Résumé
An nested cryptocurrency exchange offers its clients trading services through an account of another exchange. It therefore does not facilitate trading itself. Rather, it should be seen as a gateway between users and other service providers. Nesting is commonly used in traditional banks to provide services (such as international transfers) that they do not allow by default.
In the cryptosphere, nested exchanges are often lax on KYC and AML processes. This lack of compliance is therefore often exploited by cybercriminals. Nested exchanges therefore support money laundering, scammers and ransomware payments.
When you trade on an nested exchange, you give it access to manage your assets. Unfortunately, these exchanges offer less security and guarantees than a centralized or decentralized exchange that meets standards. You may also find yourself facing legal issues depending on which nested exchange you use.
When using an exchange, make sure it complies with KYC and AML standards. This compliance process takes a few days. So, when an exchange allows you to carry out transactions almost instantly and without limits and all without having verified you, distrust is required. A legitimate exchange will never hide the manner of execution of the trades made and you can easily consult the source of your funds via a blockchain explorer.
Introduction
When buying and selling cryptocurrencies, it is essential to use a trusted website. But indeed, you must be patient while your KYC and AML checks are carried out. Remember that these are also there to protect you. This impatience leads some users to use exchanges that require little or no verification.
While some will be perfectly legitimate decentralized exchanges, others will be nested exchanges using dirty money. The security of your funds is never guaranteed with a nested exchange. To keep your cryptocurrencies safe, it's important to understand what nested exchanges are, what they do, and how you can recognize them.
What is nesting?
Nesting occurs when a financial service provider creates an account with another financial institution for the purpose of using its services. The account holder then acts as a gateway, offering services to its customers through the nested account. This happens for many reasons. For example, a bank in one country will provide its banking services and ecosystem to a bank operating in another country known as correspondent banking.
Imagine a customer wanting to transfer money to a bank account in Australia. This customer's bank is unable to make the transfer, but can use a banking correspondent to transfer the funds. This customer's bank will process the transfer request via its nested account with the banking correspondent. Correspondent banking must exercise due care and diligence with regard to the bank with which they work. The banking correspondent mainly serving customers she does not know, must trust the holder of the nested account.
What is an nested cryptocurrency exchange?
A nested cryptocurrency exchange works quite simply. An entity or person creates an account with a regulated exchange. She then uses this account to offer trading services to third parties through her nested account. These nested exchanges are sometimes known as instant exchanges and often have multiple accounts on different exchanges.
Some may require identification documents while others require nothing at all. These are therefore very popular with scammers, fraudsters and ransomware users. Some nested exchanges even allow buying and selling of cryptocurrencies in person with cash.
What are the risks of nesting?
In traditional finance, one of the main problems is the risk of money laundering. Since the correspondent bank only deals directly with the underlying bank, he does not know with whom he is dealing. This is why nesting requires enhanced due diligence from the underlying bank. Individuals or entire countries can be blacklisted and subject to sanctions. If an underlying bank fails to follow these rules, the responding bank may end up supporting illegal activities, such as sanctions avoidance or money laundering.
With the cryptocurrency industry busy establishing robust regulations, it is easy for nested exchanges to operate under the radar. A nested exchange can very easily open an account on a reputable cryptocurrency exchange without the exchange knowing.
What are the dangers of an embedded cryptocurrency exchange?
When you use an nested cryptocurrency exchange, it doesn't just hurt centralized exchanges. You and your funds are also at risk for several reasons:
1. Your deposits have fewer security guarantees than with a regulated exchange.
2. You may support illegal activities that finance crime and terrorism.
3. Regulatory authorities may shut down the exchange, resulting in the loss of your funds.
4. You may face legal repercussions from law enforcement if you knowingly work with an exchange involved in illicit activity.
The best way to avoid these problems is to not use nested cryptocurrency exchanges. But it is true that spotting them is not always easy. This is why we are going to present some tips to help you spot them.
What is the difference between an nested exchange and a decentralized exchange?
At first glance, nested exchanges and decentralized exchanges seem similar. Decentralized exchanges do not require KYC processes and nested exchanges may have lax KYC processes or none at all. However, the way they process transactions is different. A decentralized exchange will directly connect buyers with sellers or even use liquidity pools. The exchange will never take custody of traded cryptocurrencies. In fact, the process is managed by smart contracts. On the other hand, a nested exchange will directly take care of the custody of your cryptocurrencies and will use the services of another exchange.
The Suex nested exchange incident
Let's take a concrete example. On September 21, 2021, the Office of Foreign Assets Control (OFAC) sanctioned the cryptocurrency exchange Suex, based in the Czech Republic and operating from Russia. Suex OTC provided a nested cryptocurrency exchange service using Binance and other known exchanges to serve its customers. Suex offered little to no KYC and even offered in-person cryptocurrency trading.
According to a study conducted by Chainalysis, Suex helped launch a large number of funds from ransomware attacks and hacks. Binance has proactively disabled several accounts associated with Suex, and OFAC has blacklisted nearly 30 different Bitcoin, Tether, and Ethereum wallets. Binance's offboarding also included Chatex, a cryptocurrency bank with reported links to Suex. Chatex has since been subject to related sanctions from OFAC. Anyone who has dealt with Suex is now at legal risk, and the company has taken down its website since OFAC's decision.
How to spot a nested exchange?
Nested exchanges generally do not highlight the fact that they are nested exchanges. The following points are a good start to uncovering a nested exchange and thus ensuring your security and that of your funds:
1. They do not need KYC or AML checks or identity documents. Signing up to an exchange almost instantly without any limits is in itself already a good warning.
2. The user interface does not clearly show where trades take place.
3. It is not clearly stated that the exchange facilitates trades. A legitimate exchange will indicate that transactions take place directly on its platform and not in an embedded account.
4. The exchange brings together different rates that you can choose from. This means that the exchange uses nested accounts with multiple exchanges.
5. If you think you may have used a nested exchange, try tracking your cryptocurrencies on the blockchain with a blockchain explorer. You may find that it comes from a wallet associated with another exchange.
To conclude
It is always safer to buy your Bitcoins, BNB and cryptocurrencies on an exchange like Binance. Although it may take some time to register for the first time, having KYC and AML procedures in place will help keep you safe. You should treat an exchange as you would any other financial institution and conduct due diligence before using it.