update 2 September 2021

Why Do Exchanges Freeze User’s Crypto Funds?

cryPicture this: you’ve finally mustered the courage to take the plunge into crypto. Everything is going right for you. You’re mastering the hacks to optimize your investment and are looking forward to a fulfilling experience within the space. Then it happens. You log in to your account and find that you can’t access it anymore, let alone transact in it. In a panic, you try customer support to no avail. Next, you can’t help asking how you got here. Is it something you did? Will the situation resolve amicably? How long will it take to do so? It’s not a far-fetched reality to find your exchange suspending your account. So, why does that happen? Are there any cases of such suspensions?

Moreover, what can you do to correct the situation if it affects you? This article outlines the reasons why an exchange will freeze your crypto funds. It also details how you can go about resolving the issue. Without much ado, let’s jump in then.

5 Reasons Why Your Crypto Exchange Froze Your Funds

Your exchange could provide several reasons to block access to your account. Here we look at the five reasons why crypto exchanges freeze user accounts.

1. They’ve Noticed Suspicious Activity From Your End

One reason your exchange will freeze your account is if they notice suspicious activity from it. While trying to curb crypto crime, exchanges have installed tools to detect crypto funds linked to illicit activity.  CipherTrace’s tech tool, for instance, enables exchanges to flag potentially risky transactions. Again, it can determine if transactions involve a prohibited region or entity. 

Similarly, it categorizes suspect transactions into criminal, gambling, and dark market. Further categories include ransomware and malware. Once the tool flags your account for any of these, your exchange will hold your funds pending validation.

2. You’re Violating the Exchange’s Terms and Conditions

Each exchange has its terms and conditions. By signing up to a platform, you agree to abide by their set rules and regulations. Any deviation from them is a violation that could result in account suspension. For instance, many exchanges forbid coin mixing. Engaging in such will lead to the freezing of your account(s).

3. The Exchange is Under Attack

Although exchanges have advanced their security features, they remain a lucrative hunting ground for cybercriminals. Unscrupulous individuals scour the crypto space looking for vulnerabilities in exchanges. Once they find them, they exploit them. 

Several custodial exchanges have fallen prey to hackers who’ve made off with users’ funds. Recently, for example, hackers hit Liquid, a Japanese cryptocurrency exchange, for $ 97 million. 

When an attack occurs, exchanges take steps to limit the resulting damage. The first resort is to suspend all transactions. This action gives them a chance to secure the remaining crypto funds. Additionally, it enables them to plug the loopholes that exposed them to the attack(s). 

4. The Platform is Experiencing Downtime

Besides blockchain, cryptocurrency exchanges also use internet technology. And sometimes, their systems experience glitches. Most of these outages result from demand for a platform’s services that outstrips its capabilities. 

A bull run provides the perfect scenario for orders to overwhelm an exchange’s capacity. Drawn by a cryptos bullish run, many investors would want to join in its gains. The massive volume of orders they place overburdens the system. 

Consequently, the project has to come in to forestall a potential crash. They freeze accounts and transactions for a while to diffuse the pressure. This way, they allow the digital assets exchange to revert to its optimum functioning in due time.

5. There’s a Court Injunction Freezing the Exchange’s Activity

Many jurisdictions are beginning to acknowledge cryptos. As such, they’re increasingly bringing crypto projects under regulation. And at times, regulators get court orders to suspend the activities of an exchange or specific accounts. Not keen to run afoul of the law, these exchanges have no recourse but to comply.

A case in point is last year’s freeze of Virgil Capital’s crypto funds. The SEC obtained an injunction suspending the former and its affiliates from accessing their crypto holdings. At the time, the former accused the latter of abetting fraud by one of its directors. It follows that Virgil Capital and even its customers would face account suspensions for the duration of the injunction.

Prominent Exchanges That Have Previously Frozen User Accounts

History is replete with exchanges that have suspended user accounts. Here are a few of them:

  • Coinbase – the exchange is no stranger to freezing accounts. In December 2020, it attracted the wrath of its customers. Then, many users accused it of freezing their accounts amid a Bitcoin bull run.
  • Binance – between late 2020 and mid this year, it froze accounts of many of its global customers. The dev team didn’t explain the reasoning behind the act. Its May 2020 incident, however, coincided with the plummeting of BTC.
  • CoinDCX – the Indian exchange suspended user accounts for suspicious activity in January 2021. The said activities had peaked with BTC’s rallying at the time.
  • KuCoin – in late 2020 it froze user accounts to deal with a $150 million hack it had suffered.

What Should I Do to Regain My Frozen Account?

Depending on the reason for the suspension, there are several interventions you may take to regain access to your accounts. First, you need to contact customer support to seek answers for the suspension. That said, many are unresponsive, and you’d be lucky to get a response from them.

If it was due to an outage, then you need not worry. The exchange will restore your functions after it sorts out the capacity challenge.

For other causes of suspensions, it might take longer. For breaching the exchange’s terms and conditions, you’d be lucky if they restored your account. It’s worse for accounts that have handled illicit funds. If it turns out that the transactions were illegal, the exchange will seize your crypto funds.

However, if the exchange has wrongfully flagged your account for illegal activity, they’ll require you to validate your particulars. After that, they’ll look into your transactions, and if clean, they’ll restore your access.

In instances where there’s a court injunction freezing your account, you have two options. The first is to seek an alternative court order restoring your account function. The second is to wait for the court process to run its entire course. Then the court will determine whether or not you’ll regain control of your funds.

Final Thoughts

For a crypto investor, the frustration of a frozen account ranks up there. One moment you’re fully in control of your account and your funds. In the next instance, you can’t perform the simplest of functions. The panic that ensues aside, you need to know the reasons behind the suspension. This article has only picked five of the most frequent ones. It has also gone ahead and identified instances where leading exchanges have withheld users’ funds.

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Moreover, it has suggested measures to restore the control of your account and funds. What remains crucial is that you strive to stick to the platform’s terms and conditions. Similarly, ensure that your transactions are always above board. These simple actions will save you the time and agony of pursuing funds that you may never recover.

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