Crypto RegulationGUIDES

5 noticeable Cases When Crypto Exchanges Have Frozen User’s Funds

4 Mins read

Quite devastating for crypto exchanges to hold money that investors have worked hard to earn. Investing in cryptocurrency requires courage and determination to start earning. It hurts that after taking the necessary steps of learning and mastering the best strategies to mint money through crypto, an exchange decides to freeze an account.

Hoarding of accounts leads to panic among the users because most of them have invested money, time, and emotions to pull out trades. Knowing the following steps to take after exchanges freeze funds is crucial. 

Reasons Crypto Exchanges Freeze Funds 

Exchanges come up with several reasons to freeze a user’s account. Here are the five main reasons.

  1. Suspicious activities in the account

Once an exchange finds out that an account conducts suspicious activities, it has the right to freeze it. Every exchange has installed tools that help detect any suspicious activity that might cause harm to the crypto space. Tools such as CipherTrace enable the exchange to flag any perilous transactions.

The tool can also decipher whether the transactions originate from prohibited entities or regions. It also can categorize questionable transactions into aspects such as dark market, criminal activities, or gambling. It can also categorize activities into malware or ransomware. When flags rise in an account, an exchange has the right to put funds on hold. 

  1. When the Crypto Exchange is Under Siege

Security is the first attribute to which each exchange has to allocate more resources and attention. Cybercriminals also continue to advance their capabilities of penetrating high-level security grounds.

Unscrupulous people take their time in finding out the vulnerabilities of exchanges. Liquid, one of the cryptocurrency exchanges, lost more than $97 million to attackers. In case of an attack, the crypto protects its users and frees accounts to ensure no money goes out or comes into the exchange. 

  1. Violation of Exchange’s Terms and conditions 

Deviation from terms and conditions set by an exchange can lead to the freezing of funds. Once one signs into a platform, it is necessary to read and accept the terms and conditions. The penalties for individuals going contrary to the terms set include freezing funds. Aspects such as coin mixing are unacceptable to crypto exchanges. On the other hand, FTX was under criticism after exploiting users. 

  1. Court injunction forcing an exchange to freeze accounts 

Recognition of crypto as a medium of crypto exchange is now common in many jurisdictions. The regulators use court orders to force an exchange to freeze its accounts or specific accounts that might have violated the rules set to govern transactions. Every exchange in the jurisdiction must obey the court orders issued. 

  1. Interruption in the exchange

Crypto exchanges depend on internet technology to operate. In some cases, downtime might result due to some unaffordable circumstances in the platform. It is possible for an exchange’s platform to become overwhelmed by some actions, thus making it experience glitches.

Aspects such as a bullish run can lead to a high number of investors joining the platform to earn from its gains. The large number of trades conducted affects the operational capability of the crypto exchange, thus causing delays. 

Cases of Exchanges freezing accounts 

  1. Virgil Capital due to a lawsuit

A case against the company led to a court order to freeze the affiliates and former management due to fraud charges against one of the directors of Virgil Capital. The injunction also affected customers whose accounts were also frozen. Every account could only operate once the injunction period ended. 

  1. Coinbase freezes accounts due to unmonitored account takeovers 

Coinbase is not new to cases of account freezing. Customers accused the exchange of imposing suspensions when there was a bull run in Bitcoin. Some customers saw it as one of the ways the exchange was used to control their investment activities. Although exchanges have the right to suspend accounts or freeze funds, they must give compelling reasons for taking the actions. 

  1. Binance leveraged trading 

Global customers on Binance faced account freezing between late 2020 and mid-2022. The company did not give clear reasoning for suspending the accounts. Devastated traders who had invested in Binance expressed their sentiments on the company’s trajectory toward taking advantage of the market.

Most people became concerned about the rate of account freezing in Binance, leading to a slow number of people joining the platform. Binance is the leading crypto exchange in the market, and its actions impact most people. 

  1. CoinDCX freezes accounts due to ‘pump and dump.’

CoinDCX is prominent in India. The exchange came under criticism when it suspended the accounts of users due to suspicious activities. The suspension occurred when Bitcoin was dropping in January 2021. 

According to the crypto exchange, the accounts frozen had engaged in a ‘pump and dump’ structure that breached the rules and regulations of trading. It had suspended four accounts enticing investors towards investing in smaller coins. CoinDCX took the initiative of warning its investors about putting money on coins they had inadequate knowledge of. The suspension of trading in the case of CoinDCX was to protect its investors from exploitation. 

  1. Hacking led to KuCoin freezing accounts. 

Devious folks gained access to KuCoin and took more than $150 million. The hack forced the management to authorize a suspension of transactions to assess the situation and devise an amicable solution. 

Parting shot 

There are various steps to take to regain a frozen account. First, contacting customer care is the best idea since they might have the correct answers, but sometimes, customer care might need to be more responsive because of calls from many people.

Halting resulting from an outage can be resolved automatically. Any individual guilty of breaching terms and conditions faces a risk of closing the account entirely. Crypto exchanges have a right to seize illegal funds. 

Nevertheless, crypto exchanges must validate the account of any user flagged wrongfully. In occasions of a court injunction requiring the crypto exchange to freeze the user’s account, the user can seek an alternative order or wait for the progression of the court to make a final verdict. Account freezing leads to frustration, but the affected party must be ready to get answers from the concerned authority.

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