FTX and co. 10 Cryptocurrency Exchange Scam Stories

This overview includes the most prominent cases. We left the most epic of them at the end of the article. The best things we left for the dessert!

It’s no secret that today's world of cryptocurrencies does not look the way the first enthusiasts imagined it. Initially, crypto was conceived as free, anonymous, and decentralized. Cryptocurrencies still follow these principles, but the cryptocurrency market has turned away from the path outlined. Today, most digital funds are held by centralized exchanges (such as Binance or Coinbase). According to CoinGecko, the share of trading on CEX (centralized exchange) in the 3rd quarter of 2020 reached almost 90% of the total trading volume.

However, by storing crypto on CEX, you lose:

– anonymity (because of KYC verification);

– decentralization (since you transfer the crypto under the control of the exchange management);

– complete control over the assets (you no longer, de facto, own your funds).

This situation on the market is the result of the struggle of crypto ideologists with the authorities and central banks. The crypto supporters managed to win back the field of DEX (decentralized exchange) for themselves. Today, decentralized exchanges remain islands of unlimited freedom. CEXes, in turn, remain convenient for users and governments but have some disadvantages. One of them is scam risk.

Cryptsy: the exchange closed down after a hack

At the end of June 2014, Cryptsy was hacked, resulting in 13,000 BTC and 300,000 LTC being stolen. The administration blamed the developer involved in the creation of the Lucky7coin cryptocurrency, who, using inside information, identified a vulnerability and used it to carry out a hack.

Truth does not matter anymore. The fact is that the sole responsibility was on Cryptsy. The exchange was supposed to compensate the users’ losses. And, according to its reports, it even had the financial ability to do so. But it did not happen, and the company disappeared from the market.

BTC-e: owner arrested, assets location unknown

The exchange was established in 2011, became the market's dinosaur, and was one of the top exchanges in terms of turnover. Significant experience in the market, recognition, reputation – all this instilled in users the belief that the exchange had everything under control. However, on July 25, 2017, the exchange announced technical issues and suspended withdrawals. The exchange's founder was arrested on money laundering charges on the same day.

Four days after the arrest, 485,760 ETH was withdrawn from the exchange’s internal wallet. There is every reason to believe that the funds were stolen.

BItsane: the mysterious disappearance

This exchange was not a market leader, but it had its audience. The number of users reached 250 thousand people. There were no signs of trouble, but in the third year of operation, users began to complain about withdrawal problems. Official reason – technical issues. In June, the exchange’s website disappeared, along with users' funds.

The amount of funds stolen is estimated at $150-400 million.

Other cases

Before we get into DEX's two hottest stories and benefits, we want to mention a few more stories.

• Cryptopia: In May 2019, the exchange was liquidated due to irreparable damage from a hack. Damage: about $16 million
• QuadrigaCX: In February 2019, due to the death of the exchange’s founder (the only person who had access to the exchange's cold wallet), access to the tens of thousands of users’ funds was lost. Damage: about $130 million
• BitGrail: in February 2018, the exchange owner withdrew funds from circulation due to a fraudulent scheme. As a result, the assets of the exchange were arrested. Damage: about $170 million
• Tagz: in the fall of 2019, the exchange team restricted withdrawals, withdrew liquidity, and announced a hacker attack (probably staged). Direct damage: 226 BTC. The full damage cannot be assessed.
• Bitmarket: In July 2019, the exchange ceased operations due to low liquidity. Some users have not been able to withdraw funds. The founder of the exchange was shortly found shot dead in the forest. Damage: 2,300 BTC. 

FTX: billions backed by air

Not that long ago, Sam Bankman-Fried, the FTX founder, was considered the world's richest entrepreneur under 30. But something went wrong. Namely, the actual FTX’s balance sheet was revealed.

Almost all assets traded on the exchange were backed by FTT tokens (native tokens issued by the trading platform). FTX's reserve reporting was the first card to fall in the company's card castle. It was followed by delisting the FTT token from other exchanges (including Binance). It resulted in a panic selling of tokens, which triggered the depreciation of the only asset providing liquidity.

The FTX case is in progress right now. The company's total debt to users is about $8 billion. So far, eight billion is the largest amount mentioned in this article. It is not without reason that this scam is now being discussed in the crypto industry. But in fact, that's peanuts compared to the following story.

MtGox: how one exchange scammed the entire industry

This story took place in 2013. Back then, Binance didn't even exist, and the most popular centralized exchange was MtGox. More than half of all bitcoin transactions took place on this exchange, and the trading volume was about 80% of the total cryptocurrency trading volume. Even today, Binance has a significantly small market share.

At first, users began to face problems with withdrawing funds, and by February 2014, the funds' withdrawal was suspended completely. Perhaps the exchange would have remained the leader unless, on May 17, 2013, the US authorities had seized the company's accounts for transmitting money without a license. Two days later, MtGox reported that 850,000 BTC were missing due to a hack ($14 billion at press time).

Was the attack real or not? We’ll leave this question for you to ponder. The fact remains that Bitcoins have disappeared, the exchange has filed for bankruptcy, and users have lost funds.

Moral of all stories

These stories featured different schemes, but they share a common detail. As we can see, even the top exchanges can run out of liquidity and go bankrupt after a hack or scam. All of these were made possible by CEX vulnerabilities.

FTX is not the first and certainly not the last centralized exchange scam. Sooner or later, we will hear about the closure of a new large exchange – it's only a matter of time. Even Binance may fall one day, just as MtGox did.

This is why centralized exchanges are considered less reliable than decentralized ones. Using DEX, you do not transfer your funds to the platform but continue to store them on your decentralized personal wallet. Whatever happens to DEX, your funds will stay with you. This is how cryptocurrencies should be used.

DEX is about security!

Which exchanges are safe to trade on?

As you have already learnt from the above, it is safest to trade on decentralized exchanges. They align with the crypto philosophy and are more secure than CEXes.

Here are some examples of popular decentralized cryptocurrency exchanges that have a good reputation:

• WhiteSwap (Ethereum network)
• Uniswap (Ethereum network)
• PancakeSwap (BNB Smart Chain)
• SushiSwap (Arbitrum)

Join the light side. Use DEX!