Recently, this group chat screenshot caused panic among many cryptocurrency investors because some people said that exchanges were freezing accounts of large investors on a large scale. So today we will talk about the freezing of accounts on centralized exchanges and how to unfreeze them.
1. Why can your account be frozen?
1. Technical logic behind the freezing of exchange accounts
Some novice users may ask, isn’t blockchain decentralized? Why are their on-chain assets frozen?
First, the various tokens in the user's registered account on the centralized exchange are hosted in the address of the exchange's private key. When depositing coins, after the user deposits from the external wallet address to the deposit address created by the exchange, the exchange will transfer gas to this address and collect the deposited tokens into the exchange's withdrawal wallet address; when withdrawing coins, the tokens are also withdrawn from the exchange's withdrawal wallet address to the user's specified external wallet address. In the process of user deposit and withdrawal, the private keys of the exchange user's deposit address and withdrawal address are controlled by the exchange.
Therefore, when a user deposits the on-chain assets in the wallet address controlled by the user into the exchange, the exchange can theoretically freeze this part of the assets and not allow you to withdraw the money. This is the technical logic behind the freezing of the exchange account.
The business logic of the exchange is mainly to provide matching transaction services to earn transaction fees, so for the exchange, ensuring the security of users' assets and improving the trading experience are the ways to make money. In the last bull market, more than 1,000 BTC were stolen from an exchange, and it only took about two weeks to recover the stolen asset losses through transaction fees. Therefore, under normal circumstances, the exchange will not easily take the initiative to freeze user accounts, and there is no need to do so.
In practice, some users’ exchange accounts have been frozen. What are the main reasons for the freezing?
2. Common reasons for exchange account freezing
1) Assist judicial regulatory authorities in freezing
At present, more and more criminal groups use virtual currency as a tool for crime and a medium for money laundering. Therefore, when investigating some criminal groups, domestic and foreign regulatory authorities often dig out the virtual currency exchange on the chain from the off-chain fund transfer, which will involve retrieving the KYC information and transaction records of the exchange accounts involved in the case and seizing the virtual assets in the frozen accounts. For the legal basis for freezing, please refer to the legal basis for freezing and unfreezing in the currency circle (II).
For example, in cases of online gambling that are severely cracked down by domestic public security organs, the addresses of online gambling platforms that deposit coins into exchanges are generally analyzed through on-chain data models, and the exchanges are investigated in batches to freeze the accounts of suspected gamblers.
Last year, the U.S. Department of Justice, together with USDT issuer Tether and OKX Exchange, froze the exchange accounts and on-chain USDT of a criminal group involved in a human trafficking case.
In addition, when investigating cases of theft and fraud of virtual assets, regulatory authorities will also verify and freeze the accounts of assets involved that have flowed into exchanges.
These are all cases where the issuers of USDT on exchanges cooperated with regulators to freeze virtual currencies, so many cryptocurrency investors must remember that blockchain is not a lawless place. With the continuous advancement of technical investigation methods, regulators will increase their efforts to crack down on crimes on the chain.
In addition to the centralized exchanges mentioned above that passively freeze exchange accounts in order to cooperate with regulatory authorities in combating illegal crimes, there are also some special circumstances in which user accounts will be actively frozen.
2) Triggering the exchange’s anti-money laundering and risk control temporary freeze
Centralized exchanges, as an important part of the cryptocurrency ecosystem, host the assets of hundreds of millions of cryptocurrency users and have the most comprehensive user data. Binance, the world's largest exchange, currently has 200 million users. Therefore, it is very necessary for exchanges to take measures to combat money laundering in order to address regulatory compliance, on-chain crime warnings, and other issues in the entire cryptocurrency industry. Some users will have their accounts frozen by risk control due to their abnormal on-chain deposits and transactions that trigger the platform's anti-money laundering.
For example, if a user with a low KYC level registers an exchange account, deposits funds to buy USDT, and then immediately withdraws the currency, the platform is likely to regard it as a suspected money laundering user and freeze it for risk control.
After the user uses the address to interact with the black and gray addresses marked by exchanges such as mixers, hackers, high-risk projects, and money laundering platforms, the risk control will be triggered and the account will be frozen when the received virtual currency is deposited to the exchange.
Some users, in order to participate in the platform's IPO activities, used multiple associated accounts under their control and even photoshopped pictures to get free rides on the platform through KYC. Eventually, their accounts were frozen by risk control for violating the activity rules and user agreement.
In summary, the reasons for freezing decentralized exchange accounts are mainly divided into two types: passive freezing to cooperate with supervision and active freezing due to anti-money laundering risk control. In the case of the first type of freezing involving a case, the decision-making power still lies with the regulatory authorities. The exchange is only executing the regulatory orders to cooperate with the freezing to combat crime. It is useless to blindly go to the exchange to defend your rights.
From a technical logic point of view, the virtual assets of users in the exchange are managed in the entire exchange asset pool and are not stored in isolation. Therefore, if a normal user only deposits money to trade cryptocurrencies, as long as the platform's risk control is not triggered, their account will not be frozen due to involvement in black U.
2. How to unfreeze an exchange account after it is frozen
When your exchange account is frozen, you first need to understand the reason for the freeze.
Regardless of the type of freeze, the act of freezing the account is executed by the exchange, so it is necessary to contact the manual customer service through the exchange APP or customer service email as soon as possible to obtain the real reason for the freeze.
Secondly, after communicating with the exchange’s customer service, you need to determine the type and cause of the freeze and prescribe the right remedy.
If the account is frozen due to risk control reasons of the platform, then communicate with them directly about the solution, whether it is to complete the KYC information, facial recognition verification or provide an explanation of the source of funds for account recharge, and directly cooperate with the exchange to unfreeze the account.
If the account is frozen by the judicial authorities because of involvement in the case, then communicate with the customer service to obtain the contact information of the case-handling unit, and actively communicate and cooperate to provide materials. Because the case is involved in the case due to on-chain coin charging, it is generally necessary to provide an on-chain fund traceability diagram and an explanation report to explain that the entire link has nothing to do with the funds involved in the case. The figure below is the on-chain fund traceability diagram of the case I handled. If such a link diagram can be provided and relevant explanations and proofs can be attached when unfreezing, the probability of unfreezing the account can be greatly increased.
A frozen account on a centralized exchange is different from a bank card. The fluctuation of spot transactions and contract positions in an exchange account can easily cause loss of account assets. If it is frozen and cannot be operated, it needs to be unfrozen as soon as possible. The author has handled a large number of theft and fraud cases in the past and has rich experience in analyzing on-chain capital links. If you need help, you can add the author's WeChat through the homepage public account.
