Key takeaways

Unregulated crypto platforms carry significant risks, as evidenced by major hacks and scams, such as the $238 million phishing attack in August 2024.

Key warning signs of unsafe platforms include lack of licensing, anonymous management, poor customer support, unrealistic promises and a lack of Know Your Customer (KYC) requirements. These indicators can help identify potential scams.

Prioritize platforms that implement security measures like two-factor authentication (2FA), SSL encryption, cold storage and regular audits to safeguard your investments.

Conduct thorough research on any platform before investing. Being cautious and staying informed helps investors avoid fraud while safely navigating the cryptocurrency landscape.

The world of cryptocurrency is fast-paced, exciting and full of potential, but it also comes with serious risks. According to the blockchain security firm PeckShield, hackers stole over $313 million in August 2024. In one phishing attack, a crypto whale lost 4,000 Bitcoin worth $238 million. Incidents like these highlight the risks of unregulated crypto exchanges. Whether through phishing scams or code loopholes in decentralized finance (DeFi) products, you can lose a lot if you’re not careful.

Platforms that aren’t regulated pose even bigger risks, as you’re on your own when it comes to recovering stolen funds or dealing with fraud. This makes it crucial for investors to spot and avoid risky, unregulated exchanges. It’s not just about avoiding scams but protecting your financial future.

The July 2024 WazirX hack, which led to $234.9 million in losses, reminds investors that ignoring these risks can be costly. Investors are realizing that failing to do proper research can lead to disaster.

This article will help you understand the differences between legitimate, regulated crypto platforms and risky, unregulated exchanges. Knowing the red flags can protect your investments from scams and set you up for long-term success in the crypto market.

How do unregulated crypto exchanges grow?

Since Bitcoin’s launch in 2009, the crypto world has grown rapidly, but regulations have struggled to keep up, as often happens with new technology. This unregulated environment allowed for innovation but also made room for fraudulent projects alongside genuine ones.

Blockchain technology advanced quickly, sparking interest in new financial products like non-fungible tokens (NFTs) and DeFi platforms. With no regulatory barriers, developers could freely experiment and bring new ideas to market. Many retail investors didn’t fully understand the risks and were drawn in by the potential for big gains. Meanwhile, criminals like scammers and money launderers also took advantage of the anonymity offered by blockchain technology, helping the ecosystem grow behind the scenes.

In this unregulated world, concerns about market manipulation, investor protection and security took a back seat to the pursuit of fast wealth. Unregulated platforms often attract traders with promises of lower fees, anonymous trading and easy sign-ups, while regulated platforms tend to require more paperwork and have higher fees due to compliance.

Did you know? Crypto exchange thefts declined in 2023, with stolen funds dropping from $3.7 billion in 2022 to $1.7 billion. However, the value of these thefts has increased in 2024 due to rising digital asset prices.

How to spot unregulated crypto platforms

So, what should you look out for when evaluating a platform? Here are major red flags that suggest a platform may be unregulated and unsafe:

Lack of licensing and regulation: One of the clearest warning signs of unregulated crypto platforms is the absence of proper licensing or permissions. Legitimate crypto platforms are usually regulated by financial authorities to ensure they follow legal standards and protect consumers. Without regulation, the risk of fraud is higher.

Anonymous management: If a platform doesn’t reveal who’s in charge, it’s a serious red flag. Trustworthy platforms provide clear information about their founders and leadership. Anonymous management can be a way to avoid accountability. For instance, Bitconnect, which collapsed in 2018, had unknown developers with the pseudonym “Satao Nakamoto.” The developers later vanished with millions of dollars from investors.

Poor or nonexistent customer support: How a platform handles customer support speaks volumes about its reliability. Reputable platforms usually offer multiple contact methods, like live chat, email or phone support. It is a red flag if the platform is slow to respond or has no support.

Promises of unrealistic returns: If a platform promises incredibly high returns quickly, it’s probably too good to be true. Scammers often lure people in with these promises and disappear with the money. For instance, PlusToken was a project that promised investors 10–30% returns but disappeared later.

Pyramid schemes disguised as referral programs: Pyramid schemes rely on an endless stream of new users, and when that stream dries up, the whole thing collapses, leaving the last people to join with big losses. Ruja Ignatova launched a pyramid scheme, OneCoin, and scammed victims out of more than $4 billion.

• [ ] No KYC requirements: Legitimate platforms require KYC verification to prevent fraud. If a platform skips this step, chances are it could be hiding something. Moreover, without KYC, recovering your money will be much harder if things go wrong.
• [ ] Bad reviews: Check customer reviews and feedback online. Platforms with poor reviews or lots of complaints on forums like Reddit may have underlying issues that you should be wary of. Checking these reviews can provide insight into the experiences of other users and highlight potential problems with the platform.

Did you know? As of June 3, 2024, according to Glassnode, the amount of BTC held by exchanges has fallen to around 11.5%. This decline could be attributed to the United States Securities and Exchange Commission approving spot Bitcoin exchange-traded funds.

How to evaluate a crypto exchange’s security

When choosing a crypto platform, security should be a top priority. Here are some key security features to look for:

• [ ] Two-factor authentication: This adds an extra layer of security to your account. If a platform doesn’t offer 2FA or makes it hard to set up, it could be risky.
• [ ] SSL encryption: SSL encryption protects the data sent between your browser and the platform. Look for the padlock icon or “https://” at the start of the web address.
• [ ] Cold storage: Reputable platforms store most of their funds in cold storage, which is offline and less vulnerable to hacks. You can check with customer support or read the platform’s white paper to find out more.

• [ ] No insurance or audits: A lack of insurance and independent audits is another red flag. Trusted platforms often provide insurance against losses and are regularly audited by third-party firms to ensure they meet security standards.

How to avoid risky crypto platforms

The cryptocurrency space offers exciting opportunities. But if you are working on unregulated platforms, you have to gear up for significant risks. By staying informed, checking for key security features, and doing your due diligence, you can easily avoid the traps that many fall into.

Do adequate research before doing a transaction on any of such unregulated platforms. Make it a point to use crypto platforms you know you can trust and keep your crypto secure. With the right precautions, you can navigate the crypto world securely and enjoy its benefits without falling victim to scams or fraud.

Disclaimer：

1. This article is reprinted from [cointelegraph], All copyrights belong to the original author [Guneet Kaur]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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