As the world of cryptocurrency keeps surging to new heights, new trends are also rising. Some are positive while some are harmful to this space. For both newbies and existing buyers and sellers of crypto assets, it is important to carry out transactions with platforms that are trusted so you don't fall victim to the schemes out there.
Nested exchanges is one of those platforms which brings about the negativity on the growth of the crypto exchanges. Nested exchanges are being utilized by money launderers all over the world to provide crypto trading services via an account on an existing host exchange.
It operates secretly from the host exchange and there's no guarantee that funds are safe when you trade with a nested exchange. Users all over the world are actively using it because it offers instant trading with little or no sign-up requirement.
Patience is key in the world of cryptocurrencies which is why when signing up for an account, it is important to go through the AML and KYC process especially if you are using a centralized exchange. The reason for AML and KYC is to ensure your crypto funds are safe but with nested exchanges, your crypto funds' safety cannot be guaranteed.
Let's explore further what nested exchanges are and how they work.
What is a Nested Exchange?
A nested exchange operates in a manner whereby a person creates an account or multiple accounts with a trusted and regulated exchange and then uses the account to offer a third-party trading activity.
They are also referred to as instant exchanges. This exchange acts as a bridge between users and other service providers to offer trading services on an exchange to an account without the exchange's notice.
The risks associated with this kind of exchange are numerous and they should be avoided by users. Because it rarely requires any means of identification or KYC/AML, it can be easily used by scammers or fraudsters to exploit innocent users who are not aware of its dangers. Some of these nested exchanges buy and sell crypto assets in person with cash payments.
Engaging with a nested exchange means you are putting your funds in the hands of an account you are not familiar with hence, no security guarantees you will get your funds back.
Any exchange that allows users to trade instantly without any limits should be questioned and as such, proper investigation should be carried out to check the source of funds using a blockchain explorer.
How Nested Exchanges Work
Because of how impatient a user can get having to go through the KYC and AML process, they often result in using nested exchanges. The essence of decentralization is indeed to bring anonymity but not without security ensuring users' safety of their crypto assets.
Here's an example of how nested exchanges work:
It is quite simple and fast. Let’s say a buyer wants to exchange their USDT for Ethereum, all they need to do is make a deposit of the amount of USDT that they want to exchange, the nested exchange takes it up from there and completes the transaction on their account on a trusted exchange. Once the transaction is completed the buyer gets his or her converted funds hence, the transaction is completed instantly.
This can be tempting because the buyer doesn't need any form of registration or KYC to exchange one crypto asset for another therefore, they are comfortable using this means. It becomes easy for any form of money laundering activity to happen without any trace.
Dangers of Using a Nested Exchange
Carrying out transactions through a nested exchange brings back one of the striking issues confronting the traditional banking system in the cryptocurrency space which is money laundering. Money laundering involves a financial transaction scheme where launderers change money that is gotten through illegal means such as drug trafficking, crimes, and theft into a legitimate business to conceal the source, destination, and identity of the illegally obtained funds.
No doubt, it is easy for nested exchanges to hide under the guise of cryptocurrency because it's still a growing space where everyone is allowed to participate. This act can bring down a centralized crypto exchange if any illicit transaction is traced through them.
Here are a few highlighted dangers of using a Nested exchange
They operate as an independent body without any regulatory system hence, there’s no guarantee that your funds are safe;
All your funds can get missing if there’s any trace found on the nested exchange for illegal transactions;
Nested exchanges can be used to fund terrorism and all forms of crime;
You could get arrested and face law enforcement agencies if you are involved with nested exchanges supporting crimes.
How to Spot a Nested Exchange
Without the use of nested exchanges, centralized exchanges will smoothly thrive in the cryptocurrency space with less risk associated. However, newbies can easily fall victim to nested exchanges, so we will be highlighting some of them.
They do not have transaction limits and they have little or no sign-up requirement
There’s little or no AML or KYC requirement on nested exchanges
They operate secretly under a regulated/trusted crypto exchange without their knowledge
Their rates are not regulated hence, they can especially exploit traders on their platform
We believe users can now easily identify nested exchanges. Without going through a trusted crypto exchange, it is easy to get scammed. Don’t be deceived by their offers to access all their features without any means of verification because this kind of platform may turn out to be suspicious.
Ensure to investigate by using a blockchain explorer to verify where your crypto is coming from. Users are advised to stick to trusted crypto exchanges to prevent funds from being siphoned or stolen. Finally, if you notice any external account you are not familiar with, don't proceed with such a transaction. Stay SAFU.