officer at Veridium, an identity and access management software company, wrote in Forbes.

Know Your Customer

Know Your Customer, refers to a set of procedures and process that a company employs to confirm the identity of its user or customer. The robustness of KYC procedures varies across companies and jurisdictions. However, KYC fundamentally involves the collection and verification of a customer’s means of identification — including government-issued identity cards, phone numbers, a physical address, an email address and a utility bill, to name a few.

Anti-Money Laundering

Anti-Money Laundering measures are a set of procedures, laws and regulations created to end income generation practices through illegal activities. Some of them include tax evasion, market manipulation, public fund misappropriation, trade of illicit goods and other activities of this kind.

AML regulations require financial institutions to continuously conduct due-diligence procedures to detect and prevent malicious activities.

Anti-Money Laundering

The crypto industry has already been cited as facilitating a “rise of a new, high-tech era of virtual money laundering,” with cryptocurrency gambling sites reported by blockchain research house CipherTrace as being a common money laundering tool. In addition, Jamal El-Hindi, the former acting director of the Financial Crimes Enforcement Commission (FinCEN), a part of the United States Department of Treasury, hinted that AML compliance will be fundamental to the stability of crypto exchanges in the coming years:

“We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate US AML laws.”

Combating the Financing of Terrorism (CFT)

Combating the Financing of Terrorism refers to the set of procedures aimed at investigating, dissecting, discouraging and blocking sources of funding intended for activities that realize religious, ideological or political goals through violence, or its threat thereof, against civilians. These procedures provide law enforcement agencies with an alternative, and potentially effective way to track and block terrorist activities.

Yaya Fanusie, the director of analysis for the U.S. Foundation for Defense of Democracies Center (FDD), earlier in September 2018, told the U.S. Congress that terrorist organizations aren’t using cryptocurrency as a funding vehicle. However, the U.S. House of Representatives, on Sept. 26, passed a bill that would establish a task force to fight the use of cryptocurrencies by terrorist groups.

How crypto exchanges approach KYC, AML and CFT compliance

As stated earlier, the process of regulatory compliance for AML and CFT involves KYC throughout transaction lifecycles. The KYC process is generally divided into four levels, namely:

  • Customer acceptance policy (CAP), which is the stage where a company determines and documents the demographics of its desired customers.
  • Customer identification program (CIP), which is the stage where the company confirms that the identity of a (potential) customer matches its CAP.
  • Continuous monitoring of transactions to ensure regulatory compliance, identification of suspicious activities and risk management.
  • Risk management

Based on the information available, it can be examined how exchanges handle these stages. Crypto exchanges will be divided into two groups namely the “fiat-to-crypto” exchanges and “crypto-to-crypto” exchanges. Fiat-to-crypto exchanges are the gates for new fiat money to enter the cryptocurrency market. These exchanges allow users to exchange fiat currencies like dollars for bitcoin, ether or any other supported cryptocurrency. Crypto-to-crypto exchanges, on the other hand, primarily allow users to exchange one cryptocurrency for another.

Fiat-to-crypto exchanges

A few top fiat-to-crypto exchanges include Coinbase, Coinbase Pro, Gemini, Bittrex, Kraken, Bitfinex and Bitstamp.

Fiat-to-crypto exchanges

Fiat-to-crypto exchanges typically perform at least some level of KYC because they deal with fiat money. This forces them to conduct business with banks and other traditional financial institutions, most of whom conduct KYC procedures before doing business with any entities.


Coinbase is a licenced crypto exchange based in the U.S. A full list of the licenses it holds is here. All that the exchange requires to open an account is a full name, an email address and a password. While this means that anyone from anywhere in the world can store, send and receive cryptocurrencies using a basic Coinbase account, ID verification is required to buy and sell cryptocurrency in the 33 countries it supports.

For its KYC, Coinbase chose Jumio’s digital identity solution Netverify in an attempt to be regulatory compliant while still delivering a smooth customer experience. In a bid to further mollify regulators, the company hired former New York Stock Exchange executive Peter Elkins to build the Coinbase Trade Surveillance Program, an initiative to monitor the markets with the aim to weed out bad actors.


Also licensed by the U.S. government, Gemini, unlike Coinbase, conducts KYC before allowing anyone to use its platform. On its user agreement page, Gemini states at least 13 regulations — including FinCEN, AML and CTF regulations — to which the users of its platform must be compliant. The exchange was launched in 2014 by brothers Cameron and Tyler Winklevoss.
At the start of the second quarter of 2018, a few months before Coinbase’s trade surveillance reports surfaced, Gemini partnered with U.S.-based stock exchange Nasdaq, which is one of the two largest exchanges in the world, for the deployment of Nasdaq’s SMARTS Market Surveillance technology to track market manipulations and fraudulent trades. The surveillance moves from both Gemini and Coinbase put them in the third stage of the KYC process.


Bitstamp requires ID and address verification before users can start trading on the platform. In the wake of surged interest in bitcoin, the exchange partnered with Onfido in February 2018, a digital identity verification provider, to handle its KYC to the end in order to make the customer onboarding process frictionless. Bitstamp was originally founded in Slovenia in 2011, but moved to the United Kingdom in 2013, and then to Luxembourg in 2016.

On Nov. 5, Bitstamp chose Cinnober’s crypto trading system for its exchange. Cinnober claims that its trading solution is built for regulatory compliance. The solution also employs Irisium’s market surveillance technology for risk management. Cinnober boasts a list of customers, including the NYSE, the London Stock Exchange, Euronext, and the Johannesburg Stock Exchange, to name a few.


Developed by fintech company iFinex, Bitfinex allows crypto users to open an account and immediately deposit, trade and withdraw crypto without identity verification. However, verification of a phone number, a residential address, two forms of government-issued ID and a bank statement is required to deposit and trade fiat currencies.

Earlier in the year, Bitfinex employed Irisium’s market surveillance technology to detect fraudulent behavior on its exchange. Bitfinex is based in Hong Kong.


Bittrex requires ID verification before allowing users to deposit, trade or withdraw cryptocurrencies. However, other than having a user agreement page that says its operations comply with KYC, AML and CTF policies — as does every other exchange — it is unknown if the exchange employs a market surveillance technology or plans to do so.


Kraken launched following two years of product development and beta testing, making it one of the oldest crypto exchanges. It has five tiers of verification (tier 0 to 4) requirements, depending on users’ intent to use their account. Kraken founder Jesse Powell decided to build the exchange after seeing the struggles of the then-largest — but now defunct — crypto exchange Mt. Gox.


Unlike Gemini and Coinbase, Kraken doesn’t appear to have any publicized surveillance program. All that is known comes from a Kraken blog post that was issued in response to the New York attorney general’s questionnaire. The company said:

“We currently employ nearly 200 people (more than 25% of the company) in compliance-related functions. As of Q1 2018, we are processing more than 1 law enforcement request per day, seven days a week.”

At the end of the second quarter of this year, a Bloomberg report called out irregularities involving certain tether trades on the Kraken exchange. John Griffin, a professor of finance at the University of Texas, told Bloomberg that the irregularities noticed are “suggestive of wash trading.” This technique is sometimes employed by traders, who act as both seller and buyer in a given transaction, to give a false impression of supply and demand. This act in itself is illegal. Kraken discredited the content of the report in a blog post. “It’s not clear what harm could come from wash trading of a pegged asset against its peg,” Kraken wrote.

Crypto-to-crypto exchanges

Based on data from CoinMarketCap, top crypto-to-crypto exchanges include OKEx, Binance, Huobi, HitBTC, Bibox,, Coinbene and LBank.

Crypto-to-crypto exchanges


Binance, being a pure cryptocurrency exchange, isn’t as exposed to regulations. Therefore, it allows withdrawals of up to 2 BTC per day without any form of ID verification. For withdrawals up to 100 BTC per day, it requires photo ID verification.


OKEx, which partially allows fiat trades, has three levels of verification. Level 1 users have a transaction limit of $10,000 per order or $2,000 for fiat trades, and are required to provide a government-issued ID during verification. Its level 2 allows for trades over $10,000, and requires document verification. Level 3 is for trades above $200,000 and involves video verification.


HitBTC doesn’t perform any form of ID verification at account opening. Users can deposit and trade crypto without going through any KYC procedures. However, the exchange advises users to verify their identity by sending in the usual KYC documents, including bank documents, to its compliance department via email to “avoid eventual verification procedure in the future.” Users have taken to a number of social media channels to complain that HitBTC allegedly limited their accounts, with the exchange operator asking them to verify their identities.


Huobi doesn’t appear to require any KYC documents before allowing users to trade, but it does have an ID verification section in the settings area of a user’s account. It appears to only enforce KYC when users reach a certain account usage limit. In addition, Huobi has different withdrawal limits for verified and unverified users.


Bibox allows users to trade up to 2 BTC per day without any form of KYC verification. For trades up to 20 BTC per day, it requires a passport verification. On its website, Bibox advises users who want a higher limit to reach out to its support team via email. All that is required to deposit funds and start trading with Bibox are account security measures, including SMS and Google authentication.

Should crypto exchanges take KYC seriously?

Put simply, similar to fiat-to-crypto exchanges, the top crypto-to-crypto exchanges, as determined by their 30-day volume on CoinMarketCap, have some sort of KYC policy that they enforce at different stages. However, many of them haven’t been proactive about compliance.

“To gain respect and empathy from regulators, crypto exchanges need to be proactive about compliance,”  Tony Mackay, who recently launched the Kryptos-X exchange, said. He went on:

“At the minimum, you want to get the on-boarding stage right, even if the crypto market is currently under-regulated. You also want to ensure that your user registration system can detect and deter criminal activities, using the expertise of best-in-class KYC/AML providers.”

Also, unlike their fiat-to-crypto counterparts, crypto-to-crypto exchanges — except for Binance — haven’t been reported as monitoring or tracking transactions to detect market manipulation or fraudulent behaviors.

Should crypto exchanges take KYC seriously?

In October, Binance partnered with Chainalysis, a compliance and investigation company catering to the cryptocurrency space. As part of the partnership, Chainalysis did a global roll-out of its compliance solution, which has a Know Your Transaction (KYT) feature. KYT is a real-time transaction monitoring solution for cryptocurrencies. U.S. agencies — including the IRS and FBI — are using Chainalysis’ solution to track cryptocurrency transactions.

Is it worth playing by the rules?

A recent report from P.A.ID Strategies, a payments and identity security consulting firm, found that the majority of crypto exchanges “lack sufficient background checks.”

It also claims that exchanges, at best, take a reactive approach to being compliant. Only a few have set up a system for monitoring behaviors and appear prepared to deal with regulators despite the under-regulation of the industry.

A recent emerging trend in the crypto space has been that of exchanges closing their offices in highly regulated jurisdictions and setting up shop in jurisdictions — such as Malta — where the local laws are “crypto friendly.” Binance and OKEx are the most notable examples.

For some crypto firms compliance is a double-edged sword in that on one side, firms ensure that no illicit activity is conducted on their platforms, while potentially compromising on the notion of decentralization on the other side.

In June 2019, new Financial Action Task Force (FATF) guidelines will be imposed that govern AML and CFT activities. The announcement from February states:

“Countries should ensure that VASPs [virtual asset service providers] are subject to adequate regulation and supervision or monitoring for AML/CFT and are effectively implementing the relevant FATF Recommendations, to mitigate money laundering and terrorist financing risks emerging from virtual assets. VASPs should be subject to effective systems for monitoring and ensuring compliance with national AML/CFT requirements.”

There are many who disagree with the tightening of controls, saying that, first of all, it would be difficult to set up domestic regulatory bodies, and in the meantime, companies may suffer as they will become overburden by reporting.

It is also not always possible to know the identity of the beneficiary, whom the destination wallet belongs to and what type of a wallet it is, according to Chainalysis. The company states that it would be more beneficial to collect wallet addresses of bad actors instead of user’s personal information.

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Reserve Bank of India Urged to Reconsider Banning Crypto From Regulatory Sandbox

Lobbying groups argue that the Reserve Bank of India will better understand the risks associated with crypto if it allows them to be tested on consumers.

Lobbying groups are urging the Reserve Bank of India (RBI) to allow crypto-related products to be tested in its regulatory sandbox, Indian daily The Economic Times reported on May 16.

The RBI’s proposed framework, unveiled last month, would allow blockchain technology to be tested on a small number of consumers — but cryptocurrencies, exchanges and initial coin offerings are excluded.

Nasscom, a trade association of Indian IT companies, is calling for the regulator to rethink, and argues the RBI would better understand the risks associated with crypto by including it in the sandbox. The organization said:

“Since cryptocoins and tokens are an important component of the blockchain technology, the draft regulations appear to exclude testing of smart contracts and other approved blockchain technology under the sandbox.”

Meanwhile, the Payments Council of India has warned innovation will be difficult to achieve if the sandbox’s framework has such large exclusions.

Sandboxes are used by regulators around the world, including the United Kingdom’s Financial Conduct Authority. Some startups are concerned that India’s hardline approach will mean innovative products cannot be tested in their home country, even if they are permitted in international markets.

India’s relationship with crypto has been fraught at times. Late last month, a report suggested that the world’s second-most populous nation was considering a complete ban on digital currencies.

On May 10, Indian crypto exchange Coinome announced it was halting operations because of regulatory difficulties.

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TrustToken Launches Stablecoin Backed by Canadian Dollar

TrustToken has released its latest stablecoin, TrueCAD, tied to the Canadian dollar.

TrustToken has released its latest stablecoin, TrueCAD, on May 1, 2019. The latest in TrustToken’s line of fiat-backed stablecoins, its value is linked to the Canadian dollar.

TrustToken has also created a number of other stablecoins, such as TrueUSD (U.S. dollars), TrueGBP (British pounds) and TrueAUD (Australian dollars); each of these backed at a purported 1:1 ratio with their associated fiat currencies.

For now, holders can use these four stablecoins on the TrustToken app, and expect them to be listed on exchanges “over the coming weeks and months.” TrustToken further notes that some of their products are already being traded on top exchanges such as Binance, Huobi, and OKEx.

Stablecoins are digital tokens that are backed by either a separate asset like a mineral or currency, or are stabilized by an algorithm. Moreover, stablecoins may take a number of different forms, and do not even necessarily require backing from a tangible asset. TrustToken alludes to this fact in their statement about TrueCAD:

“We wanted a simple stablecoin, without the need to trust some company’s hidden bank account or special algorithm. […] Our open source smart contracts ensure a 1:1 parity between TrueCAD and CAD in the accounts.”

TrueCAD and TrueAUD are two of four new stablecoins pegged to national currencies that TrueToken announced would release in 2019. Further on the agenda for the year are TrueEUR and TrueHKD, for euro and Hong Kong dollars, respectively.

Lawyers recently confirmed in court documents that the Tether stablecoin USDT is not backed 1:1 with U.S. dollars (its reserve asset). In fact, Zoe Phillips of law firm Morgan Lewis said that only three-quarters of Tether reserves had USD backing.