A nested exchange offers users access to crypto trading activities by using an account on another crypto exchange. What this means is the nested exchange has an account on another trading platform, acting as an intermediary between those that want to carry out crypto trading and the direct exchange that hosts the activities.
Nested exchanges tend to possess multiple accounts in regulated exchanges and then act as a bridge to clients. In some cases, this type of exchange allows users to buy and sell crypto for fiat in person. They tend to have little or no KYC procedure, making it easy for anyone to carry out anonymous transactions on the platform. For lack of proper identification, sometimes, their services are even used for illegal activities. Usually, their security architecture is lax compared to those seen in decentralized and centralized exchanges. In some regions, usage of a nested exchange may be termed illegal because of their almost non-existent KYC and AML processes.
What are the risks of a nested exchange?
- Depending on the region that you live in, the regulatory authorities may shut down the crypto exchange. If your crypto is still in possession of the exchange, it is as good as lost.
- These exchanges offer little or no security guarantees of users’ crypto holdings, making them an easy target for hackers.
- Some countries have stringent rules on the type of exchanges their residents can utilize. Using a nested exchange may contradict that rule and get you into legal issues.
Are nested exchanges the same as decentralized exchanges?
No. Decentralized exchanges are not nested exchanges. A decentralized exchange links the buyers and sellers together or utilizes liquidity pools. Though they do not have KYC requirements, decentralized exchanges are never in custody of your funds. In a nested exchange, they are custodial, which means they hold user funds.