Over the past few weeks, the seizure of the Russian BTC-e exchange and its associated funds by USA law enforcement has resulting in many traders and investors losing their assets. In this article, we will be reviewing the events leading up to shutting down of BTC-e and reminding ourselves why centralised exchanges are so dangerous.
Vinnik was arrested in Greece
In late July, the Russian exchange BTC-e's website was seized by United States law enforcement amid claims that its head operator, Alexander Vinnik, has been using the platform to launder money since 2011. Vinnik was arrested while on holiday with his partner in Northern Greece, and is awaiting extradition to the USA. According to FBI officials, during the time in which Vinnik operated the platform he managed to launder over USD$4,000,000,000 worth of BTC.
In the wake of the arrest and domain seizure, the FBI has also seized all of the BTC-e hardware and wallets. This was revealed through the company's Twitter handle by presumably an employee of BTC-e:
On July 25, FBI staff came to the data center where our server equipment was located and seized all of the equipment, the servers that contained databases and the purses of our service. For almost six days now we could not get sane information from our hosting provider on what happened to our servers and because of this information we publish now.
Several members of the technical staff have also been taken into custody, which bitcoin security specialists say is likely due to Vinnik also being the chief suspect of the notorious Mt. Gox theft. While BTC-e has promised to make every effort to refund its customers, it is unknown how much of the funds, if any, will be returned by the FBI. Even if no illegal activity is discovered, all funds could still be seized through civil forfeiture laws. The official statement from BTC-e claims:
In the next 1-2 weeks, we will evaluate and publish information about how much money fell into the hands of the FBI and what amount of funds is available for return.
Australian Trader Jack Kingston, and His USD$430,000 Loss
Landing of the BTC-e domain
Australian trader Jack Kingston was reportedly quite surprised to fin BTC-e 'under maintenance' when logging on in late July. However, he was even more shocked to find the US auhtorities had labelled all platform users as criminals, seized their funds, and emblazoned their seizure notice on the domain.
Kingston earned his fortune through early investment into BTC, holding from $5 through to $800 per BTC. He then followed up by reinvesting into DASH master nodes, which in turn saw a twelve fold rise. Kingston put his decision to use BTC-e down to its relaxed stance on verification and withdrawals - something that in itself should ring alarm bells. While Kingston claims he has never taken part in any illicit activity, it is highly unlikely he will see all his funds returned - and he may not get any back at all.
A Timely Reminder On the Dangers of Centralised Exchanges
We are often concerned as a crypto community that an exchange may be employing some shady practices, such as fractional reserve backing. There is also nothing to stop an exchange from closing its doors one day and running off with all funds it held, never to be seen again. However, the BTC-e seizure should remind us all that the real danger of centralised exchanges is that they are not safe from government runs. In the US alone, civil forfeiture laws allows United States law enforcement to seize any and all funds on an exchange, at will, for utterly no reason.
If you hold funds on any exchange that you are not willing to lose, there are two options available to you:
Withdraw all funds into your own wallet. I am referring to wallets on your local machine, not third party wallet services that essentially act as a bank - these suffer from the same dangers at centralised exchanges. Remember the number one rule:
Your Wallet - Your Keys - Your Money
Switch to using the only decentralised exchanged - the Openledger DEX. The DEX exchange is built on top of a blockchain, which means that no-one is able to seize the assets recorded on it. Further, the DEX it not operated by a single entity, so there is no risk of a corrupt entity shutting down the exchange and making a run with the funds.
Do not lose your investment to a centralised exchange! Even with the most thorough, honest and hardworking team, exchanges are still vulnerable to a host of issues that can result in the loss of your funds. Do not become a victy
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