As cryptocurrency’s popularity rose, the number of crypto exchanges began to proliferate. One can make the connection between this noticeable boom with a similar “follow the leader” mentality for other cryptocurrencies. To elaborate on this, after the success of Bitcoin, many others wanted in on the action. This would result in the creation of a wide variety of other digital currencies. Whether they want to copy what Bitcoin is doing or improve on its shortcomings, there is now more diversity in the market.
Likewise, there is now an array of crypto exchanges to choose from. Some are listed on CoinMarketCap while others are still in their start-up period. Regardless, just like with cryptocurrencies, we have an abundance of crypto exchanges at our disposal.
Sadly, like numerous crypto coins, the lifespan of some of these exchanges is short. For whatever reason, a good amount of exchanges don’t have what it takes to stick around for very long. Why do so many end up pulling the plug after a handful of years?
Speculation of these demises
The primary reason as to why many crypto exchanges crash and burn is not an overly complex one. A large portion of new coin projects that found a home in the crypto space in 2016 are dead. Moreover, they have no real reason to exist at all, let alone partake in trading. These specific exchanges never built up the business they needed to properly preserve the cost of remaining open.
Forbes writer, Clem Chambers, provides input on this:
“The world doesn’t need another bitcoin. Well, it probably does, but it doesn’t need another 2,000. There are lots of cryptocurrencies out there but when you strip the Ethereum tokens out of that universe, there are left perhaps 30 cryptocurrencies of a scale that would be considered listable were they a stock. At most, there are 150 relevant distributed cryptocurrencies.”
It’s safe to say that the regulatory walls are gradually closing in on most of these upstart exchanges. As Chambers claims:
“It is obvious to anyone but a fool that it doesn’t take much to get a cryptocurrency exchange owner busted at a U.S. airport for breaking all sorts of nasty local U.S. laws.”
In a similar vein, there are some local rules in other countries that are not exactly a cakewalk either. A majority of exchanges that are closing do so because they are wary about continuing to trade. Specifically, under regulatory pressure that is constantly increasing. This means that there will likely be more instances of shrinkage in the exchange space in the near future.
There are many exchanges that we could go over and see what went wrong for them. However, to avoid being needlessly long and repetitious, we will focus on those that experienced closures that were comparatively more interesting than the others.
Once upon a time, QuadrigaCX was seemingly on top of the crypto world; or at least a small part of it. The platform was founded in 2013 and people would go on to consider it to be Canada’s largest cryptocurrency exchange. Its owner and operator were Quadriga Fintech Solutions and its CEO was a man by the name of Gerald Cotten.
In February of 2019, users of this exchange were greeted with this message on the website:
“Today an order for creditor protection in accordance with the Companies’ Creditors Arrangement Act (CCAA) was issued to allow us the opportunity to resolve outstanding financial issues that have affected our ability to serve our customers.”
In April of the same year, the company issued another statement:
“Please be advised that on April 11, 2019, the Supreme Court of Nova Scotia issued a Termination and Bankruptcy Assignment Order outlining the process by which the Quadriga CCAA proceedings will be converted to bankruptcy proceedings under the Bankruptcy and Insolvency Act.”
For a platform claiming to be the largest in its native country, these announcements may appear to be random. How did it come to this? The answer lies with the occurrence of a sudden incident in December of 2018. Supposedly, Cotten died while doing volunteer work at an orphanage in India. I say “supposedly” because many believe that he is not actually dead. In fact, he probably faked his death or is, at the very least, missing.
Up to $250 million (in Canadian dollars) that 115,000 customers were entitled to went missing or they cannot access it. It’s impossible to access because only Cotten knew the password to off-line cold wallets. This certainly adds some suspicion to the man’s apparent death.
An ongoing conspiracy
This rampant skepticism is mainly because it effectively left many crypto users out of pocket for roughly $145 million in assets. Cotten was – to reiterate an earlier point – responsible for the exchange’s wallets and keys. The company states that it has been trying to find them since his death. So far, their efforts are unsuccessful.
Among the many who are hit hard by all of this is Tong Zou, an exchange user who spoke of his experience. The software engineer would lose over $400,000 trying to use QuadrigaCX as a way to get his money back to Canada. To rub more salt in the wound, at the time, those were his life savings.
Approximately 17,000 creditors of QuadrigaCX are filing to reclaim their lost assets. Ernst & Young (EY), the trustee for QuadrigaCX’s bankruptcy proceedings, notes that QuadrigaCX didn’t file its tax returns. Moreover, they did not do it in the conventional course of business prior to the commencement of bankruptcy proceedings. Therefore, the outstanding amount pertaining to its corporate tax liabilities is currently a mystery.
The doubt surrounding the CEO’s death is only continuing to grow. As a matter of fact, many are demanding the exhumation of the body just so they can get some answers. There was an online poll during a Virtual Consensus 2020 event, “QuadrigaCX – Yell Into the Void and Get Some Questions Answered.” According to the results, 60% of viewers believe that Cotten was definitely still alive. Moreover, 90% agree that the body is seemingly the CEO’s need to undergo exhumation and autopsy.
Zou says that the problem with cryptocurrency is the lack of regulation. The worst possible outcomes are potential scams and situations similar to QuadrigaCX. He admits, “Even the biggest, longest-running exchanges can still fail.”
According to what CoinMarketCap says, the C-CEX crypto exchange has suspended its services for reorganization. Going just by that statement, it may not sound like that big of a deal; “suspension” implies that it’s temporary. Yet, while C-CEX’s downfall is nowhere near as crazy as that of QuadrigaCX, it is still quite an ordeal.
C-CEX was a platform specializing in crypto-to-crypto exchange and fiat-to-crypto exchange. It operated as an alternative to the mainstays of Poloniex and Bittrex. The exchange would go on to garner various criticisms, particularly for its handling of user funds. A large number of complaints from users were mostly on the subject of its security features. This, however, was not the reason why the exchange went down.
The nail in the coffin
In September of 2018, C-CEX would become victim to a bad hacking attack. The attackers were able to successfully withdraw any and all Litecoin and Dogecoin directly from company servers. To their credit, the exchange was quick to address the loss. In response, they would ask users to not send DOGE and LTC to any of the exchange’s old addresses. In a tweet, the companies say:
“We regret to inform that there was a breach discovered by hackers in our withdrawal procedures. DOGE and LTC balances stolen. Important! Do not send DOGE or LTC to old addresses! You need to get a new address for new deposits!”
On BitcoinTalk, C-CEX would make the following statement:
“We regret to inform that there was a breach discovered by hackers in our withdrawal procedures. They were able to repeat the same withdrawals several times. Our DOGE and LTC completely depleted. As DOGE and LTC withdrawals of current user balances are no more possible – we transferred them to ‘Hold’ balances.’”
The platform would never recover from this. It currently has a ranking of 1.9 on CryptoCompare, evidently displaying the general disdain of the exchange. Given the fact that its suspension began almost a year ago, it’s unlikely that it will come back anytime soon.
Cryptocurrency exchanges experiencing a hack is admittedly quite common. However, it’s rare for a major exchange to fall victim to a hack seeking a significant amount of money. The only trace of a bright side to come from this is it’s unlikely that the C-CEX attackers got more than a few thousand dollars. Moreover, C-CEX was a relatively insignificant exchange when it comes to trading volume. And that’s including the Litecoin and Dogecoin communities.
CoinExchange.io was once an altcoin trading platform. While not achieving Binance levels of popularity, it still had its own loyal audience. However, these followers would receive unfortunate news in October of last year. In a statement, they made a point to clarify that the decision was due to difficulties in business. Moreover, there was no breach in its securities.
At the time, Coinexchange.io was seeing daily traded volumes of approximately $700,000. In addition, it was supporting more than 500 altcoins. The platform would later came out with the following:
“Unfortunately it is no longer economically viable for us to continue offering market services. The costs of providing the required level of security and support now outweigh our earnings.”
The eventual outcome of this decision was that trading and deposits came to a halt later in the month. The website and withdrawals would remain in operation until December, but after that, it was officially over. During this time, CoinExchange was asking that its users remove all funds by the time December rolled around.
While the exchange is shut down, the company implies a possible return if there is an incentive. With market conditions being the way they currently are, they say that the platform might return in the future. However, that is only if the industry makes some changes and improves.
NovaExchange was a cryptocurrency exchange whose focus was primarily on altcoins. In September of 2019, they made an announcement concerning a decision from the board of its parent company. They would be establishing a different course in order to properly develop a new service experience. Therefore, the exchange platform would inform its users that on October 7th, NovaExchange trading on will come to a close. What’s more, the Nova API will undergo deactivation.
Similar to CoinExchange.io, the team behind NovaExchange was quick to clarify that this was purely a business decision. Furthermore, there was no incident involving a hack, fraudulent behavior, or any type of wrongdoing.
Users had to be KYC verified before they would be able to withdraw funds. And they had to do so as soon as they could. The platform would remain open for regular withdrawals starting in September and continue until October 25th. Following this day, any additional withdrawals were likely to provoke additional fees. In a message from the NovaExchange team, they state the following:
“Now, even if we can’t disclose our exciting plans today, we can tell you that Nova, in some form, will enrich and play a key role in shaping the crypto future for the masses, however not in the shape and form that you know today. The Nova Team is very proud and grateful to have been of service to you and we are thrilled to come back with the new products we’re currently building.”
Blackmoon Crypto was an exchange whose main goal was to be the first to sell Telegram’s blockchain tokens. Unfortunately, it – along with Telegram Open Network – is shutting down. Oleg Seydak, the firm’s CEO, cites the legal issues of TON tokens (GRAM) in the U.S. as the primary cause of the closure. Also playing a role is the cost of regulatory compliance. Says Seydak in an email to CoinDesk:
“After in-depth analysis we concluded that running a crypto exchange in compliance with all modern [European Union] regulation including the Fifth Anti-Money Laundering Directive and licensing requirements (that are constantly changing unpredictably and unfavorably) is not competitive to unregulated alternatives that are available in the market at the moment.”
Last fall, Blackmoon was promoting its relationship with investors in Telegram’s upcoming blockchain. This was not long before the U.S. Securities and Exchange Commission (SEC) would file suit against the messaging platform. In October, they were able to secure an injunction that would result in a delay in GRAM circulation.
Telegram was able to sell up to 2.9 billion grams tokens at a discount. In total, there were 171 initial purchasers worldwide who would receive them. This includes U.S. investors receiving over 1 billion GRAMs. However, there was a complaint alleging that Telegram did not officially register its offer, nor did it register the sale. Stephanie Avakian, the co-director of SEC Division of Enforcement, says that the emergency action is:
“…intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold.”
Apparently, Telegram didn’t provide its investors with information concerning the GRAM token and Telegram’s operations.
Unlike the other exchanges in the article, Blackmoon was just an unfortunate casualty in another system’s closure.
As mentioned before, there are tons of crypto exchanges beyond the ones we’ve gone over that are dying out. There are plenty of reasons as to why they meet this fate, but the fact is they could not survive in the long-run. This is the natural progression for most things, though. There are some innovations that run their course and need to pull the plug. For others, they become obsolete due to the ever-changing business world. Or maybe there’s a chance that their CEO went missing under very dubious circumstances.
What does all this mean for the future of crypto exchanges? Are they dying out? Well, if we really think about it, assuming that would be going a little too far.
Indeed, many exchanges are calling it quits, but that does not make them an endangered species. With every exchange that fails, there are still plenty of others that are thriving. So long as cryptocurrency maintains its relevance, these exchanges will not be going away anytime soon.
Chambers agrees with this belief, writing the following statement:
“There are already enough big exchanges to deal with the needs of the ‘industry’ for a long time to come.”