What Do Centralized Exchanges Consider as Taint?

[Pmalek]

The exchange wouldn't know that the coins have changed hands here.

This is one of the reasons why I argue that taint is completely meaningless. As soon as coins are involved in a transaction - any transaction - then they could have changed hands in a perfectly legal transaction such as the purchase of some goods from a vendor or a peer to peer trade.

Of course it makes no sense. Even a direct transaction between a gambling platform and a centralized exchange can involve two different people and doesn't mean that the same person owns both addresses. It's quite possible that person A has sold Bitcoin to person B, and person A made that transaction from a casino they use. Person B received the coins in their exchange account on a CEX. Accusing person B of illegal activities or having tainted coins is out of order.

If the exchange has good reason to believe that you are depositing money from certain prohibited sources (as outlined in their agreement with you), they will reject the deposit and/or close your account.

Those Terms and Conditions are written in such a way that gives them the right to freeze or block your accounts for whatever reasons they think are necessary. After that, they can request from you whatever proof they deem necessary, including KYC. You have a choice to play ball and do what they say, or give them your coins. A third choice is never depositing there in the first place.    

[PrimeNumber7]

Exchanges are not going to necessarily to look at "taint" percentages (which are often wildly inaccurate). If the exchange has good reason to believe that you are depositing money from certain prohibited sources (as outlined in their agreement with you), they will reject the deposit and/or close your account.
...

I don´t think that they will reject the deposit. At most exchanges cryptocurrency deposits are fully automated.
Therefore the funds will be credited to your exchange account even if they are tainted.

It is more likely that the account will get frozen after the deposit or they will at least ask you
to prove that you obtained the cryptocurrency from a legitimate source.

The process for checking for deposits from prohibited sources is also largely automated.

Exchanges may seek additional information from the customer if it appears a deposit is from a prohibited source.

It is unlikely that exchanges have any legal basis to freeze coin indefinitely without some kind of court order.

The exchange wouldn't know that the coins have changed hands here.

This is one of the reasons why I argue that taint is completely meaningless. As soon as coins are involved in a transaction - any transaction - then they could have changed hands in a perfectly legal transaction such as the purchase of some goods from a vendor or a peer to peer trade.

Of course it makes no sense. Even a direct transaction between a gambling platform and a centralized exchange can involve two different people and doesn't mean that the same person owns both addresses. It's quite possible that person A has sold Bitcoin to person B, and person A made that transaction from a casino they use. Person B received the coins in their exchange account on a CEX. Accusing person B of illegal activities or having tainted coins is out of order.

If I am not mistaken, most exchanges have TOS that direct people to only deposit their own coin onto their exchange account.

If the exchange has good reason to believe that you are depositing money from certain prohibited sources (as outlined in their agreement with you), they will reject the deposit and/or close your account.

Those Terms and Conditions are written in such a way that gives them the right to freeze or block your accounts for whatever reasons they think are necessary. After that, they can request from you whatever proof they deem necessary, including KYC. You have a choice to play ball and do what they say, or give them your coins. A third choice is never depositing there in the first place.     

I think it is probably a good idea to assume you will need to provide KYC to any exchange you deposit coin onto.

I would also point out that it is very common for various crypto businesses to ask for KYC when they have what they believe to be stolen property. Multiple reputable casinos have done this in the past to those they have evidence of substantial cheating/hacking.

Regardless of what is in any TOS, there is no legal basis for an exchange to "freeze" an account indefinitely without a court order. If an exchange were to do this, the customer should take the exchange to court.

[o_e_l_e_o]

If I am not mistaken, most exchanges have TOS that direct people to only deposit their own coin onto their exchange account.

And if I have sold you some good, service, altcoin, whatever, and you choose to pay me directly from your casino account, then legally speaking those coins you are sending me as payment are mine. And even if you send from your casino account to my own wallet, and then I send from my own wallet to an exchange, many exchanges will still take issue with that. As I said above, as soon as any transaction has taken place then you can no longer say that those coins have not changed hands, which makes taint analysis pointless.

Regardless of what is in any TOS, there is no legal basis for an exchange to "freeze" an account indefinitely without a court order. If an exchange were to do this, the customer should take the exchange to court.

Depends on your jurisdiction. If some government forces some hardline KYC requirements, then your account will absolutely be frozen unless you comply with them. And as I said in another thread:

Maybe you know otherwise, but I am unaware of literally any successful cases by an individual user against a major exchange which locked their account or seized their coins.

[Pmalek]

If I am not mistaken, most exchanges have TOS that direct people to only deposit their own coin onto their exchange account.

And if I have sold you some good, service, altcoin, whatever, and you choose to pay me directly from your casino account, then legally speaking those coins you are sending me as payment are mine. And even if you send from your casino account to my own wallet, and then I send from my own wallet to an exchange, many exchanges will still take issue with that. As I said above, as soon as any transaction has taken place then you can no longer say that those coins have not changed hands, which makes taint analysis pointless.

Imagine all those signature campaign participants who receive their payments directly in their casino accounts on a weekly basis. There are such campaigns. I remember when I was in the old FJ campaign. The weekly rates were always paid out to your casino account. According to Gemini or Binance.US, those coins are tainted, dirty, and worthless, and will probably by frozen or confiscated if I try to deposit them on those sites. Yet, I did nothing wrong. I provided a service and was paid for it.

[Oshosondy]

Imagine all those signature campaign participants who receive their payments directly in their casino accounts on a weekly basis. There are such campaigns. I remember when I was in the old FJ campaign. The weekly rates were always paid out to your casino account. According to Gemini or Binance.US, those coins are tainted, dirty, and worthless, and will probably by frozen or confiscated if I try to deposit them on those sites. Yet, I did nothing wrong. I provided a service and was paid for it.

I can remember this also applied to Coinbase, it is one of the reasons to read the terms and conditions of any custodial wallet or exchange that you are using, you should know that the exchanges and wallet have the control and not you, they can because of your coins came from gambling site to freeze your coins, send it to noncustododial wallet and you are good or use a centralized exchange that accept coins from gambling sites. But that is not what tainted coins are if the gambling site are legal and follow government rules and regulations. Tainted coins are coins that are determined to have been used for illegal purpose before.

[Pmalek]

I can remember this also applied to Coinbase...

Coinbase never provided any information about what they consider to be taint when I asked them, but considering they are a US-based centralized exchange, I can only assume they have similar "rules" as does Gemini and Binance.US. If the source of the Bitcoin is a gambling platform, you will probably experience some problems depositing them into a Coinbase account. Off-shore and out-of-state gambling is illegal in certain States in the US, but that's just part of the problem.

But that is not what tainted coins are if the gambling site are legal and follow government rules and regulations. Tainted coins are coins that are determined to have been used for illegal purpose before.

Coins used in both legal and illegal ventures can end up in your wallet without you having done anything wrong. The same is true for fiat money. Imagine if someone were to check the history of your €50 bill you take out of your wallet when you are paying for gas and instead of getting into your car, you are called into the owner's office with police to ask questions who you are and where you got that paper bill from?

[PrimeNumber7]

If I am not mistaken, most exchanges have TOS that direct people to only deposit their own coin onto their exchange account.

And if I have sold you some good, service, altcoin, whatever, and you choose to pay me directly from your casino account, then legally speaking those coins you are sending me as payment are mine. And even if you send from your casino account to my own wallet, and then I send from my own wallet to an exchange, many exchanges will still take issue with that. As I said above, as soon as any transaction has taken place then you can no longer say that those coins have not changed hands, which makes taint analysis pointless.

When you withdraw from a casino account, or any other online account, you are exchanging an IOU for coin.

Regardless of what is in any TOS, there is no legal basis for an exchange to "freeze" an account indefinitely without a court order. If an exchange were to do this, the customer should take the exchange to court.

Depends on your jurisdiction. If some government forces some hardline KYC requirements, then your account will absolutely be frozen unless you comply with them. And as I said in another thread:

Maybe you know otherwise, but I am unaware of literally any successful cases by an individual user against a major exchange which locked their account or seized their coins.

The judiciary will correct injustices against complaining parties and will do so in a neutral manner. Anyone can complain online, and tell a slanted version of their side of the story, but if courts are not granting judgements against exchanges for seizing coin, one might reasonably conclude that exchanges are not seizing property that lawfully belongs to their customers.

[o_e_l_e_o]

Anyone can complain online, and tell a slanted version of their side of the story, but if courts are not granting judgements against exchanges for seizing coin, one might reasonably conclude that exchanges are not seizing property that lawfully belongs to their customers.

One might also reasonably conclude that a multinational exchange with billions in the bank have a better legal team than someone who has had 0.1 bitcoin stolen from them.

There is also the argument that nothing you hold on an exchange is legally yours in the first place. As we saw in the recent Coinbase filings with the SEC, anything you deposit to Coinbase is legally theirs, and you are an "unsecured creditor".

[Pmalek]

There is also the argument that nothing you hold on an exchange is legally yours in the first place. As we saw in the recent Coinbase filings with the SEC, anything you deposit to Coinbase is legally theirs, and you are an "unsecured creditor".

Are you talking about the new SEC requirement where cryptocurrency exchanges are required to warn investors about the dangers of storing crypto in their accounts? There is a part that says that in case of bankruptcy, anything held with an exchange is considered to be the possession of that exchange. It seems like it was always like that, the only difference now is that SEC wants the platforms to make that absolutely clear to their users through their TOS.     

[o_e_l_e_o]

There is a part that says that in case of bankruptcy, anything held with an exchange is considered to be the possession of that exchange.

Exactly this:

Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.

Anything you deposit to Coinbase (or any centralized exchange, for that matter) are legally considered to be the property of that exchange. If Coinbase mess up, then your coins (or more accurately, Coinbase's coins which you think are yours) will be used to pay off their secured creditors, which will be the large financial institutions they partner with. Average users will get nothing.

[PrimeNumber7]

Anyone can complain online, and tell a slanted version of their side of the story, but if courts are not granting judgements against exchanges for seizing coin, one might reasonably conclude that exchanges are not seizing property that lawfully belongs to their customers.

One might also reasonably conclude that a multinational exchange with billions in the bank have a better legal team than someone who has had 0.1 bitcoin stolen from them.

There is also the argument that nothing you hold on an exchange is legally yours in the first place. As we saw in the recent Coinbase filings with the SEC, anything you deposit to Coinbase is legally theirs, and you are an "unsecured creditor".

A good lawyer/legal team will only help at the margins. If an exchange has a loosing case, a competent legal team will tell the exchange to return the money/coin.

I also don't think the fact that exchange customers being unsecured creditors of said exchange is anything new. This is exactly what happened when Gox failed years ago.

[o_e_l_e_o]

A good lawyer/legal team will only help at the margins. If an exchange has a loosing case, a competent legal team will tell the exchange to return the money/coin.

And not to pick on any person or country in particular, but how do you think a citizen of a third world African country (for example) with less than $1000 to their name is going to fare trying to sue Coinbase, even if they have a winning case?

I also don't think the fact that exchange customers being unsecured creditors of said exchange is anything new. This is exactly what happened when Gox failed years ago.

Yes, but it is helpful to see it in writing, especially when exchanges keep pushing their "Funds are safu" and "You deposits are insured" and other such nonsense to fool people in to thinking they aren't putting everything at risk by deposit their coins to such exchanges.

[Pmalek]

Yes, but it is helpful to see it in writing...

It is, but I also don't think it's going to make much of a difference. Most people aren't really reading the Terms and Conditions anyways. Writing and talking about it on crypto news outlets, social media, and forums like this one will draw more attention to the problem. People aren't concerned with house fires until their kitchen appliances go up in flames. When that happens, it's already too late.

[PrimeNumber7]

Sorry, I just saw this post due to Pmalek's bump.

A good lawyer/legal team will only help at the margins. If an exchange has a loosing case, a competent legal team will tell the exchange to return the money/coin.

And not to pick on any person or country in particular, but how do you think a citizen of a third world African country (for example) with less than $1000 to their name is going to fare trying to sue Coinbase, even if they have a winning case?

Probably not very high, although if Coinbase were to do this on any kind of regular basis, I am sure that there will be a number of lawyers willing to accept their case Pro Bono, and lawyers may be willing to accept the case Pro Bono even if it is an isolated incident. I think the risk to Coinbase loosing a case when they took $1000 is more reputational than anything. If they were to lose this type of case, they would have trouble attracting and retaining customers.

I also don't think the fact that exchange customers being unsecured creditors of said exchange is anything new. This is exactly what happened when Gox failed years ago.

Yes, but it is helpful to see it in writing, especially when exchanges keep pushing their "Funds are safu" and "You deposits are insured" and other such nonsense to fool people in to thinking they aren't putting everything at risk by deposit their coins to such exchanges.

The relationship between exchanges and their customers should be more clear. I suspect exchanges haven't done this in the past because of the hysteria surrounding Coinbase making this disclosure.

The "insurance" claims are often not much more than marketing gimmicks, and often after reading the fine print, the insurance coverage is often very narrow, and covers things that have not frequently ultimately resulted in exchange customers loosing their money.

[Pmalek]

The "insurance" claims are often not much more than marketing gimmicks, and often after reading the fine print, the insurance coverage is often very narrow, and covers things that have not frequently ultimately resulted in exchange customers loosing their money.

But even things that happen often, like losing money following a hacking incident of the exchange wouldn't require the service provider to refund their customers. They surely consider such events as events they can't influence and hence are not bound by the TOS agreement to compensate the damages to the clients.   

[o_e_l_e_o]

I think the risk to Coinbase loosing a case when they took $1000 is more reputational than anything. If they were to lose this type of case, they would have trouble attracting and retaining customers.

I think simply we fundamentally disagree on this point, which we have discussed before: https://bitcointalk.org/index.php?topic=5393592.msg60068274#msg60068274

Coinbase have done plenty of suspect, shady, and downright illegal things in the past, and yet continue to have no problem attracting and retaining customers. Everything from selling user data to insider trading, hiring human rights abusers to seizing customers' coins, attacking bitcoin itself to creating their own blockchain analysis subsidiary. The loss of a court case would add very little to that rap sheet, especially not a court case for only $1000. Most users simply wouldn't care.

[PrimeNumber7]

I think the risk to Coinbase loosing a case when they took $1000 is more reputational than anything. If they were to lose this type of case, they would have trouble attracting and retaining customers.

I think simply we fundamentally disagree on this point, which we have discussed before: https://bitcointalk.org/index.php?topic=5393592.msg60068274#msg60068274

I will write this without reading the post in question because I think it is unnecessary to read it in order to make this point, although I will append my post if I am wrong....

I think we disagree on many issues, but I always find your arguments to be articulate and well reasoned. Further, I find your arguments to be made in good faith, which is not something I can say about everyone on the forum. I have found that you are capable of engaging in debate with those who disagree with you. As a result of the above, I often respond to your posts. I hope that neither you, nor anyone else views my responses as any kind of flame war, or anything like that.

Coinbase have done plenty of suspect, shady, and downright illegal things in the past, and yet continue to have no problem attracting and retaining customers. Everything from selling user data to insider trading, hiring human rights abusers to seizing customers' coins, attacking bitcoin itself to creating their own blockchain analysis subsidiary. The loss of a court case would add very little to that rap sheet, especially not a court case for only $1000. Most users simply wouldn't care.

I think a lot of what you describe are failures to implement procedures/policies properly, to have proper controls, etc. I think if Coinbase had a procedure to intentionally confiscate property in small amounts for reasons they knew were invalid, they would have difficulty retaining customers.

I know you disagree with my conclusion, but I believe the reason there are no court cases whose resolution is to provide their customer with access to their funds that were frozen is because coinbase is not denying access to funds by their customers for reasons that are not consistent with the law. I think if this was not the case, there would be at least a handful of cases in which a competent lawyer would take the case on a pro-bono basis.

[o_e_l_e_o]

I think we disagree on many issues, but I always find your arguments to be articulate and well reasoned. Further, I find your arguments to be made in good faith, which is not something I can say about everyone on the forum. I have found that you are capable of engaging in debate with those who disagree with you. As a result of the above, I often respond to your posts. I hope that neither you, nor anyone else views my responses as any kind of flame war, or anything like that.

+1

I think a lot of what you describe are failures to implement procedures/policies properly, to have proper controls, etc. I think if Coinbase had a procedure to intentionally confiscate property in small amounts for reasons they knew were invalid, they would have difficulty retaining customers.

I don't think Coinbase are setting out to deliberately steal coins from their users, but there is absolutely no doubt that their poor procedures and controls to which you refer are having the outcome of users being deprived of their coins. You can go their subreddit or Twitter accounts and see post after post after post of people having accounts locked or restricted and coins frozen or seized and receiving absolutely no help from Coinbase Support or even an explanation, even after months of sending support tickets. I'm sure that as you mentioned above that a not-insignificant proportion of those users will be telling a slanted story or leaving out important details, but it certainly isn't all of them and Coinbase are certainly to blame in some situations.

I know you disagree with my conclusion, but I believe the reason there are no court cases whose resolution is to provide their customer with access to their funds that were frozen is because coinbase is not denying access to funds by their customers for reasons that are not consistent with the law. I think if this was not the case, there would be at least a handful of cases in which a competent lawyer would take the case on a pro-bono basis.

I think for the most part users simply do not have the time, money, or resources to pursue a lengthy legal challenge against a multi-national multi-billion dollar corporation, the cost of which in most cases will be more than the value of the coins they have lost.

[PrimeNumber7]

I think a lot of what you describe are failures to implement procedures/policies properly, to have proper controls, etc. I think if Coinbase had a procedure to intentionally confiscate property in small amounts for reasons they knew were invalid, they would have difficulty retaining customers.

I don't think Coinbase are setting out to deliberately steal coins from their users, but there is absolutely no doubt that their poor procedures and controls to which you refer are having the outcome of users being deprived of their coins. You can go their subreddit or Twitter accounts and see post after post after post of people having accounts locked or restricted and coins frozen or seized and receiving absolutely no help from Coinbase Support or even an explanation, even after months of sending support tickets. I'm sure that as you mentioned above that a not-insignificant proportion of those users will be telling a slanted story or leaving out important details, but it certainly isn't all of them and Coinbase are certainly to blame in some situations.

I am sure that Coinbase has had its growing pains over its years in existence. It is difficult to reliably determine how frequently these types of problems occur. It is trivial for someone to create multiple reddit accounts (or buy/hack them) and post arbitrary information. I also remember not long after bitfinex was hacked in 2016, they were subjected to many attacks on social media that appeared to be baseless -- I suspect the person/people who were behind the bitfinex hack were also behind these attacks. I don't think that all of the reports you describe regarding coinbase is baseless or that those writing them have ulterior motives, but I do think the number is greater than 0.

I know you disagree with my conclusion, but I believe the reason there are no court cases whose resolution is to provide their customer with access to their funds that were frozen is because coinbase is not denying access to funds by their customers for reasons that are not consistent with the law. I think if this was not the case, there would be at least a handful of cases in which a competent lawyer would take the case on a pro-bono basis.

I think for the most part users simply do not have the time, money, or resources to pursue a lengthy legal challenge against a multi-national multi-billion dollar corporation, the cost of which in most cases will be more than the value of the coins they have lost.

When someone wins a civil case, they often are awarded actual damages, plus attorney's fees. You are correct in saying that most users do not have the resources to pursue small amounts in court, and will just eat the losses, but the costs to coinbase if only a small number of customers win cases involving funds being seized that shouldn't be can get expensive quickly.

[goldrushed2]

From my experience these exchanges are now worse than banks. They literally want a photo print of your backside before you can really use their services. More KYC and AML procedure than the strictest banks because hey - its crypto. They all started out singing the tune of crypto and btc decentralised and private. But now its just crazy. Whats needed is like a swiss style crypto account or even just a company who just collects the ID etc like a bank and dont act all crazy like Kraken or Coinbase over large value clients asking for backside pictures. How any institutions do business is beyond me. And they block all your funds anytime you do something they dont like the smell of. Basically anything high value. And accepting any crypto from a friend to any exchange account is an automatic ban usually and hold of all funds. Bitstamp did that to me once over 150$ worth of XRP. I had no wallet so sent it there and wham. Had enough. Thats why these web 3 wallets seem good if you can just convert to USDC - but again you taking a risk in the stable coin. If you want convert to USD now and again we unfortunately tied to exchanges.
I for one am going to test a Web 3 wallet, then send to exchanges for buys or sells.