Leonardo Gonzalez Dellan: How to choose a Cryptocurrency Exchange
Leonardo Gonzalez Dellan, I have written about the end of money and the importance of the new cashless economy before, in this article I outline my advice for engaging with the exciting, but risky, world of crypto currencies and crypto exchanges.
If you are new to the world of crypto currency, then first a note of explanation.
· A Cryptocurrency is a medium exchange like Bitcoin which is traded online.
· A Crypto Exchange or Platform is the mechanism by which you can purchase, store and trade cryptocurrencies.
There is a lot more to it than that of course. But my focus here is to keep it simple and help you make a choice.
Cryptocurrencies are based on Block chain, the new technology that promises complete security. There are huge fluctuations in the value of the different currencies. Exchanges have developed to try to bring more stability and security to the trading in these currencies. They are places through which you can see the rise and fall of the various coins and then make your own choices about what and how much to purchase and sell.
I do not offer advice on which coins to buy at any one time. That is not my expertise. What I do offer are five rules to inform your choice of which exchange you should use based on my experience as a banker.
If possible, I recommend that you look for what is known as a Cryptocurrency Exchange 2.0 (CCE 2.0) for short. These are the new breed of exchanges coming on stream that have evolved and matured form the early adopters in the market. They are often membership based and require fees to use. I do not endorse any individual exchange or product but I offer these five things to look for as you explore the web sites and white papers that the exchanges and trading platforms present.
These rules are split between the four things to look for in terms of the context and policy of the exchange or trading platform itself and the one key thing in terms of the safety of the crypto or fiat currency held on your behalf.
The first four rules or key things to look for in terms of the exchange or platform are:
1) Under what legal jurisdiction is the entity registered and under the law of which country does it operate. This will tell you what chance you have for redress if something goes wrong, will indicate if the operation of the exchange or platform is likely to b stopped by regulators in the future and the extent to which the team behind the entity have the knowledge and experience to go through a rigorous registration process to obtain a licence or not. From a banking regulation and payments perspective, I would advise something under EU law and regulation above any other jurisdiction globally at the moment.
2) What is the process for registering you as an investor? How thorough are the checks and what evidence of your identity do you need to produce before you can begin using their services. This basic check will tell you how robust the internal policies of the exchange or platform are; it will also tell you the extent to which they are following the regulations of their country of registration.
3) What is the anti-money laundering protection policy and system of the currency and the exchange — the AML policy for short. This is important so you can be confident of the company your funds will be keeping.
4) The extension of the AML policy is to look for any requirement to report sensitive activities and if this then triggers any Enhanced Due Diligence. The AML and EDD policies will confirm if the entity is serious about being around for the long term and protecting investors from being harmed by an investigation or closure by regulators.
The fifth law is more technical but none the less important. There have been a number of occasions where the funds in crypto exchanges of the first generation, CEE 1.0, have disappeared because of hacking. This also happens to real work banks of course so it is impossible to be completely secure. However, there is a key indicator to look for:
5) Be careful to note the proportion of the currency that is held in cold as distinct from hot storage. Cold Storage is quite simply offline and hot storage is online. I would be weary of any exchange or platform that holds less than 90% of its assets in cold storage at any one time. Get to know the proportion and you can judge the risk yourself.
There is always a risk. But if you follow these Five Rules, you will minimise that risk from the actual operation of the exchange and from regulators closing down the entity you are using. The actual market risk cannot be controlled for by any number of rules!
Leonardo González Dellán is a former central banker and international trade expert.