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Is My Money Safe on a Crypto Exchange?

Money on a crypto exchange is held by the exchange, not you, so safety depends on its practices and transparency. Here is what to check, and how proof of reserves helps.

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Is My Money Safe on a Crypto Exchange?

Direct answer

When you hold crypto on an exchange, the exchange controls the assets, not you. Your money is only as safe as that exchange's solvency, security, and conduct. No exchange can be called completely safe, but you can assess the risk by checking how transparent and well-run it is, and you can reduce custodial risk by moving assets you do not actively trade into self-custody. One of the strongest transparency signals to look for is verifiable proof of reserves.

Why this matters

Holding crypto on an exchange is convenient, but it means trusting a third party with your assets. Past exchange failures have shown that funds can be lost when an exchange becomes insolvent, is hacked, or mismanages customer assets. The phrase "not your keys, not your coins" captures the core point: if you do not control the private keys, you are relying on the exchange to honour your balance. Understanding that trade-off helps you decide how much to keep on an exchange and which exchange to use.

How it works

The safety of funds on an exchange rests on a few factors:

  • Custody. The exchange holds the keys. You hold a claim, recorded in the exchange's system, not the assets directly.
  • Solvency. The exchange must actually hold enough assets to cover what it owes customers. This is where proof of reserves matters.
  • Security. Protection against hacks and internal theft, including how much is kept in cold storage.
  • Conduct and regulation. Whether the exchange is licensed where it operates, and how it handles customer assets, complaints, and withdrawals.

A useful way to think about it: regulation and audits reduce the chance of a problem, transparency lets you see warning signs earlier, and self-custody removes the custodial risk entirely for the portion you move off the exchange.

Practical example or analogy

Keeping crypto on an exchange is like keeping cash with a custodian rather than in your own safe. It is convenient and often necessary for trading, but you are trusting the custodian to keep the money there and give it back on demand. You would want to know that custodian is solvent, audited, and regulated. Crypto is the same, with the added option of taking self-custody whenever you choose.

Key steps or considerations

When assessing an exchange:

  1. Check regulation and licensing in the jurisdictions where it operates.
  2. Look for verifiable proof of reserves, not just a claim that funds are safe.
  3. Review security practices, such as cold-storage policy and incident history.
  4. Read the withdrawal terms, including any conditions that can pause withdrawals.
  5. Hold only what you need on the exchange, and move longer-term holdings to self-custody.

How proof of reserves and Sixpence relate to exchange safety

Sixpence does not custody your funds or make a given exchange safe. Where it fits is transparency: helping exchanges demonstrate that they hold the assets they owe, which is one of the clearest safety signals a user can look for.

  • Ledgernalysis supports verifiable proof of reserves. It provides attestations and audit-grade analytics for proof of reserves, including an attestation bundle with a Merkle root, methodology, and coverage, plus a public website widget and data feeds. This is the machinery behind a credible proof-of-reserves page, the kind of evidence worth looking for before trusting an exchange with significant funds.
  • This is an area Sixpence is investing in. Sixpence was selected by Coinbase, out of more than 50 proposals, to work on research and development of an open-source hub for proof of reserves.

For the deeper explanation of how proof of reserves works and what it does and does not prove, see the related guide on proof of reserves.

Limitations and compliance considerations

  • No exchange is risk-free. Regulation, audits, and transparency reduce risk; they do not remove it.
  • Proof of reserves is not a full audit. It shows assets at a point in time and is strongest when paired with a view of liabilities. The related proof-of- reserves guide covers this in detail.
  • Self-custody carries its own responsibility. Moving funds off an exchange removes custodial risk but means you are responsible for your own keys.
  • This is general information, not financial advice.

Frequently asked questions

What does "not your keys, not your coins" mean? If you do not control the private keys, you are trusting the exchange to honour your balance. Self-custody means you hold the keys yourself.

Is a regulated exchange automatically safe? Regulation reduces risk and adds oversight, but it is not a guarantee. Combine it with transparency and your own limits.

What is proof of reserves? It is verifiable evidence that an exchange holds the assets it owes customers, often using cryptographic methods. See the dedicated guide for how it works and its limits.

How much should I keep on an exchange? That is a personal decision, but a common approach is to keep on the exchange only what you actively trade and self-custody the rest.

Conclusion

Money on a crypto exchange is held by the exchange, so its safety depends on the exchange's solvency, security, and conduct, and on your own choices about how much to keep there. Check regulation, security, and above all transparency, and treat verifiable proof of reserves as a key signal. Sixpence supports that transparency through Ledgernalysis, which gives exchanges the tools to publish verifiable proof of reserves. To understand what that evidence does and does not prove, read the proof-of-reserves guide.

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