2. What is a nested cryptocurrency exchange?
3. What's the danger of nesting?
4. What are the dangers of nested cryptocurrency exchange?
5. What's the difference between a nested exchange and a decentralized exchange?
6. The Suex nested exchange incident
7. How to spot a nested exchange?
8. Closing thoughts
When trading cryptocurrency, it's important to use a trusted exchange that offers adequate security measures. However, some users may choose to use instant exchanges that require little to no sign-up checks. These exchanges, known as nested exchanges, can be dangerous and put your funds at risk. In this article, we'll explore what nested exchanges are, the dangers they pose, and how you can avoid them.
Nesting refers to a financial service provider creating an account with another financial institution to use its services. The account holder then offers these services to their customers via the nested account. Correspondent banking is a good example of nesting, where a bank in one country provides its banking services and ecosystem to a bank operating in a different country. The customer's bank would process the transfer request through its nested account with the correspondent bank. The correspondent bank must take care and conduct due diligence on the bank they work with. Correspondent banking is regulated, and compliance rules must be followed to avoid money laundering, funding terrorism, or other illicit activities.
Nested cryptocurrency exchanges work in a similar way, where an entity or person creates an account with a regulated exchange and then uses this account to offer trading services to third parties via their nested account. These exchanges are also known as instant exchanges and can have little to no identification requirements. This makes them popular with scammers, fraudsters, and hackers. By using a nested exchange, users bypass the security measures and due diligence procedures required by regulated exchanges, putting their funds and identity at risk.
A nested cryptocurrency exchange works in a fairly simple way. An entity or person creates an account with a regulated exchange. They then use this account to offer trading services to third parties through their nested account. These nested exchanges are sometimes known as instant exchanges and often have multiple accounts across different exchanges.
Some may ask for identifying documents, but others might require little to no identification at all. This makes them a popular choice among scammers, fraudsters, and ransomers. Some nested exchanges even allowed for the purchasing and selling of crypto in person with cash.
One of the most significant dangers of using a nested cryptocurrency exchange is that your funds are not guaranteed to be safe. You're entrusting your crypto to a third party who has not undergone any security checks or regulations. In other words, your funds are at risk of theft or loss. Additionally, if you unknowingly use a nested exchange that is involved in illicit activity, you could face legal repercussions. Therefore, it's crucial to do your due diligence when selecting an exchange and make sure it's a regulated exchange that has undergone proper KYC and AML procedures.
When it comes to traditional finance, one of the biggest problems is the risk of money laundering. As the correspondent bank only deals directly with the underlying respondent bank, they cannot be sure exactly who they are dealing with. This is why nesting requires enhanced due diligence checks on the underlying bank. Individuals or whole countries may be blacklisted and have sanctions placed on them. If an underlying bank doesn't abide by these, the respondent bank may end up supporting illegal activities, such as avoiding sanctions or money laundering.
As the cryptocurrency industry is still developing robust regulations, it's easier for nested exchanges to operate under the radar. A nested exchange could open an account with a large crypto exchange without them easily knowing. Once a nested exchange is opened, it can be challenging to track, and users' funds may be at risk. Additionally, nested exchanges make it easier for scammers, fraudsters, and ransomers to use crypto to fund their illegal activities. It's essential to stay vigilant and ensure that any exchange you use has undergone proper security checks and regulations.
When you use a nested cryptocurrency exchange, it doesn't just hurt centralized exchanges. You and your funds are also in danger for several reasons:
Your deposits have fewer guarantees on their safety than with a regulated exchange. If a nested exchange is hacked or goes bankrupt, you may lose your funds.
You might be supporting illegal activities that fund crime and terrorism. Using a nested exchange that is involved in illicit activity puts you at risk of being involved in money laundering or other illegal activities.
Regulatory authorities may shut down the exchange, causing you to lose your crypto or other funds. If a nested exchange is not following proper regulations, it can be shut down by the authorities, and you may lose your funds.
You could face legal repercussions from law enforcement if you knowingly work with an exchange that is involved with illicit activity. Using a nested exchange that is involved in illegal activities can lead to legal problems for you.
To avoid these risks, it's best to use a regulated exchange that has undergone proper KYC and AML procedures. This ensures that the exchange is complying with regulations and is more likely to be secure. While nested exchanges may seem convenient, the risks are too high to ignore.
At first, a nested exchange and a decentralized exchange look similar. Decentralized exchanges require no KYC, and nested exchanges can have lax KYC processes or none at all. However, the way they deal with transactions is different. A decentralized exchange will connect buyers directly to sellers or even use liquidity pools. The exchange will never take custody of the traded cryptocurrency. Instead, smart contracts handle the process. However, a nested exchange will take direct custody of your crypto and use the services of another exchange. This means that there is a higher risk of your funds being stolen or lost when using a nested exchange.
While decentralized exchanges may have some limitations, they are a safer option than nested exchanges. If you're unsure about the security of an exchange, it's best to avoid it and choose a more reputable exchange instead.
A real-world example of the dangers of nested exchanges is the Suex cryptocurrency exchange incident. On 21 September 2021, the Office of Foreign Assets Control (OFAC) sanctioned the Suex cryptocurrency exchange incorporated in the Czech Republic and operating out of Russia. Suex OTC provided a nested cryptocurrency exchange service using Binance and other large exchanges to serve its customers. Suex offered little to no KYC and even provided in-person cash exchanges for crypto.
According to Chainalysis research, Suex helped launder a large number of funds from ransomware attacks and hacks. Binance proactively deactivated several accounts associated with Suex, and the OFAC blacklisted almost 30 different Bitcoin, Tether, and Ethereum wallets. Binance’s offboarding also included Chatex, a crypto bank with reported ties to Suex. Chatex has since then faced related sanctions from the OFAC. Anyone having dealt with Suex is now at legal risk, and they have taken down their website since the OFAC decision. This incident highlights the dangers of using nested exchanges and the importance of conducting proper due diligence before using any exchange.
Spotting a nested exchange can be tricky as it's not always obvious. However, some warning signs include a lack of KYC or AML checks, an unclear UI, no clear statement of where trading takes place, and the aggregation of different rates. If an exchange has any of these warning signs, it's best to avoid it and choose a more reputable exchange instead. If you suspect that you have used a nested exchange, you can follow your crypto's trail on the blockchain with a blockchain explorer. You may find that it has come from a wallet associated with another exchange, indicating that it was traded through a nested account.
It's essential to remember that using a nested exchange is never a good idea. While it may seem convenient at first, the risks of losing your funds or supporting illegal activities are too high. By using a regulated exchange that has undergone proper security checks and regulations, you can ensure that your funds are safe and secure.
In conclusion, nested exchanges are a dangerous option for trading cryptocurrency. They offer little to no security measures and put your funds and identity at risk. By using a regulated exchange that has undergone proper KYC and AML procedures, you can ensure that your funds are safe and secure. It's essential to stay vigilant and conduct proper due diligence before using any exchange. With the right precautions, you can safely and securely trade cryptocurrency and avoid the risks associated with nested exchanges.