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How to Identify Fake Cryptocurrency Exchanges



One of the best ways to vet a cryptocurrency exchange and protect yourselves from rug pulls and other deceptions is to look at the track record of the exchange in the crypto community.


Often, it's relatively easy to see which exchanges have brand-name recognition and which ones have been around for a while, gathering a larger audience of traders and users.

Traders have to look out for the fledgling exchanges, because they tend to have less attention from people who could spot potential problems. As an additional tip, look out for fly-by-night exchanges that operate by using the name of a popular exchange like Coinbase and flipping individual letters (for example, Cionbase) so that unwary users get redirected to an alternative website.


Know Your Customer Anti-Money-Laundering

Along with figuring out whether an exchange has a legacy in the crypto space, it's also important to look for whether that exchange has enacted key standards recommended and even required by government agencies. One of the largest and most dominant standards of this kind is Know Your Customer (KYC) rules.


Essentially, government agencies are worried about tax dodging and different types of fraud and crime in the crypto community. That's part of the reason that these agencies require exchanges to gather data on their customers.


One aspect of cryptocurrency is that it's inherently anonymous, since transactions can be completed without central bank validation. But established exchanges, such as Coinbase, have created systems where users do get thoroughly identified when they buy or sell cryptocurrency. Some exchanges even go as far as collecting a user's driver's license or government identification in order to promote KYC compliance.


If the exchange you are working with doesn't have any of this, it's a huge red flag in terms of its legitimacy.


Be Reasonable: If It’s Too Good to Be True, It Probably Is

Another major red flag for deceptive and fake cryptocurrency exchanges is big promises of upfront rewards.


On the one hand, cryptocurrency staking can generate larger interest yields than plays in the traditional stock market. Users may see legitimate staking returns of up to 10% or more from some established exchanges and related businesses.


On the other hand, if an exchange is offering 30% or 40% annually, that's unrealistic and something that users should watch out for. The same goes for big, flashy upfront rewards, whether they are in the form of bonuses, airdrops, or loyalty rewards. Sometimes the operators try to lure people in with these attractive promises, but when traders take the bait, they find that they have been conned.


Evaluate Blockchains and Proof of Work or Proof of Stake Algorithms

Every blockchain has its own proof of work or proof of stake process. One general rule that serves beginners well is to stay in the shallow end of the cryptocurrency pool until you are more familiar with how exchanges work.


Some of the very common fundamental coins, such as Bitcoin and Ethereum, have blockchain models that are more thoroughly reviewed and easier to understand.

Newer blockchains might have different processes that involve other complexities, particularly blockchains that you've never heard of before. It also makes it hard to value that blockchain’s coins or tokens. So, one good rule of thumb is to start with the most established blockchains and work your way toward the “altcoin” area of the business.


Fake Cryptocurrency Exchanges: Look for the Glitch

Many experts also recommend looking for small problems with the website that may clue you into the reality that you're not dealing with a fully legitimate exchange operator.

Sometimes these come in the form of small grammar mistakes. Sometimes it's the formatting of the website itself. Other times you read something that doesn't sound like it's coming from experienced subject matter experts.


Another common concern is when you see a website that uses the exact same language that dozens of others share. For example, a piece at Bitchecker shows how many of the least genuine or fake cryptocurrency exchanges all use the phrase “The world's leading digital asset trading platform.” So, this phrase is another warning sign that you may be entering choppy waters.


Any of these telltale signs can warn you that you're in an environment that may have been crafted to match what an established exchange looks like rather than one that is actually established and well-regarded.


Look Forward Toward Regulatory Changes

Another way to assess cryptocurrency exchanges is to look through your newsfeed and see if they are in good standing with outside auditors, such as the SEC. This goes back to the KYC/AML rules mentioned above and other requirements that government agencies have set up for exchanges.


If an exchange is unable to legally operate in the US, it stands to reason that US traders shouldn't be trying to get around those rules but rather looking for compliant and transparent operators who have a green light from all relevant agencies.


Be Skeptical of Unsolicited Communications

As with so many other types of scams and fraudulent activities, it's in your best interest to be very wary of unsolicited calls or emails that invite you to participate in a cryptocurrency exchange.


The idea is that if you are interested in trading cryptocurrency, you should be proactively looking at different exchanges and evaluating them, not accepting solicitations from parties trying to get you interested in being a part of their particular platform.


Again, these fake cryptocurrency exchanges might be offering you big rewards or a chance to double your money. Being reasonable means evaluating these offers not just according to the best-case scenarios, but with regard to where the offers come from — what kind of track record the website has. To that end, you can do a simple WHOIS query and other research to determine whether a website constitutes a genuine cryptocurrency exchange with a positive track record.


Yet another way to differentiate exchanges is to prioritize non-custodial platforms. Non-custodial trading means that your assets stay with you throughout more of the transaction process rather than being held by the exchange for any extended period of time. A non-custodial approach, if it is genuine, exposes the holder to less risk and provides better security on the whole.


Final Thoughts

These are just a few approaches to protect yourself from fraudulent and deceptive cryptocurrency exchange operations and scams. By being savvier and up to date on what’s happening in the tech community, traders can set out on more solid ground when starting up with crypto trading.


Anywhere in the world of cryptocurrency, or in any digital business environment, cybersecurity is crucial. Best practices protect data and systems in a variety of ways. FYEO's identity and domain intelligence tools help clients to harden systems, build better architectures, and enter complex environments with confidence.