In brief
Parasitic cryptocurrency exchanges offer customers the service of trading cryptocurrencies through an account on another exchange. This exchange does not support direct trading. Instead, these exchanges act as a bridge between users and other service providers. This parasitic practice is often used in traditional banking to provide services that some banks cannot provide such as international transfers.
In the cryptocurrency space, parasitic exchanges often have lax KYC and AML processes, or even no processes at all. Cybercriminals often take advantage of this lack of compliance. Parasitic exchanges facilitate money laundering, fraud, and ransomware payments.
When you trade on a parasitic exchange, you are handing over the management of your assets to an untrustworthy party. These exchanges offer less security and less certainty than a centralized or decentralized exchange that ensures compliance. When trading on parasitic exchanges that violate the law, you may also face legal issues.
When you use an exchange, make sure it has appropriate KYC and AML checks. These processes often take many days. If the exchange allows you to trade almost instantly without any limits, you should look into it carefully. A legitimate exchange will not hide how transactions are made, and you can easily see the source of your funds on a blockchain explorer.
Introduce
When buying and selling cryptocurrency, you should trade on a trustworthy website. However, you need to patiently complete the KYC and AML anti-money laundering process to keep yourself safe. For this reason, some users choose to use exchanges that offer little to no registration vetting process, and are allowed to trade right away.
Of these, some may be legitimate decentralized exchanges, while others may be parasitic exchanges, specializing in handling stolen or illegally laundered funds. Your funds will never be guaranteed safe on a parasitic exchange. To ensure the safety of your cryptocurrency, you need to understand what parasitic exchanges are, how they work, and how to identify them.
What is parasitic activity?
Parasitic activity occurs when a financial service provider creates an account from another financial institution to use their services. Then, the account owner acts as a bridge and provides services to customers through the parasitic account. There are many reasons why this happens. For example: There are cases where a bank in one country will need to provide its banking services and ecosystem to a bank operating in another country, i.e. a correspondent bank.
Let's say a customer wants to transfer money to a bank account in Australia. Their bank may not be able to transfer funds, but it may use a correspondent bank to perform that service. The customer's bank will process the transfer request through a parasitic account with the correspondent bank. Agent banks must receive and conduct appraisals of the banks they cooperate with. Basically, agent banks do not work directly with customers so they need to trust the parasitic account holder.
What is a parasitic cryptocurrency exchange?
Parasitic cryptocurrency exchanges operate in a fairly simple manner. A legal entity or an individual creates an account on a licensed exchange. They then use this account to provide trading services to third parties through their parasitic accounts. These parasitic exchanges are sometimes called instant exchanges and often have multiple accounts on different exchanges.
Some exchanges may require verification documents, but others may require little or no verification. This makes them a popular choice among tricksters, fraudsters and ransomware users. Some parasitic exchanges also allow buying and selling cryptocurrency directly with cash.
What are the dangers of parasitic activity?
When it comes to traditional finance, one of the biggest problems is money laundering risk. Because agent banks only deal directly with base banks that work with customers, they cannot know for sure and exactly who they are dealing with. This is why parasitic activity requires increased due diligence checks on the underlying bank. Individuals or entire countries can be blacklisted and sanctions imposed. If a base bank fails to comply with these, the correspondent bank may find itself in a position to support illegal activities such as sanctions evasion or money laundering.
Since the cryptocurrency sector is still developing strict regulations, it is easy for parasitic exchanges to find ways to escape controls. A parasitic exchange can open an account on a major cryptocurrency exchange, and these major exchanges are not easily known.
What dangers do parasitic cryptocurrency exchanges pose?
When you use a parasitic cryptocurrency exchange, this action does not only affect centralized exchanges. You and your money are also in danger for a number of reasons:
1. Your deposits are less secure than with a licensed exchange.
2. You may be supporting illegal activities that fund crime and terrorism.
3. Regulators can close the exchange, causing you to lose your crypto or other funds.
4. You may face legal consequences from law enforcement agencies if you knowingly cooperate with an exchange that is involved in illegal activity.
The best way to avoid these is to not use parasitic cryptocurrency exchanges. Detecting them can be quite difficult as identifying them is not easy. Follow our tips below to best protect yourself.
What is the difference between a parasitic exchange and a decentralized exchange?
First, a parasitic exchange and a decentralized exchange are quite similar. Decentralized exchanges do not require KYC and parasitic exchanges also only apply lax or even non-existent KYC processes. However, the way transactions are processed on these two exchanges is very different. A decentralized exchange would connect buyers directly to sellers or even use liquidity pools. This exchange will never regulate traded cryptocurrencies. Instead, smart contracts handle this process. However, a parasitic exchange will manage your cryptocurrency and use the services of other exchanges.
Suex parasitic exchange incident
Let's look at a real-life example. On September 21, 2021, the Office of Foreign Assets Control (OFAC) sanctioned the cryptocurrency exchange Suex, an exchange founded in the Czech Republic and operating in Russia. Suex OTC has provided parasitic cryptocurrency exchange services on Binance and other major exchanges to serve its customers. Suex does little to no KYC, and even offers a direct cash exchange for cryptocurrency.
According to research by Chainalysis, Suex has helped launder large amounts of money from ransomware attacks and hacks. Binance proactively disabled several accounts linked to Suex, and OFAC blacklisted nearly 30 Bitcoin, Tether, and Ethereum wallets. Binance also stopped working with Chatex, a crypto bank that reportedly had ties to Suex. Since then, Chatex has faced related sanctions from OFAC. Currently, anyone trading with Suex is at legal risk, and they have taken down their website following OFAC's decision
How to detect a parasitic exchange?
Parasitic exchanges often do not clearly represent themselves as a parasitic exchange. To keep yourself and your funds safe, you can identify a parasitic exchange by checking the following:
1. Parasitic exchanges typically require little or no KYC or AML checks. If registration on an exchange is almost instant without limitations, you should pay attention.
2. The interface does not clearly display where the transaction takes place.
3. The exchange does not have a clear statement that it is supporting the execution of transactions. A legitimate exchange will clearly state when trading takes place directly on its platform, and not through a parasitic account.
4. This exchange synthesizes many exchange rates that you can choose from. This means that this exchange is using parasitic accounts on many different exchanges.
5. If you suspect that you have used a parasitic exchange, try to trace your cryptocurrency on the blockchain with a blockchain explorer. You can see it comes from a wallet linked to another exchange.
summary
Buying bitcoin, BNB and other digital currencies on licensed cryptocurrency exchanges like Binance is the safe solution. While initial registration may take some time, proper KYC and AML processes will ensure your safety. You should evaluate an exchange as you would any financial institution, don't forget to do your due diligence before using it.