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A gray cryptocurrency exchange allows its clients to trade cryptocurrency through an account on another exchange. It does not provide operations on its own. Instead, it acts as a “bridge” between users and other service providers. Correspondent banking, which is typical for traditional banks, allows you to gain access to services that are not available at a particular bank, for example, international transfers.

In the cryptocurrency space, gray exchanges are often characterized by lightweight verification and anti-money laundering procedures, which may or may not exist at all. Cybercriminals often take advantage of the lack of such requirements. Gray exchanges allow you to service transfers related to money laundering, fraud and ransomware activities.

By making transactions on a “gray” exchange, you trust it with your assets. Such exchanges provide a low level of security and provide fewer guarantees than centralized or decentralized exchanges. You may also face legal difficulties when operating on a sanctioned gray exchange.

When dealing with an exchange, make sure it has proper verification and anti-money laundering procedures in place. It often takes several days to process the information. If an exchange allows you to trade almost instantly without restrictions, you should inquire about it. An exchange operating in accordance with the law does not hide how transactions are made. You can easily see the source of funds in the blockchain explorer.

Introduction

When buying and selling cryptocurrency, you must use a reliable site. However, you need to be patient and go through verification and anti-money laundering procedures for your own safety. For this reason, some users prefer to use exchanges that have minimum verification requirements during registration (there may be none at all) and provide instant access to trading.

Of course, these can be decentralized exchanges that operate in accordance with the law. But the exchange may also turn out to be “gray”, handling stolen and “laundered” funds. A “gray” exchange never guarantees the safety of your funds. To ensure the safety of your cryptocurrency, you need to understand how gray exchanges work and how to identify them.

What is correspondent relations

Correspondent relationships refer to the use by a financial service provider of an account with another financial institution to provide its own services. The account holder acts as a “bridge” and provides services to its clients through an account with another organization. This is possible for various reasons. For example, a situation where a bank in one country provides its own banking services and ecosystem to a bank in another country is called correspondent banking.

Imagine a customer wants to transfer money to a bank account in Australia. His bank may not be able to complete the transaction, but he may be able to use a correspondent bank to transfer the client's funds. The client's bank will process the transfer request through a correspondent sub-account at the correspondent bank. The correspondent bank must provide due diligence on the bank with which the transaction is carried out. He mainly serves unknown clients, so he must trust the owner of the correspondent sub-account.

How gray crypto exchanges work

The “grey” cryptocurrency exchange is quite simple. A business or individual creates an account with a regulated exchange and then uses that account to provide trading services to third parties through its own external account. Gray exchanges are sometimes called instant exchangers. They often have multiple accounts on different exchanges.

Sometimes they may request a full set of documents, sometimes they require them only partially or not at all. This is why they are so popular among scammers, criminals and extortionists. Some gray exchanges even allow you to buy and sell cryptocurrency with cash.

Why is it dangerous to use “gray” exchanges?

In the case of traditional finance, one of the main problems is the risk of money laundering. Since the correspondent bank deals directly only with the corresponding respondent bank, it cannot know the end customer. Therefore, correspondent settlements require enhanced due diligence of the partner bank. Individuals or entire countries may be blacklisted and sanctions may be imposed on them. If the partner bank does not comply, the respondent bank may ultimately become involved in illegal activities, such as sanctions evasion or money laundering.

Since legislation for the crypto industry is being developed, gray exchanges can operate without attracting attention. A gray exchange can open an account on a major cryptocurrency exchange without its knowledge.

Why is it dangerous to use the services of a “gray” crypto exchange?

Using a “gray” crypto exchange doesn’t just harm the centralized exchange. You and your funds are also at risk for several reasons:

1. The guarantees for the transferred funds here are lower than on an exchange that meets legal requirements.

2. You may become involved in illegal activities that contribute to the financing of crime and terrorism.

3. Regulators may close the exchange, resulting in the loss of cryptocurrency or other funds.

4. You may be at risk from law enforcement if you knowingly operate an exchange that is involved in illegal activities.

The best way to avoid these problems is not to use gray crypto exchanges. Detection can be difficult because the signs are not always obvious. Follow these tips to protect yourself.

What is the difference between a “gray” exchange and a decentralized one?

At first glance, gray and decentralized exchanges are similar. Decentralized exchanges do not require verification of the client’s personal data, and the verification procedure on a “gray” exchange may be simplified or absent altogether. However, they process transactions differently. A decentralized exchange allows buyers to interact directly with sellers or uses a liquidity pool. The exchange never takes responsibility for storing the cryptocurrency as part of the transaction. The process is managed by smart contracts. A gray exchange stores your cryptocurrency and uses the services of another exchange.

Suex gray exchange incident

Let's look at a real example. On September 21, 2021, the US Office of Foreign Assets Control (OFAC) used sanctions against Suex, a cryptocurrency exchange registered in the Czech Republic and operating in Russia. Suex OTC used gray schemes to exchange cryptocurrencies through Binance and other major exchanges when servicing its clients. Suex practically did not require documents for verification and even provided cryptocurrency exchange services for cash.

According to research by Chainalysis, Suex helped launder a huge amount of funds obtained from hacking attacks and ransomware. Binance promptly disabled several accounts associated with Suex, while the Office of Foreign Assets Control blacklisted nearly 30 different Bitcoin, Tether, and Ethereum wallets. Binance also disabled crypto bank Chatex, which is believed to be linked to Suex. Chatex subsequently faced sanctions from the Office of Foreign Assets Control. Anyone who dealt with Suex now faces legal consequences. The company closed the site following a decision by the Office of Foreign Assets Control.

How to distinguish a “gray” exchange

Gray exchanges usually try to hide their status. To get started, use the following tips to identify a “grey” exchange and ensure the safety of yourself and your funds:

1. There are no or minimum requirements for verification or anti-money laundering procedures. Instant registration on the exchange without any restrictions should also give you pause.

2. The user interface does not provide insight into where the transaction is taking place.

3. Nowhere is it stated that the exchange conducts transactions. An exchange operating in accordance with the law will confirm that the transaction takes place directly on its platform and not through a third-party account.

4. You can see different rates on the stock exchange. This means that the exchange uses multiple accounts on different exchanges.

5. If you suspect that you are faced with a “gray” exchange, try tracking your cryptocurrency on the blockchain using a browser. You can see that it came from a wallet associated with another exchange.

Summary

The safest place to buy Bitcoin, BNB and other digital currencies is from a regulated crypto exchange such as Binance. It may take you some time to register, but robust verification and anti-money laundering procedures will help you protect yourself. You should treat the exchange as you would any other financial institution and conduct due diligence before using it.