Intertwined exchanges have become a popular tool for money launderers. Find out all about interconnected exchanges/services, what we do to deal with them, how to protect yourself from them, and why accounts are blocked or frozen because of them.
A nested exchange offers crypto trading services through a wallet or account on another existing exchange.
Nested exchanges are attractive crypto platforms for money launderers looking to circumvent Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.
In this article, you'll learn how to avoid nested exchanges, common security issues, and how we dealt with it at Binance.
A new trend has emerged in the world of cryptocurrencies and this trend is not very pleasant. These are called nested exchanges and have become the newest tool of choice for money launderers around the world. In short, a nested exchange offers crypto trading services through a wallet or account on another existing exchange. Nested exchanges typically operate covertly and are rarely associated with the exchange on which the account is located. So why do people use them?
Some users prefer nested exchanges because they have very few KYC and AML requirements. These users maybe live an anonymous life, maybe they have some bad intentions. In fact, it is often the latter. So, how do intertwined exchanges work?
Person A visits a nested exchange and decides to sell ETH for BTC
Person A deposits ETH in a nested exchange.
The nested exchange transfers ETH to its account/wallet on the other exchange where its account/wallet is located to complete the conversion.
The intertwined exchange sends the converted funds to Person A and the trading is completed.
However, the lax requirements of this process make it an attractive tool for malicious individuals trying to cover up their illicit revenues and warding off the requirements of centralized exchanges like Binance. In this article, you'll learn how to avoid nested exchanges and common security issues.
How Can You Avoid Nested Exchanges?
Nested exchanges are just like traditional crypto exchanges. Some may even have a fake UI, but this is rarer. Users typically know what nested service they are using, but they do not know which main exchange is where the transaction is made and how the transaction is made. If you want to avoid nested exchanges and all their associated risks, we recommend using a regulated centralized exchange or nested service with lawful KYC and AML procedures.
It is a bad sign that the crypto exchange you are using has almost no validation checks or trading limits. If you suspect your service provider is a nested exchange, you can always use a blockchain explorer to see if your funds are coming from a wallet or account on another exchange.
Among the most important risks of these services is the failure of the main exchange to monitor the transactions. Remember, you are taking an even greater risk when you entrust your funds to an exchange with minimal security. Malicious people use these services to circumvent the AML/KYC requirements of the main services. Even if you use a peer-to-peer exchange for your daily crypto trading, you may be unintentionally financing criminal or terrorist activities. In this case, the intertwined exchange may be subject to sanctions by law enforcement and even shut down. Depending on the jurisdiction, your funds may be confiscated or your funds may be blocked indefinitely. If a law enforcement agency has reason to believe that a collaborative exchange is engaging in illegal activities and has the ability to initiate legal proceedings against that exchange, related services and assets may be blocked and/or confiscated. There may be different reasons for law enforcement to do this, but the part that really interests the user is the possibility that funds cannot be recovered as a result of legal proceedings against a service. Even if the funds can be recovered, this effort can be quite burdensome in terms of time and financial resources.