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I have been told by some that bitcoin exchanges do NOT record BTC transactions by a buyer/seller on the blockchain, but rather hold them in their own name and ledger - eg, if I buy one BTC via an exchange, I do not own a UTXO on the blockchain, but simply have been 'assigned' a BTC that the exchange owns.

This of course, would give rise to counterparty risk, even ignoring fraud risk.

Truth or fiction?

GPB
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Most exchanges are centralized services, operating in the way you've mentioned. So yes, the exchange owns the bitcoins, so there is significant counterparty risk involved with storing your coins on an exchange.

chytrik
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  • So, how does one determine the risk of an exchange? I have been studying something called "Proof of Reserve" which seems to be a cryptographic way to prove a minimum fractional reserve. – GPB Mar 01 '18 at 12:08
  • I think most people would agree that exchanges with publicly known owners/operators, and those that adhere to government regulations are likely less risky to use than an exchange located in a foreign country, with anonymous owners/operators. Remember too that exchanges are juicy targets for hackers, so even a legit operation could lose money to some unforseen bug in their system being exploited. Some sort of proof of reserves is good to ensure solvency, but doesn't stop an exit scam or hack from occuring. Best practice is to not store coins on an exchange for longer than necessary. – chytrik Mar 01 '18 at 12:13
  • Just like banks, but without public accounts. No wonder why so many fail! – GPB Mar 01 '18 at 12:15
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    So, it's possibly to a) buy BTC then b) transfer to your own wallet? – GPB Mar 01 '18 at 12:16
  • Sort of like a bank, I'm not sure what you mean by public accounts though. The bitcoin reserves/transactions of the exchange are more of a public record than any analogous bank reserves/transactions. Yes, it is of course possible to buy BTC, and then transfer to your own wallet. Just remember: at that point you are solely responsible for your funds. Financial sovereignty comes with a high level of responsibility. – chytrik Mar 01 '18 at 12:21
  • By a bank, I mean an entity which publishes an income statement and balance sheet statement which one can use to approximate the creditworthiness of the institution (within limits of course). Other than Proof of Reserve (which not many exchanges use), how to I get comfortable holding my BTC/ETH/etc with the exchange? – GPB Mar 01 '18 at 13:40
  • I'd rather be responsible for my own account if the other holder does not provide me with information regarding solvency, governance, etc! – GPB Mar 01 '18 at 13:40
  • @GPB historically, I think loss due to hacking/theft is more common than insolvency, and it is impossible to guarantee no thefts will occur. For this reason it is best practices to hold your own coins in a secure wallet. To find the most ‘legit’ exchange otherwise, see what I wrote above about public figure ownership/regulation. A US-based exchange is probably what you want. – chytrik Mar 01 '18 at 18:45