Using exchanges for long-term custody of crypto assets is not advisable due to the significant risks involved. The notorious hack of the Mt. Gox exchange a decade ago, which resulted in the loss of 7% of all bitcoin (valued at around $45 billion today), highlighted these dangers and was a major event threatening the crypto ecosystem. Despite this, the industry has not learned from past mistakes, continuing to experience similar incidents.

In 2023 alone, over $1.8 billion was lost to hacks, with large platforms like Binance under pressure from institutional players to use independent custodians while retail customers remain vulnerable. For instance, FixedFloat, a decentralized and non-KYC crypto exchange, lost over $26 million in a hack. In 2024, the global crypto community has already lost at least $200 million.

There is a widespread reluctance in the industry to address the risks associated with using exchanges for custody, despite numerous cautionary tales. Users continue to treat exchanges as custodians of their assets, which is problematic given the inconsistent and insecure offerings from even the largest players. Trust issues are exacerbated by fraudulent actors and malpractice, as seen with Binance’s $4.3 billion AML charges and the FTX collapse, which caused significant financial and emotional damage.

Exchanges play a crucial role in managing, trading, and off-and-on-ramping assets, but they are unsuitable for custody. Regulatory bodies like the Financial Stability Board (FSB) emphasize the importance of separating exchange functions from custody, yet the industry largely ignores this advice.

Alternatives like self-custody present their own risks, including human error and cyberattacks. Cold wallets, though safer, still face security threats and are outdated in their approach. With bitcoin's price surge attracting more users, the industry is particularly vulnerable to hackers, as new entrants often overlook due diligence.

To ensure the safety of crypto assets, users should consider regulated institutions that operate to high standards of security, akin to traditional banking. These institutions offer a more reliable option for storing assets, blending stability with the innovation of cryptocurrencies.

Ignoring the risks of exchanges for long-term custody is absurd, and the industry must take security seriously by promoting truly regulated solutions to avoid repeating past mistakes.

Joey, a top-ranked lawyer by Chambers and Partners, has extensive experience advising major global platforms in the crypto space. He has co-chaired the Gibraltar Government’s working group on Blockchain, consulted for the United Nations, and contributed to various blockchain and regulatory initiatives globally.