Unlike traditional stock exchanges, where your shares remain with your broker until the trade is completed, all crypto exchanges require you to deposit your funds to trade.
This is a recipe for failure as proven by the spectacular failures such as Mt. Gox (hacked or stolen), cryptsy (alleged fraud), Bitfinex (hacked), BTC-e (alleged link to crime), Poloniex (maybe next, trading abnormalies), as you cannot have the crypto exchange serve all three functions namely, trading exchange, custodian and clearing house. This is why when you deposit your funds or shares at your broker, the shares are only given to the buyer upon payment and clearance by a clearing house. Your broker acts as your custodian in dealing with the exchange.
There are currently over 100 exchanges worldwide and many more who provide both trading and wallet functions.
https://cryptocoincharts.info/markets/info
By acting as all three, the risk of being hacked both by external and dishonest owners or employees subject our funds to great risk when it is deposited at a crypto exchange. You have to identify and authenticate yourself, reveal your crypto assets to the exchange, make trades that could be manipulated by whales, and hope for the best each time you withdraw from your exchange wallet.
This is compounded by the fact these exchanges are unregulated businesses run by private investors who can pretty much do what they wish. It is always tempting to abscond with the funds deposited when it runs into the millions of dollars.
Crypto currencies are designed for anonymity and able to operate in a trustless environment with no middleman and yet we have crypto exchanges acting as the middleman whom we must trust. We must give them all our information (risk of hacking and leaking) via KYC/AML rules. This is unlike the traditional model where only your broker knows how many shares you own and the buyer only knows the volume for sale from the exchange and not how many shares you own.
So what is the solution then? Stay tuned.
