What happens to your funds after you send them into an exchange or an OTC desk? If you leave your funds on a crypto exchange, you’re essentially pooling your money into a delectable honeypot for hackers looking to steal funds. In 2018, more than $800 million was stolen from crypto exchanges.
Few people know the root of the problem lies in the fact that once you put money, both fiat cash or a crypto onto an exchange, it goes into a giant shared account, and you lose ownership of your crypto. Instead, you own an IOU.
These commingled accounts are risky. Too risky, in fact, for investors looking to trade millions of dollars in cryptocurrencies. While some wait for clearer regulations, others turn to OTC desks, where they’re able to find much larger liquidity than on exchanges. In the meantime, large fiduciaries sit on the sidelines.Any time you put money on an exchange, it goes into one big omnibus account for the cryptocurrency you bought.
While long waits and custodial risk are plaguing investors now, Wall Street veteran Caitlin Long says we’re not far from a better form of settlement through the Lightning Network, which settles off-chain but is still anchored to the Bitcoin blockchain itself.
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