Crypto Exchange Rating 2023: How investors can strike a balance between security and quality of service
And the extent of the adequacy of financial regulators' decisions
Mind presents the first comprehensive analysis of centralised cryptocurrency exchanges available to Ukrainian users. The rating approach is based on the parallel study of three groups of factors: security, liquidity, and service quality. Not only reliability, regulatory and technical risks were taken into account , but also trading commissions, the availability of deposit/withdrawal of funds from Ukraine, and so on. That is, the total score reflects a comprehensive assessment of the exchange based on all parameters important for a client from Ukraine.
No exchange has received the highest rating. This is due to the partial shadowing of owners, regulatory risks, or the tendency of beneficiaries to operate in offshore areas. The highest rating – 4 out of 5 stars was immediately given to six of the 22 analysed exchanges: Kraken, Coinbase, Binance, Huobi, Whitebit, and Bitstamp. All these platforms are equally reliable, but there are minor risks in their work that do not allow customers to feel maximally confident and secure.
Our editors do not recommend working with token exchanges that have got 3 or less stars. As the regulatory landscape is actively changing, various countries are creating new regulatory legislation and conducting checks, thus any technical or security risks can significantly affect the safety of customer assets.
In February, we published a guide on using cryptocurrency exchanges, where we dissected what to pay attention to and what risks accompany working with these types of organisations. After that, our team investigated the work of specific crypto exchanges on the market.
A series of loud bankruptcies last year and the overall drop in crypto markets highlighted problems that were unnoticeable in a "bull market". As long as the market was growing, numerous investment mistakes and even machinations could be compensated for. It's a different story when the trend reverses. Government reactions were not delayed.
Back in February, Mind, observing increasing interest from government structures of various countries in regulation, announced a difficult 2023 for the industry. Over the past four months, these processes have only accelerated.
The most active were the regulators from the USA: the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the New York Attorney General. The National Bank of Ukraine did not stand aside either.
Read also: Cryptocurrencies go underground: NBU bans withdrawals from crypto wallets. Why is it a sign that the market is being prepared for strict regulation?
In June, a lawsuit was regulated against Kraken concerning the provision of crypto asset staking services for US citizens – the crypto exchange was forced to pay a fine of $30 million. The logic of the regulator can be understood here, as by their nature, staking services via the exchange are similar to investment ones – the client receives passive income from the transfer of their assets to the exchange's management. Kraken ceased to work with US citizens, but left the service active for others, promising up to 24% annual rewards for certain tokens.
As the area regulated by the SEC is securities, they are naturally inclined to consider cryptocurrencies and tokens as such instruments (an exception with certain reservations is made only for Bitcoin). Since it is the SEC that decides which securities should be admitted to circulation, by this logic almost the entire crypto market becomes outlawed, as mechanisms for the registration of the issuance of "token-securities" are not legislatively prescribed.
In the spring, the company Paxos Trust was accused of issuing BUSD – Binance's stablecoin, the price of which is attached to the US dollar. In the regulator's opinion, this is also a security, not a digital asset, and therefore requires appropriate registration. But this is far from the only problem the largest trading volume crypto platform has encountered.
Read also: The US sues the largest crypto exchange Binance. What consequences can this bring?
After the lawsuit from the CFTC, the SEC didn't waste time either, accusing Binance and its officials of misusing client funds and lying to regulators. It also released a list of tokens that it considers unregistered securities. Binance's own token, BNB (which can be seen as an indicator of the situation), fell by a quarter and, until the issue is resolved, it is trading close to its annual lows.
Binance's troubles didn't stop with the United States – later in June, France announced the start of an investigation; the company left the Netherlands as it could not obtain a licence, and in Austria, it withdrew its application. Amidst these events, Binance has announced that the UAE is a priority for its future operational hub.
The last fact illustrates that it's not so easy to clamp everything into regulatory grip on the global cryptocurrency market. Businesses will choose jurisdictions that allow them to operate as freely as possible. At the same time, no matter where the exchange is registered, governments can quite rightly claim to protect their resident clients and introduce restrictions from this side. There may be complications for the withdrawal of funds or additional tax burdens.
Not all exchanges only counter-attacked regulators – in April, Coinbase itself filed a lawsuit against the SEC's activities, demanding clarification on regulation criteria. The long-standing saga with the SEC lawsuit against Ripple with the regulator accusing the company of selling unregistered securities in the form of XRP tokens, is nearing its end. Ripple's victory could be a significant success for the market in terms of establishing transparent rules of the game.
An even bigger positive for the market could be the legalisation of cryptocurrency ETFs (Exchange Traded Funds). The world's largest investment company, BlackRock, filed an application for the registration of a bitcoin ETF on June 15th (the application text is on the SEC website).
Aforementioned Coinbase will be the custodial partner in this project. It became known that ARK Invest also submitted an application, and later other leading investment companies (such as Fidelity) also expressed their interest.
The rating of centralised crypto exchanges
Methodology
The rating analyses groups of factors along three dimensions:
- Security
- Liquidity
- Quality of services
First and foremost is security, because no matter what technological services an exchange provides, and what profits clients “on paper” may have earned, it all won't make sense if the assets can't be withdrawn – if they are frozen, stolen, or if the exchange ceases to exist altogether.
Let's recall that the very essence of centralised exchanges implies that clients' assets are deposited on the exchange and effectively remain under the control of the organisation until the user withdraws them. On one hand, this offers substantial advantages: the ability to execute deals as swiftly as possible with minimal commissions (as the exchange is the very place where buyers and sellers converge to the maximum).
On the other hand, for this advantage, one has to pay not only literally (fees for transactions and other operations), but also in terms of security. Therefore, let's go through all the groups of factors that we took into account when constructing the rating.
Security
Weight: 55% in the overall result.
This group, being the most important, is in turn divided into a number of additional categories, each having its own weight in the final result:
a) Owners and management (total weight 17.5%)
Here we focus on the individuals or organisations that directly control the exchange. The highest ratings are given for belonging to a large financial group (4 points), a group of public figures or with investments from large investment funds (3). If the owner is a public individual – 2 points, non-public – 1 point. Zero is given to an exchange about which Mind could not find reliable current information regarding the beneficiaries.
A similar system applies to management, where the maximum point is given to the exchange with a fully public team, people with authority in the industry. On the reverse side (zero points) are organisations where management has been involved in criminal proceedings or suspicious operations.
The overall rating of the "Owners and Management" category could be raised or lowered using additional criteria, each of which could earn from -1 to +1 point:
- Risks of associated companies. We try to take into account the risks of a “chain reaction’ of related businesses and possible financial consequences for the exchange.
- Development strategy. We pay attention to declared plans and their realism.
b) Financial risks (17.5%)
This is the second group with the most weight in the rating. Clients' assets must be accessible and not diverted to side projects. That is, the principle of "since everyone won't come at once, assets can be managed relatively freely" should not apply.
The latter example resembles "bank runs", which we have written about many times. But if a bank really does invest client resources in investments or loans (how they balance liquidity and portfolio quality is a different pair of shoes), an exchange has no right to manage client assets without their consent. Unquestioned access to their assets is the first priority for clients. The exception is the voluntary transfer of assets for a certain period of time for earning – this is more like a traditional fixed-term deposit at a bank.
Following last year's collapse of FTX, the question of proving that assets are in place has drawn attention. The market standard in this has become the Proof of Reserves (PoR) system.
PoR is actually a report that shows the presence of crypto-assets in the control of the institution (in our case – a centralised exchange). The record is double – you can see both the deposited client assets and their presence at a specific point in time in the exchange wallets. More about the concept can be read on the CoinGecko website.
Availability of current PoR data forms the basis of our assessment in the "Financial Risks" category. Additionally, these are accounted for:
- presence of insurance;
- public reporting;
- external audit.
c) Technical risks (10%)
In assessing technical risks, we rely on the industry leader, Hacken, and their project cer.live. The company regularly monitors token exchanges for a large number of parameters, the results of which are grouped into an indicator of the overall level of security. At the time of publication, the highest score (AAA) was held by 12 exchanges, six of which made it into our rating. The level of server security and user security is calculated separately.
The crypto industry faced a large number of hacks and account thefts over the years of its existence, and exchanges were no exceptions. We took this into account, reflecting in the rating the history of incidents that occurred with them.
At the same time, it is worth mentioning that the technical security level is constantly increasing. Leading exchanges actively apply the bug bounty programme, rewarding users for finding "weak" spots, obtaining ISO 27001 certificates, and offering more methods of protection for clients.
g) Regulatory Risks (10%)
This category reflects potential legal issues. There are regular lawsuits against crypto exchanges from regulators, or even work blockages in certain countries. And although formally this should not affect customers, the emergence of problems with regulators can trigger a chain of adverse consequences – an outflow of customers, and therefore, a decrease in liquidity on the exchange, the impossibility or unwillingness of owners to provide quality service in unstable conditions, or even an attempt to withdraw client assets if the situation is nearing critical. Temporary risks are also not ruled out, such as asset freezes, until the exchange's problems are resolved.
When assigning points, we primarily base ourselves on the jurisdiction in which the exchange is registered, and whether it has a licence. Here, priority is given to the USA and the European Union with their strict regulation (3-4 points). Two points are given to exchanges from Hong Kong, Singapore, Dubai, and 1 point to those registered on exotic islands, such as the Cayman, British Virgin, Seychelles.
We take into account the year of establishment, highlighting exchanges with a longer history, as well as the diversification of business across regions.
And of course, exchanges received a lower score for the presence of current conflicts with regulators or those that were in the recent past and led to consequences in the form of fines, restrictions on types of activities, or the exit of exchanges from certain countries.
Liquidity
Weight: 20% in the overall total.
This group primarily reflects whether a client will find what they came for at the exchange, namely: the presence of active trading, and the opportunity to profitably and promptly make deals with variable assets.
Not only the total trading volume was taken into account, but also the ratio of real figures to declarative ones. This is an evaluation category, which is oriented towards the infamous practice of "wash trading". We took into account the variability of trading as well, giving a higher score to crypto platforms where trading activity is distributed across a large number of tools, rather than focused on a few key ones.
The total number of tokens available for trading was considered. At the same time, it should be understood that a large number of instruments is not always a benefit for the client, and often can be just a temptation to excessive speculation.
We paid special attention to the direct cost of trading for clients. As a rule, exchanges offer a tiered commission system: starting from a certain base level, the client can expect them to become cheaper as their trading activity grows. Most of the exchanges participating in the ranking also offer commission discounts for holding their own tokens.
But not only commissions. On some exchanges, low commissions are offset by a larger spread (the difference between the buying and selling price). So, the client saves initially, but then incurs more costs directly on the price of the transaction when carrying it out "according to the market".
We combined these quantities into an overall score – our indicator takes into account both the direct commission and the spread, effectively answering the question "how much does the client lose on the transaction."
The last indicator in this group is the average monthly number of visitors to the exchange, which is an indicator of its overall popularity.
Quality of Services
Weight: 25% in the overall total.
Finally, the last large group of indicators concerns the opportunities a client receives in the process of use. The entire group is divided into three categories.
a) Trading and direct services (10%)
To evaluate these parameters, we checked the quality of the crypto trading terminals, their speed, and the presence of glitches or errors. We considered the general informativeness and convenience for the user: whether there are options to choose display formats of information, work with charts, etc.
Also included in this category is the breadth of services. Indeed, modern crypto exchanges offer not only standard trading, but also:
- margin trades (the ability to trade on leverage);
- trading on derivative markets (derivative instruments – futures, options);
- copy trading services;
- staking of assets (otherwise known as freezing for interest);
- person-to-person deals (P2P).
And numerous other services.
We tried to give a comprehensive assessment of the breadth and quality of services that a client can receive within one exchange without the need to "jump" between different exchanges.
b) Depositing and withdrawing assets (10%)
However, no matter how convenient and high-quality the exchange is, interaction with the outside world is also important. We assessed how easily and cost-effectively a client can deposit and withdraw assets while working with the exchange.
We considered all popular payment methods:
- cryptocurrency transfers;
- bank cards;
- SWIFT transfers;
- use of payment services, etc.
Preference was given to exchanges that not only work with cryptocurrencies, but also allow depositing and withdrawing "fiat currency" (traditional money issued by countries).
We paid special attention to the KYC (Know Your Client) procedures. This can vary in complexity. Furthermore, it is standard practice to limit the withdrawal (or even deposit) of assets for clients who have not undergone identification. We consider this a normal practice and advise clients to take KYC seriously to avoid potential problems in the future.
c) Information availability and customer support (5%)
Here we considered the completeness of the information – how easily a client can find all the necessary information regarding the exchange, its terms, their rights and opportunities. To receive a high score, the exchange's website should have a FAQ section (Frequently Asked Questions), and detailed instructions.
The presence on social media, the availability of special info products for beginners or even a full-fledged knowledge base or integrated courses was advantageous.
We also took into account the presence of a Ukrainian language interface and, of course, the speed and quality of customer service.
The maximum possible total score is 4. This applies to each separate parameter that we evaluate (specific parameters are discussed below).
So we investigated the leading exchanges according to the above criteria and derived the total scores, which we are publishing. In the brief overviews of the exchanges, we emphasised key important factors and features of the exchanges' operations. Exchanges that do not meet the qualification requirements in terms of:
- trading volume (not lower than $50 million / day on the spot market, excluding futures)*;
- minimum security level (must have a cer.live rating);
- availability of services for Ukrainians (yes, we did not study exchanges with an obvious focus on Asian clientele, without full translations of information even into English).
*We made an exception here for the Kuna exchange of Ukrainian origin, the trading volume of which is significantly lower than the threshold level.
And a few words about crypto wallets. Perhaps the most common piece of advice for reducing risks when working with crypto exchanges is this: "Do not keep large sums on the exchange account, withdraw them to your own cold (hardware) wallets."
A hardware wallet is a portable device designed to securely store private keys. It is considered safer as it does not connect to the internet.
However, can we consider this advice unequivocally superior given recent events? In May, Ledger (one of the two leaders in the production of such devices) announced a new service – recovery of private keys. The very same ones that should only be known to the owner! The crypto community immediately reacted very negatively to this news, because in effect this means the company has access to the private keys. This negates the very idea of hardware wallet security, where the customer precisely does not want to depend on third parties, but personally controls the security of their assets.
Even without this "improvement", will all regular crypto investors be able to take full responsibility for storing assets through their own cold wallets? And will it be convenient to regularly deposit and withdraw assets from the exchange, losing the main advantage of this service – instant liquidity? Not to mention other services that people can use by keeping assets on exchanges.
Our rating’s objective is to help investors find a balance between security and quality of service.
The crypto world is extremely dynamic, and managing counterparty risks (exchanges, in our case) requires perhaps the most attention. This area more than any other is a magnet for dubious projects, engaging with which can lead to loss of resources. As long as the regulation of the industry is in its infancy, the customer must take full responsibility and understand exactly which organisations and the people behind them, they are dealing with.