IDAX ‘exit scam’ shows the problem with exchange centralization 🚨 This article is 5 years old...
IDAX ‘exit scam’ shows the problem with exchange centralization
2 min read
Updated: Nov. 29, 2019 at 5:52 pm UTC
Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.
The disappearance of the CEO of Chinese crypto exchange IDAX shed a light on the ever-growing problem of crypto exchange centralization. Having the fate of an entire company in the hands of a single person is a far too common occurrence in the crypto industry and a worrying trend that ought to be stopped.
Missing CEO puts the entire crypto exchange in jeopardy
The crypto industry was shaken earlier this week when news about a possible exit scam began surfacing on social media. Triggered by withdrawal problems that stemmed from last week, users of Chinese cryptocurrency exchange IDAX quickly began to suspect foul play was at hand.
The company addressed the issue, saying withdrawals were in a “congested state,” but panic quickly spread and led to the depreciation of IDAX’s native cryptocurrency.
However, days later the exchange issued an urgent announcement, saying that its CEO has “gone missing” without explanation and has not had contact with anyone at IDAX since Nov. 26. The company wrote in its blog post:
“IDAX Global is drawing up an emergency plan about platform services including deposit/withdrawal service so it is recommended that you refrain from using our all platform services.”
The company didn’t disclose the name of the CEO or whether he had access to the company’s cold wallet.
While many reports focused on uncovering the connection between China’s recent crypto exchange ban and the disappearance of IDAx’s chief executive, the situation is much more indicative of a bigger problem in the crypto industry.
Not your keys, not your coins
Decentralization has always been the basic principle behind cryptocurrencies. It has not, however, been the principle frequently implemented by cryptocurrency exchanges. The lack of decentralization in these companies has often brought serious harm not just to its clients, but to the industry as a whole.
As cryptocurrencies become more mainstream, the demand for “safe” and regulated companies increases. Most crypto users enter the market through large, well-known exchanges, risking their security and the security of their funds for a friendly user interface.
With recognizable faces at the heads of these companies and a business model that resembles that of a traditional financial institution, these exchanges are extremely popular with crypto users. However, few are aware of the risks associated with such centralized entities.
Take the example of QuadrigaCX, the largest cryptocurrency exchange in Canada, whose extremely centralized structure led to the loss of over $150 million in investor funds and the ultimate closure of the exchange. The company’s CEO, Gerald Cotten, was the only one with access to the cold wallet containing the majority of its funds.
The 30-year old entrepreneur died in December last year and left the company and its 115,000 users scrambling to recover the lost funds.
To avoid pointing any more fingers, almost every cryptocurrency exchange is guilty of centralization. While “not your keys, not your coins” might be an overused saying in crypto, it’s nonetheless a true one. Though it could take years before the industry manages to redistribute the power held by a handful of industry players, let this be a reminder to take the safety of your funds seriously.
