Bitgrail Withdrawal Saga: Accusations Fly as Exchange Institutes KYC

There is one golden rule when it comes to cryptocurrency investing. Don't keep all your coins on exchanges.

This seems to be playing out again in the case of the ongoing withdrawal saga at the Bitgrail exchange. The CEO of the exchange decided that they needed to complete mandatory KYC on all the users on the exchange.

There are a number of reasons as to why the community is currently up in arms. One of them is that they have been unable to withdraw their RaiBlocks XRB from the exchange for a number of weeks given maintenance. This culminated in the announcement that the exchange would be liquidating all of the non-EU accounts.

The sticking point though is that these users are not going to be credited their XRB but rather they will have it converted for them on the exchange into BTC and then sent to their Bitcoin wallets.

This was a suboptimal solution for a number of users and they viewed it as an extortion from the CEO. Let's take a closer look at the situation.

KYC Requirements on the Exchange

It is no doubt true that European exchanges are now required to complete KYC on all of those traders who have accounts with them. This has been the standard at a number of exchanges prior to this. Hence, one can see a rationale for Bitgrail wanting to institute these rules.

In a post on Reddit, the owner of the exchange mentioned the rules that are currently in force in the USA and how they can claim civil / criminal penalties for overseas exchange operators. He said

BitGrail cannot work without mandatory KYC anymore. Looks like exchanges in general can’t do it, even if some may ignore it. But BitGrail can’t. It is in a country where you can’t ignore the law

He went on to explain that the exchange has the right to institute a request for additional KYC in their TOS if they had suspected anyone of being involved with any sort of "suspicious activity".

One cannot fault him in theory for his actions, but the way in which it is being done is the reason that so many users are revolting against the company with some even labelling it a "scam".

Crediting Funds in Bitcoin

The main problem lies with those users who are either non EU or those who want to withdraw their XRB before KYC comes into effect. This is because they can only take their funds out in Bitcoin. The exchange will terminate the non EU accounts and convert the coins into Bitcoin for the users.

The problem that many have pointed out is that the exchange will have to use their internal Bitcoin supplies and exchange pricing in order to convert the funds. This means that the price is likely to be greatly suppressed as a result of the supply and demand.

There is currently 6m XRB on the exchange and if a large proportion of this has to be sold in order to buy Bitcoin, the price is likely to adjust as well. Hence, users will be credited Bitcoin at a discount to what XRB should be on the open market.

There are also a number of other theories that have been floated as to why Bitgrail has taken these actions. They range from the merely incompetent to the more nefarious.

Community Anger

Many took to social media like reddit to express their anger at the move by the Bitgrail founder. For example, this user who claims to have invested his life savings on Bitgrail had the following to say about the CEO

He's forcing BTC withdraws so he can sell his BTC for a massive premium & buy up tons of XRB cheap right before the Binance listing. Making millions

Many may know that up until know, Bitgrail has been one of the only exchange where people could buy and sell XRB. Now, Binance is planning to list them in due course which could impact on the user base at Bitgrail. Whether the CEO is doing this to get his hands on cheaper XRB to flip on Binance, no one can really tell.

There are other notions though that may be less sinister. According to this user, there could be liquidity problems at Bitgrail. This would explain the exchanges reluctance to release XRB. He stated that:

Bitgrail verified users with relatively small balances first to reduce the number of people affected while reducing the impact of a run on bitgrail which was now unavoidable. Because of the price rise of XRB, newer users likely have much less in their accounts than older users

Of course, one cannot allow conjecture to rule the day and it could just be an exchange buckling under the weight of thousands of KYC documents. Hence, this problem could also just be attributed to a haphazard way of clearing their backlog and shoring up their liquidity.

Potential Impact

While it is hard to prove intent behind the Bitgrail decision, one can only hope that they are able to extract their funds in Bitcoin at a reasonable level. The fact that Bitcoin will have transaction fees whereas XRB is virtually 0 is more salt in the wound.

However, this just goes to show the dangers that one faces when leaving their coins on a centralised exchange. Ever since the days of the Mt. Gox hack, users have known the risks that lie with not holding your private keys.

This is why the best practice to avoid any examples of this in the future is to store your coins in a hardware wallet or through the use of some cold storage options.

Although these solutions may be inconvenient when you want to trade, you will be happy you did it in the long run.