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I have been told by some that bitcoin exchanges do NOT record BTC transactions by a buyer/seller on the blockchain, but rather hold them in their own name and ledger - eg, if I buy one BTC via an exchange, I do not own a UTXO on the blockchain, but simply have been 'assigned' a BTC that the exchange owns.

This of course, would give rise to counterparty risk, even ignoring fraud risk.

Truth or fiction?

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Most exchanges are centralized services, operating in the way you've mentioned. So yes, the exchange owns the bitcoins, so there is significant counterparty risk involved with storing your coins on an exchange.

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  • So, how does one determine the risk of an exchange? I have been studying something called "Proof of Reserve" which seems to be a cryptographic way to prove a minimum fractional reserve. – GPB Mar 1 '18 at 12:08
  • I think most people would agree that exchanges with publicly known owners/operators, and those that adhere to government regulations are likely less risky to use than an exchange located in a foreign country, with anonymous owners/operators. Remember too that exchanges are juicy targets for hackers, so even a legit operation could lose money to some unforseen bug in their system being exploited. Some sort of proof of reserves is good to ensure solvency, but doesn't stop an exit scam or hack from occuring. Best practice is to not store coins on an exchange for longer than necessary. – chytrik Mar 1 '18 at 12:13
  • Just like banks, but without public accounts. No wonder why so many fail! – GPB Mar 1 '18 at 12:15
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    So, it's possibly to a) buy BTC then b) transfer to your own wallet? – GPB Mar 1 '18 at 12:16
  • Sort of like a bank, I'm not sure what you mean by public accounts though. The bitcoin reserves/transactions of the exchange are more of a public record than any analogous bank reserves/transactions. Yes, it is of course possible to buy BTC, and then transfer to your own wallet. Just remember: at that point you are solely responsible for your funds. Financial sovereignty comes with a high level of responsibility. – chytrik Mar 1 '18 at 12:21

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