A Brief Overview of Cryptocurrency Exchange Regulation


With the recent announcement that the popular Poloniex exchange is to be sold to US-based cryptocurrency business, Circle, for $400m, it’s a good time look at exchange regulation.

Unregulated exchanges, like Mt. Gox, Bitfinex, and Bitgrail, have long been the target of hackers, but a regulated exchange doesn’t specifically prevent it from being hacked. Part of the stringent regulatory process requires that exchanges have secure systems and some form of protection in place should the worst happen.

The first U.S. regulated exchange was created in January 2015 by Coinbase and rebranded as GDAX (Global Digital Asset Exchange) in May 2016. The first regulated exchange for ether, Gemini, was formed by the Winklevoss twins in June 2016.

With Coinbase, any fiat currency held with them for trading cryptocurrencies is held in custodial bank accounts or US Treasuries. These accounts belong to you, not Coinbase, and could be considered much safer than holding fiat as Tether (USDT) balances, which are offered by many exchanges.

Coinbase customers who are US residents and have a USD wallet are protected up to $250,000 by Federal Deposit Insurance Corp. (FDIC) insurance, but there is no protection for Tether balances on other exchanges.

As a U.S.-regulated exchange, Coinbase is legally obliged to provide the IRS (Internal Revenue Service) with details of any account holders who have annual trades over $20,000. You might feel this goes against the whole ethos of cryptocurrency confidentiality, but it’s only a minor inconvenience.

The Gemini Exchange offers broadly similar protection as Coinbase for fiat currency balances, but the U.S. Government will not provide insurance for cryptocurrencies held by any exchange. Gemini’s website includes a fairly detailed breakdown of the security measures they use including vetting all employees for criminal and credit checks in addition to the cold storage of most of your digital assets.

In January 2018, the EU acknowledged the benefit of blockchain technology but confirmed that they would now include exchanges in anti-money laundering legislation. Later the same month, South Korea introduced a requirement that the names used to open an exchange account must match the name on the associated bank account. In the coming years, it’s likely that most exchanges will become regulated and this can only be seen as beneficial in bringing Cryptocurrencies into the mainstream.

The safest way to manage your cryptocurrencies is to keep them on an exchange for the minimum amount of time to complete your trade and then return your coins to a hardware wallet such as the Trezor or Ledger. We will be looking at more general aspects of cryptocurrency security, such as Two Factor Authentication (2FA) and how to combat phishing, in some of our follow up articles. While you wait for those, why not join in the debate in our lively Telegram community?

Financial analyst, smartphone app designer, technical writer, and crypto enthusiast. Blockchain verified graduate of MOOC 9, DFIN-511: Introduction to Digital Currencies, run by the University of Nicosia.

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