Cryptocurrencies Explainers In Depth

What you need to know about the tumultuous world of cryptocurrency exchanges

Effortless French, a documentary that explores the phenomenal hacking and downfall of cryptocurrency exchange Mt. Gox, was released at the start of this month with a focus upon just one of a significant list of troublesome digital exchange spaces.

The name of the documentary, derived from the T-shirt that CEO Mark Karpelès was wearing at the time of his arrest (a year after his currency exchange collapsed in 2014)  is meant to deliver a mocking, ironic tone to an otherwise complete digital disaster which saw the loss of millions of dollars of investments. He was directed to wear the infamous t-shirt throughout the filming of the documentary. Effortless however can also be interpreted as simply unprepared, as Mt. Gox exploded beyond the director’s control and ability, the platform – originally boasted as one of the main contenders in cryptocurrency exchange – hurtled towards its unforeseen demise. It still can’t be determined how the fall really happened,  but these days the remnants of the exchange struggle to sell off as many Bitcoins as possible in an attempt to reimburse the out-of-pocket investors, who, really, always seem to be the losers in the cryptocurrency world.

The reason that cryptocurrency exchanges have received so much attention from the start is that they essentially act as the key undermining facet in an otherwise ‘seamless’ idea behind the existence of the currencies – whilst at the same time being a crucial feature within the system. The reality is that exchanges bridge the link between the individual and real money, and so are also an point of access for hackers to use. Despite glaring holes behind cryptocurrency exchanges, however, there is still a plethora of platforms to choose from, ranging from beginner-friendly sites to exchanges specifically focussed on a single currency which total 190 exchanges so far, as documented by Cryptocoin Charts. You only need to Google the word to be met with an overwhelming abundance of exchanges offering to look after your money.

 

Coinbase Exchange

The top contender in the exchange realm is San Francisco based Coinbase Exchange. Having developed a blockchain, it was in 2015 that the site received a vast amount of funding from the likes of the New York Stock Exchange and it’s website boasts of hosting trades in 32 countries around the world whilst serving over 10 million users. The site now trades in Bitcoin, Bitcoin Cash, Ethereum and Litecoin.  

As a result of its popularity, the exchange also experiences a number of first time traders signing up to use the platform services. They also offer bitcoin incentives and have now streamlined their payment services which means Paypal as well as all major credit cards can be used to purchase coins.

 

Gemini

The Gemini Exchange is overseen by the former Bitcoin billionaires, the Winklevii and is at the forefront of working with regulators to ensure the system is acting legally. The site was established in 2015 and acts as a space where traders can buy and trade Bitcoin and Ether between US dollars and was noted as the first exchange licensed to trade in both currencies. The site also boasts incredibly low fees for everyday traders as well as big spenders, playing to the appeal of a site which, overseen by the  New York State Department of Financial Services (NYSDFS), is run as a trust company.

 

Kraken

Canadian based crypto-exchange Kraken, boasts itself as being the largest bitcoin exchange in liquidity and trades in a number of countries around the world. Though trading in a number of currencies the exchange has come under fire throughout 2017 from a number of attacks and even found it’s Twitter account recently blocked by the Twitter administration in light of new online rules that aimed to stop the rise of cryptocurrency advertising.  

 

For all the currency exchanges available in the digital sphere, there is equally an large number that come under scrutiny for their safety features. Mt.Gox certainly isn’t the only Cryptocurrency Exchange to face the wrath of hackers that are essentially plunging the digital world into increasingly troubled water. Just last month, Italian exchange Bitgrail was hacked for $170 million adding to a list of several exchanges that have been prone to outsider attacks, closely followed by South Korean authorities who raided three cryptocurrency exchanges regarding suspicious transfers.

When buying into a currency such as Bitcoin, most exchanges will require its users to enter a series of personal details in order to access the market and trade. This process can acquire a users name, bank details and proof of address in a bid to prevent money laundering schemes slipping through the system unnoticed. Though there are anonymous exchanges, most reputable currency exchanges will request these details and safely store them whilst you use the system. From there a digital wallet is used to store the purchased cryptocurrency coins, as well as remaining a key link to real identity. 

The transactions that are completed within the blockchain are only identifiable through a personal address, which is made up of a combination of a private and public key. Whilst making the process essentially untraceable to the person this arguably also facilitates a prime space for criminal activities as well as legal transactions. However, the undeletable blockchain also makes the used key visible to a number of computers, meaning once the code is identified with the individual, it is possible to track the entire payment history behind the trader. What’s more is that the original personal data that was submitted to the exchange still remains logged with the platform and remains the main place where it can be possible to identify bitcoiners, traders and everyone involved in the sites themselves. It is a risk that traders must cautiously take, but can potentially become a key point of access that can unravel an entire web of secure data if hacked.

Having recently clamped down on fraudulent startups, the US Securities and Exchanges Commission (SEC) is also turning its attention to the cryptocurrency exchanges after pointing out that they are a ‘mess’:

The SEC staff has concerns that many online trading platforms appear for the majority of cryptocurrency owners, the benefit of owning a coin or token will be derived from the ability to exchange or broker at the correct time to investors as SEC-registered and regulated marketplaces when they are not’.

Here, their credibility also comes into question, whilst as well as now holding onto personal data they pose a risk to not following the (arguably loose) rules put in place to maintain an outside grasp on the power of these platforms. Their unregulated nature have seen cryptocurrency exchanges come under attack from fraudsters, investors and now the government, in a bid to quench the process.

Alongside fraudulent attacks upon the exchanges and their users, the exchanges can also face mounting pressure from usage itself. It was only in December when Coinbase had to temporarily halt its site in response to the immense volume of users trying to manoeuvre through declining prices. 

There are however some attempts by the digital community to erase the technical issues that blight cryptocurrency systems. One such solution has been developed as Tether, which, as well as being its own cryptocurrency is supposedly meant to mirror the value of $1 and hold a position as a ‘stable coin’. The idea is that the purchase of Tether would add a middle layer of anonymity between the trader and the blockchain. Another alternative would be to opt for a more anonymous cryptocurrency itself, Zcash pits itself against rival currencies as ‘the first open, permissionless cryptocurrency that can fully protect the privacy of transactions using zero-knowledge cryptography’. The aim of such coins essentially hides the paper trail of payments that can link a person to any other transactions on the blockchain.

To all intents and purposes, the realm of cryptocurrency exchanges to date is somewhat flawed. However in light of major data breaches that have overwhelmed technology giants such as Facebook, the security of online movements is something that on a whole remains under increasing scrutiny. Having said this,  for the majority of cryptocurrency owners, the benefit of owning a coin or token will be derived from the ability to exchange or broker at the correct time, and so, much like the official stock markets, the cryptocurrency exchanges remain the most paramount feature to increase the value of the coins themselves. The vicious cycle continues.

About the author

Tamara Davison

The Medellin-based Mancunian started her journalism career in a London startup and has since travelled around the globe covering arts and culture news, as well as climbing the Himalayas and being lost in remote places. She claims her knowledge of Bitcoin is a healthy obsession that she picked whilst studying the fascinating repercussions new technology has around the world.

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Author

Tamara Davison

The Medellin-based Mancunian started her journalism career in a London startup and has since travelled around the globe covering arts and culture news, as well as climbing the Himalayas and being lost in remote places. She claims her knowledge of Bitcoin is a healthy obsession that she picked whilst studying the fascinating repercussions new technology has around the world.