New Report Highlights Large Variance Between Crypto Exchange Standards

  • Only 32% of top exchanges have strong cold wallet storage
  • Majority of volume from small-state-registered exchanges

Standards of security, cold wallet storage, and know-your-customer (KYC) implementation are subject to a wide variance across centralized cryptoasset exchanges, a new report from data provider CryptoCompare has concluded. CryptoCompare surveyed the top 100 exchanges by trading volume, in order to glean broad trends among exchanges.

 

Cold Wallets

A key finding of the report is the low overall prevalence of cold wallet usage - cold wallets being disconnected from the Internet when their funds are not being actively traded. Only 32% of the top 100 exchanges claim to store the vast majority of users’ funds - at least 90% - in cold wallets, with a further twelve percent claiming to store a majority - at least 50% - in cold wallets, and nine percent claiming less than 50%.

 

An alarming 47% of the top exchanges do not detail their storage conventions, according to CryptoCompare. Since the usage of cold storage wallets is a major selling point for users trading on a centralized exchange, which no exchange should hesitate to advertise, it is not unreasonable to fear the worst for these 47% - half of the top 100 - not reporting any cold wallet usage.

 

coldWallets.png

 

The report revealed little correlation between exchanges’ cold wallet usage, and the jurisdiction of their legal registrations.

 

For example, the six exchanges with the highest reported percentage of cold wallet storage, itBit, Coinroom, Coinfloor, Bitfinex, Huobi Pro, and Coinbase, were registered in the U.S., Poland, the U.K., the British Virgin Islands, the Seychelles islands, and again the U.S., respectively. Almost none of the exchanges listed as having high cold wallet usage, with the exception of Bitfinex, were among the highest trading volume exchanges.

 

A helpful cross-reference for this observation is the New York Office of the Attorney General’s (OAG) recent audit of cryptoasset exchanges, which found only a small variance of cold-wallet standards among eight U.S.-registered exchanges that it surveyed, namely a high standard with “most participating platforms purport[ing] to keep a high percentage of the virtual currency in their possession in so-called ‘cold storage.’” These figures could perhaps suggest a somewhat higher standard of storage for U.S.-based exchanges.

 

Underlining the importance of cold wallets, eleven percent of top 100 exchanges have been hacked in the past. CryptoCompare reported that nearly 75% of exchanges require at least some KYC information from customers, while fully a quarter require no KYC.

 

Trade volumes

With respect to trading volume, CryptoCompare found that an inordinate amount of the trading volume goes through Malta-, Hong Kong- and South Korea-registered exchanges - in the case of Hong Kong, not even a completely sovereign nation but a “Special Administrative Region” of China. By far the most trading volume comes from Binance and OKEx, both registered in the small Mediterranean island nation of Malta, a member of the European Union and within the Schengen border zone.

 

The jurisdictions hosting the highest number of exchanges, the U.S. and U.K. both registering eight, see strikingly minimal amounts of trading volume pass through their borders. CryptoCompare calculated $366 and $137 million cumulative average daily trading volume, on all the exchanges in their respective countries - a total of $503 million on sixteen exchanges - versus $1.38 billion daily on just two Malta-registered exchanges.

 

The OAG report is again helpful in this case, as the single largest exchange examined by CryptoCompare, Malta-based Binance, declined the New York law enforcement office’s request to furnish information regarding its practices and standards. Two out of four of the highest-volume jurisdictions are small island nations with liberal cryptoasset regulations, and one is the city-state Hong Kong.

 

exchangeVol.png

 

A clear preference for fast-moving, liberal, and “creative” regulatory regimes is evident for the high-volume exchanges. Given, as the OAG has noted, exchanges’ propensities to “[move] their operations with little or no warning,” a competitive atmosphere could be fostered to offer the most flexible and accommodating regulatory regimes, to cryptoasset exchanges searching for their next home.

Weekly Newsletter

Binance ‘Unknowingly’ Earns $775K via Staking, Set to Launch Huge XLM Giveaway

On Thursday (July 18), Binance, the world's largest cryptoasset exchange (by adjusted trading volume), made a rather interesting announcement: it had "unknowingly" earned 9.5 million Stellar Lumen (XLM) tokens through staking rewards, and it is going to give all of it away to all Binance users who maintain XLM balances between July 20 and September 1.

Binance explained via a blog post that in August 2018 the Binance team followed the advice of the Stellar Development Foundation "to change some parameters on both cold and hot wallets," which resulted in the exchange "unknowingly" earning staking rewards for its XLM holdings since 31 August 2018.

Then, this week, while the Binance team was considering the idea of adding support for XLM staking, it found out that Binance had earned around 9.5 million XLM tokens (each of which was worth approximately $0.08157 at the time). Binance notes that all "weekly staking rewards between then and now are documented on the blockchain." 

So, the team made two decisions:

  • add support for XLM staking to Binance.com; and
  • give away the aforementioned staking rewards to the Binance community (i.e. Binance users).

This is not the first time that Binance has added staking support to Binance.com. The exchange already "distributes NeoGas for NEO holders, Ontology Gas for Ontology holders, VTHO for VeChain holders, and BitTorrent tokens for TRON tokens."

Here is how this 9.5 million XLM giveaway is going to happen.

From July 20, Binance will support XLM staking. Between this date and September 1, Binance will take "daily snapshots" of XLM balances in Binance user accounts.

Then, on September 1, Binance will "tally average user XLM balances based on these snapshots," and process the distribution of staking rewards to these user accounts (that maintained XLM balances during the staking period). Furthermore, the roughly 9.5 million XLM tokens that Binance has unknowingly earned to date will be distributed as a bonus payment to all Binance users who jave maintained non-zero XLM balances since July 20. 

Binance says in its blog post that it estimates this "one-time distribution of 9,500,000 XLM shared proportionately among Binance users" to be worth "10 to 12 months of typical monthly rewards."

According to a support article published on July 18, here are the details of Binance's "Monthly XLM Staking Airdrop Program":

  • Binance will start these daily XLM balance snapshots at 00:00 (UTC) on 20 July 2019.
  • This is how Binance will calculate the XLM staking distribution:

XLM generated by each user = Total XLM staking rewards received by Binance * User XLM holdings ratio. User XLM holdings ratio = User XLM holdings / Total XLM staked by Binance.

  •  In order to qualify for XLM staking rewards, Binance users must have a balance of at least 10 XLM.
  • This initial distribution of XLM staking rewards will be calculated until 1 September 2019, "with the total amount distributed equal to the staking rewards accrued on holdings during the 43 day period."
  • These XLM staking rewards are calculated on a daily basis and are distributed monthly. 
  • XLM distrubutions will be "completed before the 5th of each month."

In other Binance news, another support article explained that Binance's Margin Trading platform has added support for two margin assets (EOS and LINK), three borrowable assets (BNB, EOS, and LINK), and three margin pairs (EOS/USDT, EOS/BTC, LINK/USDT, LINKBTC).

Binance's announcement about its 9.5 million XLM giveaway may have helped the XLM price. According to CryptoCompare, XLM is currently trading at $0.08914, up 7.96% in the past 24-hour period:

XLM-USD 24-Hour Chart on 18 July 2019.png

Featured Image Courtesy of Binance