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I was reading through the comments to this article at Seeking Alpha and a couple of them talk about the importance of choosing an exchange that allows you to manage the private keys for the cryptocurrency you have bought.

For example one comment says that

GTFO of any exchange who claims they will "vault" your assets for you, and move your Bitcoin into a personal wallet.

What are the potential/hypothetical consequences if an exchange does not allow you to manage your own private keys?

Are there any exchanges that allow this option?

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Managing your own private keys means not having your cryptocurrency assets on the wallet of your exchange but in your own wallet. For example, if you store your bitcoins on some exchange website like coinbase or poloniex you don't control the private keys. Coinbase or poloniex could run away with your coins and you could do nothing about it. This is not just theory, it has happened in the past.

If you store your coins in your own wallet on your own computer with a wallet software program like Bitcoin-core or Electrum, you have full control over your private keys which means nobody except you can do anything with your coins, unless someone else gets access to your private keys by hacking or tricking you. This means you are responsible for your private keys. For example, if you lose them somehow due to a hardware failure or delete them by accident your coins are gone forever. So you have to make sure that this won't happen by taking appropriate measures (backups, secure passwords, etc.).

This is true for all cryptocurrencies alike, not only bitcoin.

So, by storing your coins on an exchange by definition you don't have control over your private keys because you did not create those private keys, that means someone else have seen them before you did.

  • this does not address OPs second question on whether any exchanges allow users to control their own private keys – coderworks Jan 27 '18 at 22:52
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    Also if an exchange begins to deny a particular sell or purchase of any type of currency you still can still attempt to trade via another exchange. Bitconnect consumers suffered this when their exchange stopped accepting bitcoin and then eventually shut down. – Melvin Jefferson Jan 31 '18 at 3:43
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+50

What are the potential/hypothetical consequences if an exchange does not allow you to manage your own private keys?

If an exchange is managing the private keys (i.e. you are not managing your own private keys), it means that the exchange controls your money. They are then like a bank; you deposited money in and got a promise that they will give you the money later when you ask for it. This means that you are trusting them to hold onto your money securely.

Because they control the private keys, they could steal your money by taking it and running away. Or if the exchange were to be hacked, the money could be stolen by hackers. Both of these scenarios have occurred in the past. In either case, your money would be gone and there would not be much that you could do about it.

Are there any exchanges that allow this option?

In the traditional sense of an exchange where you have an account and login (e.g. Bitstamp, kraken, Bitfinex, etc.), no. No exchange allows that for multiple reasons: controlling your own private keys means that during an actual trade, you may scam the other trader by taking their money and not releasing the amount you were to pay; it also means that the exchange will work less efficiently as instead of doing trades in an internal database, trades must occur on chain.

There are decentralized exchanges which allow you to control your own private keys such as Bisq. But few people use them and there is a bit more risk involved because the other party could scam you.

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1.) next to the reply from ooze, the importance of managing "my own keys" relies on the fact, that you control the funds. If you don't have the keys, then you need to trust someone, that he doesn't abuse your keys/funds. Easy as this. For low values you can easily trust someone, for high values? The history of bitcoin is full of losses due to trust issues (including exchanges going down).

There is a pitfall with managing your own keys: it requires some serious thoughts to secure them. And with high volume funds, you immedeatly come into the cold storage topic, requiring you to spend some time for the process on it. I just posted a generic answer here.

2.) yes, there are exchanges to give you "your" privkey. Blockchain.info for example. With bitcoin and ethereum. I haven't seen it (yet?) in BitTRex, nor in HitBTC, nor in Binance. Gatehub allows you to export for Ripple wallet. I leave the other options for the audience to contribute.

  • I really wouldn't classify blockchain.info as an exchange though. Apart from their broken BTC -> Bcash, they don't really allow any form of trading on their platform – Rutger Versteegden Jan 31 '18 at 16:16
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Looking for an answer (or additional clarification) to this question in the original post: Do any Bitcoin exchanges work so that the customer is the only one with the private keys?

I have not seen any Bitcoin exchanges that allow you to have exclusive (when compared to them) the private keys of your wallets with them. In the event that a Bitcoin Exchange is objectively honest and honorable, letting you control your private keys could be seen as a liability that you could then blame on them. The reason is if you claim they mismanaged your private keys when they also gave you copies of them, how can they determine, as an organization whether they have someone in their ranks stealing them or if you are trying to scam them or if the leak was on your side. They don't know if someone hacked your computer and stole your bitcoin, nor would you necessarily know.

They would also be unable to control your coins for trades due to you having the private keys, so they wouldn't be able to send your coins elsewhere which would defeat the purpose of their platform. Yes, they could just let you send to a particular address to complete a transaction, but then you have to wait for the bitcoin network for the exchange to complete and then the exchange either can't take their "cut" of the transaction, or it would require you pay a transaction fee to the bitcoin network just to send it to the exchange (which would probably cost you more than transferring on the exchange) and pay the exchange a cut, which isn't really worth it. That's in addition to taking maybe 1-2 hours for your transaction to the exchange to be confirmed by the Bitcoin network, and the person on the other end of your trade likely is unwilling to wait that long.

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I don't know about any Bitcoin exchanges, but for Ethereum you can do this with decentralized exchanges like Idex.market and EtherDelta.

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  • No, none. Every bitcoin exchange as of now can see your private keys.
  • Such an exchange cannot exist for fiat.
  • Crypto-to-crypto exchanges can possibly do it.

The problem with building such an exchange is that since the exchange is not controlling the money, it is to be controlled by a system of smart contracts that let you atomically swap. Setting up these series of contracts(eg opening a payment channel) takes a lot of time and discovery of bids is slower too. As a result decentralised exchanges are supposed to be very slow.

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