Crypto Exchanges Unveiled – Top 5 Insights for Secure Trading

In-depth analysis of Crypto Exchanges

All standard crypto exchanges act centrally, i.e., taking part in deals as an intermediary (between buyer and seller). Decentralized exchange is a crypto-currency exchange platform operating not possessing central authorities or control. That is, customers can implement trading in a direct way (without intermediaries). Such exchanges do not store assets and user data, and deals occur using smart contracts (rules written in code).

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Features, Privileges And Weaknesses Of Dex

So, among the undeniable advantages of DEX, we can highlight the following:

  1. Complete anonymity. Most essential advantage of DEX-exchanges is that verification is not required during registration and placing any order (as, for example, on centralized ones). 
  2. DEX-exchanges don’t store private keys for any client’s wallet.
  3. No one can prohibit or restrict your trade.

Among the main disadvantages of DEX, the following are especially important.

  1. There is no support for any order in fiat (i.e. real money). This is because incorporating crypto into fiat currency will require the participation of banks.
  2. Low liquidity. It is difficult to sell any token at an acceptable price on such sites due to the low number of applications for the purchase/sale of crypto-currency). If entrepreneurs want to sell a low-liquid token, the price may slip and it will be difficult to sell it at a favorable rate.

In the future, we can expect expanded market functionality for traders and simplified exchange in a variety of blockchains.

Licensing And Regulation Of Decentralized Exchanges

Now, DEXs operate in a gray area, since legislation does not yet take into account all the nuances of the architecture of these platforms, and regulators have not found effective ways to supervise them.

However, attempts to force decentralized exchanges to comply with local legislative provisions have been made several times in recent years, particularly in USA. As of 2023, regulators in EU, USA, Singapore, Hong Kong and several other countries are actively developing future legislation, being able to control decentralized exchanges and digital asset exchanges locally and internationally.

AML-Requirements And Customization Strategies For Aml-Compliance

The use of crypto exchanges, exchangers, and payment systems is possible taking into account AML rules: USDT and other cryptocurrencies, as well as accounts in general, are checked to search for “dirty” money and scammers. Among the points of the AML procedure there is also a requirement for mandatory verification. In addition, platforms receive the right to freeze crypto assets if violations are detected, which is why some users are notoriously dissatisfied. But this process is also important for protecting clients.

To comply with AML-requirements financial establishments must implement the five core principles.

  1. Hire a compliance-officer who will be responsible for everything related to AML in the business.
  2. Develop internal policies to efficiently monitor and report distrustful deals.
  3. Create a training program for employees that will enable them to meet the standards set by the regulator. 
  4. Provide independent testing and auditing of the AML-program and policies by accredited third parties.
  5. Conduct in-depth risk evaluation when verifying the identity of clients.

The main disadvantage of DEXs is next-mentioned: in most cases the participants themselves are in charge of their own securities mechanisms. Although there is DEX, where the developers have implemented AML algorithms. It’s mandatory to realize next-mentioned: Dex isn’t an endpoint for attackers. Next, tokens are sent to Cex. It’s centralized cryptocurrency exchange-platforms, which, unlike Dex, can only be managed by one organization. Such manipulations confuse the tracks. It takes a compliance officer a lot of time to establish where monetary means went.

Deals with crypto-currencies can be highly anonymous compared to transactions using credit cards, debit cards or even cash – it all depends on how exactly transaction is carried out. Currently, crypto-currency exchanges are required to control accounts for distrustful activities, however this was not always the case, and even today DEX-platforms are largely exempt from AML rules, at least for now.

Technology and Security Solutions

Trading operations with cryptocurrencies on decentralized platforms have a high degree of risk. Among all potentially dangerous threats, there’re three main ones, namely the following.

  1. Hacking smart contracts. All smart contracts are implemented based on open source code. This increases the reliability of any trade transaction, but at the same time, the vulnerability of protocols to hacker attacks also increases.
  2. Fraudulent smart contracts. Quite often, hackers create fake smart contracts by purchasing which asset holders provide scammers with fully-provided, and most importantly free, access to them.
  3. External economic threats. A characteristic peculiarity of all decentralized platforms is that any user of such a platform can create their own liquidity pool and token with minimal cost and effort. Attackers often profit from this.

Some of the main solutions to ensure security in relation to these problems are the following.

  1. Developed and implemented a reliable AMM (market maker). AMMs use liquidity pools into which customers may deposit their tokens. These pools serve as the basis for automatic execution of trades based on pre-installed algorithms.
  2. Maintaining smooth operation of the decentralized network. Since DEX platforms are based on decentralized mechanisms, they’re less susceptible to interruptions or outages being common with centralized ones. It allows people to continue to make trades even in conditions of expanded volatility or problems on exchanging processes.
  3. Development and implementation of reliable customers’ identification systems.
  4. Choosing a reliable liquidity provider.

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Final Thoughts About Crypto Exchanges

In wrapping up, Crypto Exchanges are more than a trend; they’re a financial evolution. As regulations tighten and technology advances, the promise of secure and efficient trading through DEX becomes apparent. It’s not just a new way to trade; it’s a step towards a more empowered financial future.

The author of this article is Denys Chernyshov – CEO and founder of the world-famous law firm Eternity Law International.

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