Nested exchanges have grown increasingly common for illegal activities as a result of the lack of regulation.
When using specific aspects of the exchange, users in the digital asset sector may emerge the idea of a "nested service." This approach is prevalent in traditional and digital banking, and it is frequently used to expand the functionalities of a platform to a group of end-users. For example, users can acquire access to more trading pairs from another exchange, or a bank operating in one region seeks to expand its services to another region, which is referred to as correspondent banking.
Carrying this idea ahead, whole nested cryptocurrency exchanges have developed, working in a manner quite explained above. A user or investor can form their account on an exchange and utilise it to provide "trading services" to unknown parties.
As a result, these exchanges are usually considered instant exchanges, and they may even strengthen several accounts to complete these deals. Instant exchanges will be able to acquire all of the facilities and functionality linked with the platform they are using under their name. In this situation, we may draw an analogy with a third-party travel website that gathers vacation packages on its platform, even though these services are not their own. Whereas these platforms provide ease and save users time that would otherwise be spent shopping around, these benefits may arise at the risk of a user's security, a similarity that can be observed in the crypto space.
Regulations are still being established because of the industry's rapid expansion, causing gaps in the Know Your Customer (KYC) and Anti-Money Laundering (AML) policies that ensure the safety of exchanges. As a consequence, cybercriminals frequently target nested exchanges.
Accordingly, it is not unusual for a nested exchange to unwittingly assist bad parties such as cybercriminals, ransomware payments, and money laundering. One example was SUEX, an unregulated exchange that converted illegal crypto ransoms into fiat currency, which Binance supported in de-platforming many accounts connected with it, with communication taking place over Telegram. SUEX was eventually sanctioned for these acts by OFAC, the Office of Foreign Assets Council.
Nested exchanges serve as a warning for users, implying that faith is given up over the custody of your funds via their use, resulting in less safety and fewer assurances than a compliant centralised or decentralised exchange (DEX).
Trading in a secure manner
The most simple method for investors to prevent assisting these destructive middlemen is to buy digital currencies via cryptocurrency exchanges that follow accurate KYC and AML protocols. It is thus the user's responsibility to perform the proper research before using a new platform, assuring relevant criteria are followed, and they are now unintentionally involved in a nested exchange.
The identification of KYC and AML protocols is one of the required tests. This is frequently the first step a user must do before they can begin trading. A secondary aspect is the user interface. Reliable exchanges will usually show the exact location of trades, providing users with some added protection through transparency. In keeping with transparency, a credible exchange will generally publish a clear statement stating that they are enabling the trades taking place on their platform.The absence of this data might be a sure sign for a nested exchange.
Users may go forward by checking at the exchange rates. Any difference in pricing may detect the presence of nested accounts, as account owners utilise various exchanges, each with its own range of rates.
If the exchange fits all of these criteria, a final check may be performed by following the track of your cryptocurrency on the blockchain using a public blockchain explorer. Users can determine when a wallet is linked with another exchange by carefully analysing the actions.