Lawyers for Centralized Exchanges - Federal Lawyer
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Lawyers for Centralized Exchanges

Dedicated Team in Centralized Exchanges

Do you need assistance for dealing with centralized exchanges for your crypto transactions? Do you operate an online crypto exchange that has recently attracted federal attention?

If so, then you need the services of a blockchain attorney. Centralized exchanges are becoming increasingly popular—which means that the federal government is closely watching their operations.

Further, using a centralized exchange may have some risks—mainly those that arise from giving custody of your assets to someone else. It can also be hard to know whether using centralized exchanges is good for your business. We are here to help.

At Oberheiden, P.C., we have a dedicated group of blockchain attorneys who have been tracing the development and evolution of blockchain technology as applied to centralized exchanges for years.

Our team understands the difficulty conforming business needs to a novel area of financial innovation—online crypto exchanges—and the possible consequences.

This is especially true as the federal government grows increasingly wary of crypto exchanges. Along with the risks faced by decentralized exchanges, centralized exchanges face additional risks under already-existing legislation because centralized exchanges also maintain custody of their customers’ funds.

For legal assistance on federal defense against allegations involving your use of centralized exchanges or to receive a legal opinion on the fit of centralized exchanges for your business, call or contact us online today for a free consultation and ask for our blockchain team.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Michael Koslow
Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

What are Centralized Exchanges?

Centralized exchanges (“CEXs”) are online platform that allows users to buy and sell various cryptocurrencies. These cryptocurrencies can be purchased or sold for fiat currencies such as the U.S. dollar or for other cryptocurrencies such as Bitcoin.

A core aspect of centralized exchanges is that they are operated by an entity that owns and controls it—thus, the “centralized” aspect. This third-party entity or intermediary facilitates the entire trading process for its customers.

Trades are generally facilitated by using what is called an order book—this is a collection of buy and sell orders by users that are executed by using special software programs.

Because centralized exchanges use third-party intermediaries to facilitate trading, they are seen as custodians over their customers’ funds. This “custody” responsibility extends from protecting digital assets to storing digital assets in wallets.

Using Centralized Exchanges

Centralized exchanges require users to complete various identity verification steps before making an account. This includes multiple identity verification procedures as well as checks for know your customer (KYC), anti-money laundering (AML), and counter terrorism financing (CFT) policies.

This can sometimes be lengthy but is required to comply with federal regulations that aim to prevent fraud and criminal activity.

As soon as the centralized exchange verifies your identity, the customer is notified that the verification stage is complete. The customer can now deposit funds into the exchange—typically by bank deposit, credit card transaction, or funding through other cryptocurrencies.

Once the account is funded in one of these ways, the customer can begin trading on the centralized exchange. Some centralized exchanges use hot wallets and others use cold wallets.

The Process and Services Offered by Centralized Exchanges

Centralized exchanges require users to sign up for an account and complete a complicated user verification process.

Most centralized exchanges are brokers—meaning that they generally keep insurance on funds that are kept in storage. The Federal Deposit Insurance Corporation (“FDIC”) also insures USD funds.

So what actually happens when a transaction is made on a centralized exchange? Technically speaking, there is no actual exchange of cryptocurrencies or fiat currencies.

When an individual deposits funds into the exchange, the exchange becomes the custodian of the funds and issues an “IOU” to the other party. All these IOUs are tracked by the centralized exchange and are not converted into actual currency unless the user withdraws the funds.

As the custodian of the users’ funds, the centralized exchange holds the private keys. This means that the centralized exchange is responsible for keeping your funds secure. If you lose your digital wallet or private keys, the centralized exchange still has your information and funds securely held for you.

And what can users do on centralized exchanges? Centralized exchanges allow users to buy and sell cryptocurrencies by (1) placing market orders that allow them to buy or sell cryptos at the market price right away or (2) placing limit orders which automatically buys or sells an asset when it reaches a specific price. This allows for ease in execution or automatic execution.

Regulating Centralized Exchanges

The regulation of centralized exchanges is unsettled. Most issues are handled at the state level and can differ from state to state.

That said, centralized exchanges must implement customer identity verification and KYC/AML policies, which are required at the federal level.

Further, because centralized exchanges often store customer funds and serve a custodial role, additional regulatory requirements may be imposed—both at the state and federal level.

As a result, centralized exchanges must comply with multiple regulatory regimes at multiple levels to remain compliant.

Examples of Centralized Exchanges

The most common centralized exchange today is probably Coinbase. As a centralized exchange, Coinbase monitors user transactions and maintains custody of customer funds.

Coinbase offers brokerage services to customers along with crypto trading flexibility, advanced trading options, and staking options. And because it acts as a broker, Coinbase charges fees to its customers.

The security of Coinbase is strong. It has implemented two-step verification, insurance, and FDIC-insurance for USD funds. Users on the exchange can buy, sell, exchange, send, receive, and withdraw funds. Coinbase has trading limits, but the amounts can differ depending on the user’s region and payment method.

Examples of other centralized cryptocurrency exchanges include Binance, Kraken, Bittrex, and Bitfinex. Advantages of using centralized exchanges over decentralized exchanges include the ability to earn rewards for holding crypto, staking crypto, learning about crypto and the ability to buy crypto with fiat currencies.

Disadvantages of centralized exchanges include high transaction fees (e.g., Coinbase has large fees compared to other centralized exchanges) and the fact that users have less control over the funds since their funds remain on the exchange under the custody of the centralized exchange.

Need Advice with Centralized Exchanges?

Centralized exchanges are popular platforms for trading, buying, and selling cryptocurrencies. While they give users many advanced trading features, centralized exchanges differ from decentralized exchanges in that they maintain custody over customer funds.

This basically gives centralized exchanges brokerage duties, which triggers several regulatory provisions—such as identity verification and KYC/AML policies.

Understand and keeping up with the ever-evolving crypto sphere for centralized exchanges can be daunting. Further, knowing whether using a centralized exchange is a good fit for your company can be just as complicated.

At Oberheiden, P.C., we can resolve these issues for you and your business. Our dedicated team of blockchain attorneys can advise you on the advantages and disadvantages of centralized exchanges.

We can also defend you against federal accusations involving centralized exchanges—whether you own the exchange or transacted on one.

Do not wait to get the legal assistance you need. Call or contact us today for a free consultation.

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