BLOG: Know Your Exchange (KYE) – 5 questions to kick-start your exchange diligence process

Five questions institutions should ask to kick-start their digital asset exchange vetting process

The impact of FTX’s collapse continues to be felt throughout the crypto industry: Nasdaq reported that exchanges are experiencing bank runs and severe tests of their solvency; Kraken laid off 30% of its workforce; and there is a growing crisis of confidence as users pull their Bitcoin off exchanges.

Why do volatile events keep happening in the crypto space?

There are several reasons why the crypto industry keeps falling victim to events like the collapses FTX, Celsius, and Voyager. First, when crypto markets are bullish, some industry participants adopt a herd mentality and make decisions without following proper risk management processes. Second, market participants can get swept up in founders’ stories and place trust in leaders that talk a good game. Finally, since the crypto industry is nascent and largely unregulated, basic diligence is often ignored. There isn’t a regulator doing the diligence for companies and many firms have not done it for themselves. 

How does DAR vet exchanges?

Since 2017, DAR has completed quarterly reviews of crypto exchanges to identify venues that meet institutional standards, with our latest evaluation qualifying 19 Vetted Exchanges and 9 Watchlist Exchanges, out of over 450 evaluated. On average less than 5% of evaluated exchanges make it onto the Vetted Exchanges list.

DAR leverages exchange diligence to inform strategic decisions in two main areas:

– Price quality – pull trades to inform institutional-quality market prices for individual assets

– Risk management – ensure it’s a safe venue to transact and hold assets on

DAR’s transparent Exchange Vetting Methodology is the foundation of our price quality vetting. To vet risk related to an exchange’s trading or custody offerings, DAR also provides another service that evaluates platform risk with a different lens. Both approaches incorporate feedback on important factors to consider from the SEC, CFTC, FCA and other global regulators. 

What did DAR know about FTX? 

DAR never added FTX to our list of Vetted Exchanges list due to weak controls, including KYC and AML policies, unwillingness to respond to standard confirmatory diligence questions, and an opaque relationship to Alameda, among other factors.

Five questions to kick-start your exchange diligence process:

1. Is the exchange complying with the regulatory landscape in the areas which it operates?

2. What are the exchange’s governance policies in areas such as KYC/AML, trade surveillance, and handling of customer funds?

3. Does the exchange have the financial fortitude and lack of conflicts it claims to have?

4. What does a technical assessment reveal in terms of operational rigor, including security practices?

5. Does a data science assessment show evidence of non-economic activity such as wash trading?


To make the crypto industry a better, safer place, it is imperative to start on a path of stronger diligence today. Given its unique position of having vetted hundreds of exchanges since 2017, DAR is committed to sharing the best digital asset exchange practices.  

To learn more, click here to book a consultation today.