Nested exchanges are becoming a popular tool for money launderers. Learn all about nested exchanges/services and what steps we are taking to combat them, how to avoid them and why accounts are blocked or frozen as a result.

Main points:

  • Nested exchanges provide encrypted trading services through accounts or wallets on existing host exchanges.
  • For money launderers who want to bypass KYC and AML requirements, nested exchanges are an attractive encryption platform.
  • In this article, you will learn how to avoid nested exchanges, common security issues, and how we can solve this problem at Binance.

A new trend is emerging in the cryptocurrency world, but it is not pretty. They are called nested exchanges, and they are the latest tool of choice for money launderers around the world. In short, nested exchanges provide encrypted trading services through accounts or wallets on existing host exchanges. Nested exchanges usually operate secretly and are rarely associated with host exchanges. So why do people use them?

Some users prefer nested exchanges because they enforce minimum Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. Maybe they live an anonymous life away from the grid, or worse, they are doing something evil. Usually, it is the latter case. Here is how the nested exchange works:

  • Person A visits the nested exchange and decides to trade Ethereum for Bitcoin
  • A person deposit Ethereum On the nested exchange.
  • Nested exchange sending Ethereum Go to their account/wallet on the host exchange to complete the conversion.
  • The nested exchange returns the newly converted funds to A, and the transaction is completed.

However, loose requirements make this process a very attractive avenue for bad actors who want to cover up their illegally obtained funds and bypass the requirements of centralized exchanges such as Binance. In this article, you will learn how to avoid nested exchanges, common security issues, and how we can solve this problem at Binance.

How to avoid nested swaps

The nested exchange looks just like your traditional encrypted exchange. Some may have the wrong user interface, but this is not very common. Users will usually know what nested service they are using, but most people will not see or know the host exchange it is running on. If you want to avoid nested exchanges and all related risks, we recommend using a regulated centralized exchange or a nested service that legally complies with appropriate KYC and AML procedures.

If your cryptocurrency exchange requires little verification checks or trading restrictions, this is a clear warning sign. If you suspect that your provider is a nested exchange, you can always use the blockchain explorer to track whether your funds come from another exchange’s wallet.

Security Question

The major risk of these services is the lack of oversight by host exchanges. Remember, by placing the complete trust of your funds in the lowest security exchange, you also take greater risks. Bad actors deliberately use these services to avoid AML/KYC procedures for hosting services. Even if you use nested exchanges in your daily crypto transactions, you may unknowingly fund criminal and terrorist activities. In this case, the nested exchange may be deleted by law enforcement agencies. Your funds may be confiscated or frozen indefinitely, depending on the jurisdiction and duration. If law enforcement has reason to believe that the nested exchange is performing illegal operations and can take legal action against it, the service and its assets may be frozen and/or seized. There are many reasons why law enforcement agencies may take this action, but users should worry that their funds may not be recovered due to legal proceedings against a certain service. Even if they are recoverable, they can be heavy work in terms of time and financial resources.

How Binance fights nested transactions

In most cases, host exchange compliance officers will contact customers about the risks of nested exchanges. Of course, this applies to many other situations besides nested exchanges. If you encounter this situation, please cooperate with the compliance department, provide any required documents and answer all questions truthfully. At Binance, we regularly review corporate and personal accounts that appear to be in business. These audits include risk scoring and capital flow analysis. We also recently implemented TRM Labs Chain Analyzer, an industry-leading security tool that can identify nested services that exist in macro exchanges.

If the nested service appears to be malicious, appropriate measures will be taken, including cancellation and enforcement and regulatory notices. Currently, nested exchanges are very popular in Ukraine and Russia, and money laundering activities in these two countries are the most concentrated in each geographic region of all customers. Just recently, we cancelled the platform for multiple accounts related to Suex.io, an illegally operated Russian cryptocurrency exchange, and shared all relevant information with the relevant authorities.

As an industry leader, we have a responsibility to combat bad actors and protect the crypto ecosystem. Although we do our best to discover and mark nested exchanges on our platform, these accounts do not always declare their status as nested exchanges. We recommend that our users follow best security practices, trade on KYC and AML-compliant exchanges, and look for nested exchange red flags.

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Disclaimer: This article is for reference only. It is not a direct offer or invitation to buy or sell, nor is it a recommendation or endorsement of any product, service or company. Bitcoin Network Does not provide investment, tax, legal or accounting advice. The company or the author is not directly or indirectly responsible for any damage or loss caused or claimed to be caused by using or relying on any content, goods or services mentioned in this article.


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