There has been an increase in the freezing of digital assets held in centralised exchanges, with token holders demanding answers. The recent FTX saga has only exacerbated the instances of centralised exchanges freezing assets. Understanding why your wallet is frozen requires an exploration of crypto exchanges, arbitrage, and their legal requirements.
Both centralised and decentralised exchanges are platforms which enable investors to trade cryptocurrencies and facilitate price discovery. On a decentralised exchange (DEX), transactions occur directly between crypto traders using smart contracts without interference from facilitators or intermediaries. DEXs uphold a key principle of cryptocurrency: to enable transactions to occur between parties without the need for a third party. Essentially, the control provided to a user on a DEX is a key advantage. DEXs allow users to exclusively trade cryptocurrency tokens directly with other users.
A centralised exchange (CEX) enables trading to occur on a platform moderated by a private company or third party. Account and customer support services are available, and much like other stock trading websites, investors can buy and sell digital assets which are recorded using a central order book system. Since CEXs would retain custody of all digital assets on the platform rather than allow users to have exclusive access to their wallets, CEXs are much more susceptible to hacks and data breaches. Importantly, the CEX holds the users’ private keys, allowing it to prevent transactions ordinarily pursuant to its terms and conditions.
What is crypto arbitrage and is it legal in Australia?
Crypto arbitrage is a trading strategy to earn a potential profit by taking advantage of price discrepancies whereby investors purchase cryptocurrency on one exchange and sell it on another exchange for a higher price. Factors such as the fluctuation in trading volume and the latest bids on an exchange order book may contribute to price discrepancies between CEXs. One of the benefits of arbitrage is that it has the potential to balance an asset’s price across markets by attracting additional traders also hoping to exploit price discrepancies.
Cryptocurrency arbitrage is perfectly legal in Australia. At present, the Australian framework treats cryptocurrencies as property, in the sense that capital gains tax applies. Additionally, under the current legal framework, cryptocurrency exchanges must be registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC). AUSTRAC is an agency responsible for detecting criminal abuse of the financial system and thus, cryptocurrency transactions and reporting entities (such as digital currency exchange providers) are subject to the Anti-Money Laundering and Counter- Terrorism Financing Act 2006 (AML/CTF Act).
The Act places special focus on fulfilling Australia’s international obligations to combat money laundering and the financing of terrorism. In an AUSTRAC report reviewing the AML/CTF Act, it was highlighted that offshore businesses providing services to Australian customers are not regulated thereby gaining a competitive advantage. However, this is a rapidly changing regulatory environment and the existing laws are subject to these changing conditions. Although arbitrage is legal in Australia, CEXs may have to protect themselves against risks such as technical errors, money laundering and data breaches.
Why is my wallet frozen?
deducting relevant assets from their account in order to recover the assets. In relation to assisting with investigations, Binance’s terms state that they will not hesitate to seize, freeze, or terminate accounts which are flagged or investigated by legal mandate.
Salerno Law Cryptocurrency Lawyers
This article is for general information only and should not be relied upon without first seeking advice from a professional. Salerno Law is known for providing expert legal solutions in relation to operating cryptocurrency exchanges, crypto tax structuring, and estate planning. If you are experiencing hardship as a result of a frozen digital wallet or wish to seek legal advice on cryptocurrency in general, please contact our office.
Authors: Ziba Ashford and Hesham Aiyach