Exchange Custody Risks: Why Indian Users Should Move Crypto from Exchanges
Leaving cryptocurrency on an exchange might seem like a convenient and hassle-free option for beginners. However, it comes with significant risks that can be eliminated by self-custody.
Exchanges are custodians of user funds but introduce multiple risk vectors, including hacks, insolvency, regulatory freezes, and withdrawal restrictions. The 2024 WazirX hack resulted in the loss of approximately $235 million in user funds, a stark reminder for Indian users of the dangers of exchange custody.
Exchanges hold the private keys to user wallets, meaning users don't control their own coins. This lack of sovereignty means that the safety of user funds depends entirely on the exchange's security and stability. The collapse of FTX in 2022 saw billions in customer funds frozen, highlighting the risks of insolvency.
Indian users are particularly vulnerable to these risks, as seen with the WazirX hack. To mitigate this risk, experts recommend keeping only active trading amounts on an exchange and moving long-term holdings to a personal self-custody wallet.