What Have I Done? Or How to Avoid Getting Banned on a Crypto Exchange

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Starting on September 12, US residents will be blocked from trading on Binance. Traders will have to wait until the exchange launches Binance US. Many are disappointed, even though Binance has warned everyone in advance and nobody will lose their money. But what if you suddenly get banned and all your orders are automatically closed? In this post, we’ll explore why traders usually get banned and how you can avoid it.

Leading exchanges don’t ban users for no reason. If your account got blocked, the exchange must believe that you’ve violated one of its terms listed in the user agreement or the agreement itself was recently changed, banning something that you were doing. Though few traders read user agreements, they really should. Such documents usually list all major reasons for a ban.

1. Crypto tumblers and dirty Bitcoins

Here’s an excerpt from the rules of BitMEX – an exchange specializing in Bitcoin trading.

“You must not carry out any activity that involves proceeds from any illegal or unlawful activity (including activities relating to cryptocurrency tumblers, darknet markets, money laundering or terrorism financing).”

How did crypto tumblers end up on the blacklist? It’s very simple. True, mixers/tumblers themselves are legal (for now). But they can be used to “wash|”dirty crypto – that is, coins used to launder money, hide traces of crypto theft, finance terrorism, and so forth. What is the risk that an exchange will catch you using “washed” coins? Probably not very high. But remember: every Bitcoin that you deposit in your trading account after passing it through a tumbler gives the exchange sufficient grounds for a ban.

There’s another side to this: if you accidentally buy a Bitcoin that has been used in some criminal activity, the authorities could theoretically prosecute you for complicity. This is particularly dangerous for institutional investors. Even though exchanges have their own internal mechanisms for checking if a coin is “clean”, they don’t share them with their customers. (There are third-party B2B tools that can do the trick, though.) So far only one platform – Velvet Exchange – has announced the launch of a tool for detecting dirty crypto assets. At first, the service will be available to corporate clients purchasing the premium service package; a release for individual traders is in the works. One can only hope that other exchanges will follow suit.

2. Market manipulations and large orders

From the T&C of Bittrex – one of the market leaders in terms of the number of currency pairs and altcoins (8.1),

“You will not engage in any type of market manipulation.”

Crypto trading volumes are still so small compared to the stock market that a single large deal can impact the price. That’s exactly what happened in April 2019, when a $100-million order placed by a whale pushed the BTC price up by $1,000. Some traders consciously manipulate prices. They place big orders at a price that is very different from the current market price in order to elicit a reaction from bots. Next, they cancel these bluff orders and place new ones – resulting in a new price. This is known as spoofing. In the altcoin markets, where daily trading volumes often don’t exceed several hundred thousand dollars, the manipulation problem is even more acute.

There are two main ways to trade large amounts of crypto without influencing the market price, which could be judged as manipulation by an exchange: OTC trading and dark pools. OTC (over-the-counter) desks mostly operate outside of exchanges. Clients make direct requests to brokers. According to experts, OTC deals account for up to 65% of all crypto trading volume.

Dark pools are exchanges where bid and ask prices aren’t advertised. Quotes are taken from large “lit” exchanges, and deals are executed without slippage. Dark pools account for up to 8% of all crypto trading volumes.

Both dark pools and OTC desks ensure great liquidity and maximum privacy, which is crucial for institutional clients. Unfortunately, both options carry serious risks. The very anonymity that attracts whales makes fraud much easier. For instance, last year a conman almost made away with $700 million when he tried to sell BTC he didn’t have.

Therefore, if you need to place a large order, it’s wiser to use a verified crypto exchange that offers automated OTC services and fiat transactions – such as Kraken, Velvet Exchange or Bittrex. Make sure to double-check that the exchange fully complies with the law and will provide all the documents you need for reporting and accounting purposes. Otherwise, you can expect trouble with your bank.

3. Automated trading

From the Poloniex T&C (art. 22),

“You will not engage in any (…) fictitious transactions or wash trades, front running…”

“You will not take any action that imposes an unreasonable or disproportionately large load on our infrastructure…”

After reading the first excerpt, you might ask: why don’t exchanges ban bots, then? After all, bots are responsible for most market manipulations. They constantly engage in fictitious transactions, front running, and other dirty tricks.

Exchanges won’t ban bots because every automatic trade (even fictitious) means additional revenue in fees for the exchange. However, if you use a bot, your account can get temporarily blocked based on the second rule: unreasonably large load on the system. This is the “too many requests” API error. In case of an overload, the exchange won’t disable its API, which would lead to a loss of revenue. Instead, it will simply block some IP addresses. This creates additional risks for those traders who use VPN services to hide their jurisdiction.

4. Restricted territories

From the OKex Terms of Service (art.1),

“We may… restrict or prohibit use of all or a portion of the Services from Restricted Locations, which at this time include Hong Kong, Cuba, Iran, North Korea, Crimea, Sudan, Malaysia, Syria, USA […], Bangladesh, Bolivia, Ecuador, and Kyrgyzstan.”

Exchanges don’t just forbid citizens and residents of some countries to access their services. You can get banned for using an exchange while on the territory of these countries – even if you came there as a tourist. So if you plan to do some trading while on vacation, make sure that your destination isn’t restricted. And remember that the blacklist of countries can be expanded at any moment to include your country.

Of course, other reasons for bans do exist, but the majority of cases fall under one of those we’ve listed here. What should you do to avoid getting banned? There’s no single guaranteed recipe, but the best way is to read the user agreement thoroughly. Forewarned is forearmed, right?

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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

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