• In terms of regulation, three exchanges scored a perfect score of 5 out of 5 when it came to regulation: FTX US Derivatives, Gemini & Kraken Futures. However, two exchanges, KuCoin and Bybit, scored just 1 out of 5 when it came to regulation, the lowest possible score.
• When it comes to consumer protection, no exchange scored a perfect 5 out of 5, but the best performing exchange in this regard was Gemini, with 4.8. The worst performing exchange for protecting its users is OKX, the only exchange to score just 1 out of 5 for this pillar.
• Two exchanges got full marks when it comes to the pillar of market fairness: FTX US Derivatives and Bittrex. Again, OKX and Bybit come out as the worst-performing exchanges in this pillar and they are joined by Gate.io.
• Transparency is key to ensuring that consumers feel protected and for this pillar, Coinbase was once again the top-ranking exchange. A large number of exchanges scored poorly when it comes to a lack of transparency, with six different exchanges all scoring just 1 out of 5 for this factor, including Binance, OKX, KuCoin, Gate.io, Bybit, Phemex.
Rank
Exchange/5
Regulation/5
Consumer protection/5
Market fairness/5
Transparency/5
Overall/5
1
Coinbase
4.5
3.8
3.5
4.8
4.1
2
FTX US Derivatives
5.0
3.8
5.0
2.3
4.0
3
Bitstamp
4.0
3.0
4.0
4.0
3.8
4
Bittrex
4.3
3.3
5.0
2.3
3.7
4
Gemini
5.0
4.8
1.8
3.3
3.7
*Each of these pillars contains four sub-categories, to give 16 sub-categories in total. These are then divided further into three different TIERS: TIER1, TIER2 and TIER3 which were assigned 5, 3 and 1 points respectively, with the best performing exchanges scoring highest.
1. Coinbase – Overall safety score: 4.1/5
The safest crypto exchange overall is Coinbase, which is also the largest crypto exchange in the US by trading volume. Coinbase was ranked as a tier 1 exchange for the majority of sub-categories and is well known for its robust security features.
2. FTX US Derivatives – Overall safety score: 4.0/5
In the second place, FTX US Derivatives falls into tier 1 for the majority of the factors in our index. FTX US Derivatives was somewhat let down when it comes to transparency, with a score of 2.3, offering little to no financial or legal transparency and complex products.
3. Bitstamp – Overall safety score: 3.8 / 5
Bitstamp keeps 98% of assets offline in cold crypto storage, which is the most secure form of crypto storage as it is protected from potential hacking breaches and hasn’t experienced any regulatory incidents in the last five years.
Zoltan Kormanyos, Head of Legal at international broker comparison website BrokerChooser commented on Coinbase’s recent warning that its customers could be viewed as general unsecured creditors:
“The risk disclosure in Coinbase’s quarterly 10K report is not saying anything new; it merely confirms the status quo and certain risks associated with crypto. As a publicly listed company, Coinbase had to disclose and confirm this fact in an official regulatory document. The problem here is simply stemming from the unregulated nature of crypto and cannot be simply associated with Coinbase only.
Retail crypto investors use hard cash to buy crypto at Coinbase. The crypto is being held in a Coinbase wallet where Coinbase is acting as custodian. As soon as the crypto is put into the Coinbase wallet, the retail investor loses ownership and is left only with a personal claim for the crypto which they bought with hard cash.
Up until this point, this is quite similar to the relationship between banks and their depositors, but there are two key differences here. Bank depositors are preferential creditors in a bankruptcy scenario; while their deposits are being protected by deposit insurance up to a certain limit. Coinbase is actually trying to make up for these known deficiencies by holding a hot wallet crime insurance policy of USD 255 million. However, this insurance coverage might not give too much comfort in light of the USD 255 billion of crypto Coinbase is holding in custody on behalf of its customers. An average customer is holding approximately USD 3,500 worth of crypto at Coinbase, but the insurance coverage per customer is only USD 3.5 (far less than the USD 250,000 coverage the US government provides to bank depositors).
Now that these risks are known and confirmed, what retail investors can do is check what kind of safeguards might be available for them when things go wrong on an exchange. This needs to include, among others, checking the operational resiliency of the crypto exchange (including hacking history, BCP framework etc), the existence and coverage of an insurance policy, and available safeguards for fiat assets held at the crypto exchange.”
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