Legal Protections Against Exchange Failures.

[SuperBitMan]

Bitcoin was something that was actually designed or made to allow users be their own bank, but yet a lot of people or users of bitcoin still choose to store their bitcoin on centralized exchanges for convenience purpose.
Over the years we have actually seen a lot of exchange collapse due to hacks, fraud, or poor management, leaving their customers with big financial losses.

In a lot of cases users or customers to this exchanges discover that they are treated as unsecured creditors during bankruptcy proceedings, which means they may only recover or get back only a small portion of their money or even nothing at all.

It is true that self custody is the only way to get true bitcoin security, so should users just accept responsibility for the risks of leaving bitcoin on an exchange or a should governments introduce stronger legal protections for exchange customers?

[_act_]

The best is to just have your coins on noncustodial wallet, but there are some people that are traders that do not like moving their coin on exchanges daily. They may even be trading and suddenly the hack occurred. Some exchanges have safu which I will prefer than exchanges that do not have it, although I do not trust the safu but I prefer it to the exchanges that have none. If the government can regulate the exchanges in a way that users coins will not be lost after hack which is not possible or users coins are protected by something like safu compulsorily, it will be better. But I guess this will close down many exchanges.

[Z-tight]

It is true that self custody is the only way to get true bitcoin security, so should users just accept responsibility for the risks of leaving bitcoin on an exchange or a should governments introduce stronger legal protections for exchange customers?

Centralized exhanges are already regulated by the authorities, and they comply with AML and CFT laws. But they cannot prevent the exchanges from falling victim to hackers. It is the services that would have to invest in robust security and hire the best hands to protect themselves, which many of them fail to do on multiple occasions.

As for storing your funds in a custodial service, you ought to know the risks before doing so and if you choose to still go ahead, then you should be accountable for your actions. You don't only face the risk of losing your money if the exchange is hacked or collapses, you can also lose your funds if the service decides to confiscate it for whatever reason they'll tell you!

[rat03gopoh]

Stronger protection = stricter verification + higher fees (services + taxes).
So what's the preference? The law will only protect those who truly meet the criteria. And in practice, services punish the wrong people. I doubt people will simply change their minds just because they read "stronger consumer protection."

[Z-tight]

Stronger protection = stricter verification + higher fees (services + taxes).

And none of this actually protects an exchange from hackers or exchange collapse. Stricter verification could limit illicit funds from passing through crypto exchanges, that is if the exchange is fully compliant, we have seen Binance do otherwise and had to answer for it. My point is, crypto regulations has its pros, but people should not wrongly believe that their funds are safe in a crypto exchange, because the service is compliant with law enforcement.

[MarryWithBTC]

It is true that self custody is the only way to get true bitcoin security, so should users just accept responsibility for the risks of leaving bitcoin on an exchange or a should governments introduce stronger legal protections for exchange customers?

Few years ago, the government was against bitcoin, such that we were praying that the government should adopt bitcoin. Now that the government have come by themselves and through the institutions, we started crying and wishing to have the status quo.

Op, have you forgotten that one of the purposes of bitcoin is for you to be your own bank without government excessive regulations? So, because of people who decides to leave their bitcoin on exchanges, you are proposing that we give government more power and strictness to monitor exchanges, users, excessive tax and jail everyone?

No, it hasn't gotten to that extent. There are law courts for every case and that is okay imho.

[zasad@]

It is true that self custody is the only way to get true bitcoin security, so should users just accept responsibility for the risks of leaving bitcoin on an exchange or a should governments introduce stronger legal protections for exchange customers?

"Nothing is as restrictive as the idea of ​​security."(c)

Buddy, stop. Whenever I hear the government talk about security or strict protection, it only means there will be more legal restrictions.

[Majestic-milf]

Bitcoin was something that was actually designed or made to allow users be their own bank, but yet a lot of people or users of bitcoin still choose to store their bitcoin on centralized exchanges for convenience purpose.
Over the years we have actually seen a lot of exchange collapse due to hacks, fraud, or poor management, leaving their customers with big financial losses.

In a lot of cases users or customers to this exchanges discover that they are treated as unsecured creditors during bankruptcy proceedings, which means they may only recover or get back only a small portion of their money or even nothing at all.

It is true that self custody is the only way to get true bitcoin security, so should users just accept responsibility for the risks of leaving bitcoin on an exchange or a should governments introduce stronger legal protections for exchange customers?

I wouldn't say the government's negligence or nonchalance to matters like this is proper but to me, it's as though they too are telling customers "you should be in charge of your coins" because keeping it in these exchanges is a risk in itself so if laws are put in place to curb these issues, more people will be too relaxed. Non custodial wallets are the safer option as that keeps you in charge and you call all the shots, no restrictions or too much hassle when you need your money.

[yhiaali3]

Self custody remains the only way to ensure the security of Bitcoin, so users should protect their assets themselves and not risk leaving their coins on centralized exchanges.

Regarding to the question of whether governments should provide stronger legal protection for the customers of these platforms, this is difficult because even with all the strict laws what can the exchange do in the event of hacking or bankruptcy? I mean if the platform no longer has sufficient assets to compensate those affected, What can regulations do for users in this case?exchange

[zasad@]

Bitcoin was something that was actually designed or made to allow users be their own bank, but yet a lot of people or users of bitcoin still choose to store their bitcoin on centralized exchanges for convenience purpose.
Over the years we have actually seen a lot of exchange collapse due to hacks, fraud, or poor management, leaving their customers with big financial losses.

In a lot of cases users or customers to this exchanges discover that they are treated as unsecured creditors during bankruptcy proceedings, which means they may only recover or get back only a small portion of their money or even nothing at all.

It is true that self custody is the only way to get true bitcoin security, so should users just accept responsibility for the risks of leaving bitcoin on an exchange or a should governments introduce stronger legal protections for exchange customers?

I'll add a few cents to your post.

There are very few traders in the world who need to keep their money on the exchange. But these people have VIP managers, accountants, and lawyers who provide the exchange with the necessary documents every year confirming that the trader is operating legally and paying taxes.
But 50-60% of exchange users aren't traders and simply keep their money there, like in a wallet. Exchanges often freeze users' funds and violate all freezing deadlines.

[Z-tight]

But 50-60% of exchange users aren't traders and simply keep their money there, like in a wallet. Exchanges often freeze users' funds and violate all freezing deadlines.

That's people handling their coins like they would do with their fiat currency. They view crypto exchanges like banks and so they would choose the convenience over anything else. Over here in bitcointalk, we understand the recommended method of holding our coins, but i am almost certain that so many users out there would see absolutely nothing wrong in using centralized exchanges like their own wallets, maybe until they are locked out of it.

[MarryWithBTC]

But 50-60% of exchange users aren't traders and simply keep their money there, like in a wallet. Exchanges often freeze users' funds and violate all freezing deadlines.

That's people handling their coins like they would do with their fiat currency. They view crypto exchanges like banks and so they would choose the convenience over anything else. Over here in bitcointalk, we understand the recommended method of holding our coins, but i am almost certain that so many users out there would see absolutely nothing wrong in using centralized exchanges like their own wallets, maybe until they are locked out of it.

Most times i do not blame them for using some exchanges, maybe the reputable ones as wallet. This is because some of these exchanges, like binance has lasted for so long and have a lot of security fund to cover people's losses.

Binance for instance has survived too many attacks, criticism and sanctions but yet still standing strong. I personally do not consider it so risky to leave a few hundred of dollars in binance or even thousands. Besides, there are individuals and institutions trading hundred thousands daily on binance.

I do not mean that such exchanges should serve as private wallets, but I mean I can leave coins there and still sleep well.

[zasad@]

But 50-60% of exchange users aren't traders and simply keep their money there, like in a wallet. Exchanges often freeze users' funds and violate all freezing deadlines.

That's people handling their coins like they would do with their fiat currency. They view crypto exchanges like banks and so they would choose the convenience over anything else. Over here in bitcointalk, we understand the recommended method of holding our coins, but i am almost certain that so many users out there would see absolutely nothing wrong in using centralized exchanges like their own wallets, maybe until they are locked out of it.

Most times i do not blame them for using some exchanges, maybe the reputable ones as wallet. This is because some of these exchanges, like binance has lasted for so long and have a lot of security fund to cover people's losses.

Binance for instance has survived too many attacks, criticism and sanctions but yet still standing strong. I personally do not consider it so risky to leave a few hundred of dollars in binance or even thousands. Besides, there are individuals and institutions trading hundred thousands daily on binance.

I do not mean that such exchanges should serve as private wallets, but I mean I can leave coins there and still sleep well.

I even agree that storing $3,000-4,000 on Binance is safe, as long as you're willing to go through the KYC procesdure/

A friend of mine did the same thing, then sent $30,000 to the exchange, made some money, and was blocked before withdrawing.
The most interesting thing about this situation is that the exchange had issues with his previous deposits, but they didn't block his account when it held $3,000.

Therefore, storing coins on the exchange is a big trap.

[MarryWithBTC]

I even agree that storing $3,000-4,000 on Binance is safe, as long as you're willing to go through the KYC procesdure/

A friend of mine did the same thing, then sent $30,000 to the exchange, made some money, and was blocked before withdrawing.
The most interesting thing about this situation is that the exchange had issues with his previous deposits, but they didn't block his account when it held $3,000.

Therefore, storing coins on the exchange is a big trap.

I get the risk clearer now. It is not that a reputable exchange will wind up the next day, exit scam or bankrupt. There are other risks such as the ones you mentioned;

KYC related issues; 
Funds origin issues;
etc.

At times a user can be innocently held for a sin they did not commit.

[Z-tight]

I get the risk clearer now. It is not that a reputable exchange will wind up the next day, exit scam or bankrupt. There are other risks such as the ones you mentioned;

Glad you get it now. The risk is not only that the exchange could go bankrupt and collapse, even though that is a valid risk. FTX customers  were sleeping fine, not knowing the exchange was on the brink of bankruptcy due to misappropriation of funds.

There are also other valid risks when you deposit funds into any custodial service, you can't be certain you'd be allowed to withdraw that coins when you want to. And so it makes it foolish to use custodial services like they are your own wallet, you never know what can happen. Even if it is a few hundred dollars, as long as i am not trading with those funds, it costs me nothing to put it completely under my control.