Every time I sit down to write this column, I worry that the day it’s released will be the day I get fired. Still, it needs to be said.
Every centralized crypto exchange is insolvent to some degree.
![Confessions of a Crypto Insider 5 - Every Centralized Exchange is Insolvent image 46](https://i0.wp.com/nosisnews.com/wp-content/uploads/2023/06/image-46.png?resize=1024%2C233&ssl=1)
![Confessions of a Crypto Insider 5 - Every Centralized Exchange is Insolvent image 46](https://i0.wp.com/nosisnews.com/wp-content/uploads/2023/06/image-46.png?resize=1024%2C233&ssl=1)
I mean: Get your money off them now, seriously!
Okay, so I don’t think every centralized exchange will be forced to file for bankruptcy, but none of them have the assets their customers believe they do. Thus, if you’re holding funds on a CEX, you trust that they will honor your IOU.
Hint: There’s a good chance that they won’t.
History doesn’t repeat, but it does rhyme
Let’s take a quick look at the history of centralized crypto exchanges and see if we can spot any patterns.
- In 2014, Mt. Gox handled over 70% of the world’s bitcoin transactions when they abruptly halted trading, closed the exchange, and filed for bankruptcy. Hundreds of thousands of bitcoins were lost. Creditors are still waiting for compensation.
- In 2019, the CEO of QuadrigaCX – Canada’s largest crypto exchange – allegedly died in India. The exchange claimed that Gerald Cotten was the only person who knew the password to the offline cold wallets where consumers’ funds were held. The CEX filed for bankruptcy, and over $200 million was lost forever.
- In 2022, Celsius Network, BlockFi, Voyager, FTX, and more filed for bankruptcy. Billions of dollars were wiped out of the market, and their creditors are unlikely to receive even a fraction of what they’re owed.
In each of these instances, the exchange’s customers lost millions, and some took their own lives.
“So what? That doesn’t mean all crypto exchanges are insolvent!”
Okay. It’s not a gamble I’m willing to take, but by all means, do you, Boo!
More damning evidence
Before FTX’s insolvency, Nugenesis’ CEO Hussein Faraj and FTX Japan’s COO Seth Melamed had a candid discussion about how all centralized exchanges counterfeit funds by minting synthetic assets and conducting transactions off-chain to hide the imbalance between their on-paper holdings and what they actually have. This recorded conversation was leaked and is being used in the financial fraud case against Sam Bankman-Fried.
Further, as crypto YouTuber Chico Crypto reported on December 29th, USDT could soon lose its peg. That’s because the largest stablecoin by volume and market cap relies on two market makers – the now-bankrupt Alameda and Binance’s market maker – Cumberland. I’m not going to summarize it because the video, titled “This *PERSON* Will Destroy BINANCE & TETHER!! Next FTX Domino Falls Soon!!” is worth watching.
Insider Information
I wish I could share everything I know from my experience working in the crypto industry, but I’m under NDA. However, I can say that centralized exchanges are cartels. They extort funds from projects that want to be listed on them. They then use those funds to manipulate volume, prop up their own books, and control the value of assets. They call this “market making”, but market makers operate on centralized exchanges instead of decentralized exchanges because they can conduct off-chain transactions to disguise imbalances.
Backing up
For those new to CryptoMag and, thereby, this column, I suggest you look back to older editions for my credentials. Briefly, I’m the CCO of a crypto marketing agency. We represent numerous projects, and one of our functions is to contact and negotiate with centralized exchanges to get clients’ tokens listed.
In recent months, major centralized exchanges – whose names you are most certainly familiar with – have demanded as much as 6 figures for token listings. They disguise this illegal practice by calling it “market making” and/or “co-marketing”, but it’s wash trading and extortion.
Recently, an exchange that intended to list a token for no charge listed the wrong asset by mistake. When we informed them and asked them to list the correct token, they demanded $10k. We replied, telling them that they had already agreed to list it for free. They responded, “we will not be able to continue operations unless you pay us the $10k.” This means they intended to use our funds to prop up their entire exchange for as long as possible.
Thank goodness some of our clients are finally listening and refusing to pay.
For those who still don’t want to believe what I’m saying, you don’t have to. Look for yourselves. Every centralized exchange still has people complaining about being locked out of their accounts, unable to withdraw their funds, and customer service won’t respond.
A question of intentions: 2 case studies
CZ Binance
In a mid-December Twitter Space AMA, Binance chief Changpeng Zhao (aka “CZ Binance”) told listeners that 99% of people would lose funds if they self-custody. But if we look at history, that isn’t true. Sure, some people have lost funds because they didn’t control their seed phrase, lost their private key, or mistakenly gave their keys to someone who stole them. But that doesn’t account for anywhere close to 99%.
Many people really admire CZ and put Binance on a pedestal. To be clear, I hope Binance survives, and I rather like CZ too, but you’ve got to ask why he would make this patently untrue statement. Could it be because, as the CEO of Binance, he doesn’t want users to withdraw their funds en masse and trigger a liquidity crisis? Perhaps.
JP Morgan
In November, another beacon of finance, JP Morgan, contradicted what many crypto-native experts say will be the next trend. In a letter to investors, the bank’s strategists claimed that centralized crypto exchanges will remain dominant despite the FTX collapse.
Their reasoning:
- Slower transaction speeds
- Traceability
- Lack of limit order functions and stop losses
- Difficulty of use
This contradicts what the numbers show. Trading volume on DEXs is up almost 70% since FTX’s collapse.
Could it be that institutional players don’t want people to know that most of the volume and liquidity on CEXs is fake? On the other hand, might JP Morgan stand to profit from market manipulation and corruption? Once again, I’ll leave that to you to decide.
So what are my options?
Self-custody isn’t as difficult as some people want you to believe. There are many guides in this magazine and online on creating a wallet and securing your keys.
For now, centralized crypto exchanges still serve a purpose, but I’m only comfortable using them as on- and off-ramps. If I were a gambling woman, I would wager that every crypto exchange faces some level of insolvency.
Related: Centralized vs. decentralized digital networks – Key differences
BY: Nicole Grinstead (@NrdGrl007)
Originally published in CryptoMag, January, 2023