Cryptocurrency is a form of currency that exists in digital or virtual currencies and it is secured using cryptography. There are two types of recording crypto transactions – centralized and decentralized.
Since people investing in cryptocurrencies are rising day by day the number of risks involved in the field is increasing. One of them is the service disruption in a centralized exchange.
What Is A Centralized Exchange?
In a centralized cryptocurrency exchange, the user funds are entrusted to a certain entity or a company. It is similar to the bank, where the customers keep their money and entrust the bank to safeguard their assets. Centralized exchanges can be also used to conduct trade in two different currencies.
What Is A Decentralized Exchange?
A decentralized exchange is a form of exchange where there is no central entity or company. This enables users to trade and invest directly. It uses blockchain technology and users have full control over their funds which eliminates the need for intermediaries.
Now back to the centralized exchange, users can create an account, deposit funds, place orders, and leave the rest to the company to do the rest such as execute the transactions. The entity has control over the user’s private keys.
An order book system is also followed which means the buy and sell of orders and sorted by the assigned prices. Some of the popular central exchange platforms are:
- Kraken
- Bitstamp
- Binance
- Coinbase
These exchanges are popular because of their history of reliability, compliance with the standards, the availability of trading pairs, and security systems.
One of the benefits of using a centralized exchange system is that it is user-friendly. It is also a beginner-friendly system and it is easier to carry out trading and investments. The form of exchange is also a reliable form of exchange because it gives a centralized platform for transactions.
An option is available to leverage the investments by borrowing money from the entity or company. The form of exchange also has strong customer support and offers different trading pairs.
In this article, we will look at what can happen if there is a service disruption in a centralized exchange. The disruption can happen when it is hacked or a theft occurs. The exchange is also prone to insider attacks.
Since you are not allowed to have control over your wallet and the whole platform is controlled by an entity or a company, there is an increased risk of fraud or losing the existing currencies.
When there is a service disruption it can lead to the following consequences:
- Customers cannot control their cryptocurrencies
In a centralized exchange, all your currencies are controlled by the entity or the company. You won’t be able to withdraw your investments. One example is when Voyager, which is a similar exchange platform went bankrupt, the customers lost their crypto currencies. Customers have no other choice but to file legal action against it.
- The cryptocurrencies are not backed or insured by any legal agencies.
No bank in the US, nor the Federal Deposit Insurance Corporation (FDIC) backs cryptocurrency. There is no legal security provided by any such corporation that comes in handy when a fraud or a hack takes place. This is a huge drawback when it comes to investing in cryptocurrency.
How To Avoid Loss Due To Service Disruption In Centralized Exchanges?
When starting an account in a centralized exchange platform, it is important and mandatory to update your KYC (Know Your Customer). This will serve as evidence that you have invested in the platform and how much you own.
This can also give you an idea of how much you own during bankruptcy or in a situation where there is a service disruption.
When stepping into cryptocurrency, you should be aware of the potential risks and frauds that can likely occur. This is mainly because, unlike currencies, cryptocurrencies are not protected by any legal entities like the government, banks, or others. It is important to do thorough research before investing in cryptocurrency.
