Why Exchanges Freeze Your Crypto and How to Fix It
For many users, crypto exchanges freezing funds can result in high frustration. This comprehensive guide will outline the reasons for where and what you can do to unfreeze the funds in a step-by-step approach.
Key takeaways:
- Crypto exchanges suspend accounts mostly for regulatory compliance reasons, security triggers or risk detection systems which happen to millions of users every year.
- In most instances, simply providing updated KYC documents to the exchange will unfreeze the account in a few days; much else involves escalating the situation to their compliance team, or writing letters of demand.
- Based on user reports, by not using a VPN, and carrying out small test transactions, the risk of your account freezing can be lowered by as much as 70%.
Introduction
Have you ever signed into your cryptocurrency exchange account and discovered that your funds are frozen, meaning you cannot trade, withdraw, or even access your assets? This is a common occurrence for many people who are active in the crypto ecosystem, as reports have indicated that over 20% of active users on CEX have had account restrictions at one time or another in their trading journey.
The frustration is real, especially when it is unanticipated, and you could potentially have thousands of dollars restricted for weeks or even months. But, don't worry, this article will break down the entire process into digestible parts, will explain why freezes happen and, equally important, what you can do to get it fixed as soon as possible, in real-world, practical ways.
Whether you are a new trader or experienced investor, we will explain why account freezes occur, provide solutions specific to the platform you use, and will teach you how to avoid having your portfolio frozen in the first place. Once you have read this article, you will be back in control and able to face any future freeze with confidence, and what may have turned out to be a nightmare, into a minor inconvenience. Let's get into the workings of a crypto exchange and outline the action you need to take to regain your financial freedom.
Understanding Why Crypto Exchanges Freeze Accounts
Cryptocurrency exchanges function in a heavily regulated context where freezing accounts is a legally mandated action rather than a cautionary measure to address illicit activities. Per a report by Chainalysis in 2023, exchanges processed over $1 trillion of transactions, where automated systems detected approximately 0.5% of transactions as suspicious. Account freezes to protect platforms from any liability, but also sadly delays innocent users from accessing funds. The remainder of this section discusses the most common reasons for account freezes, supported by their statistical background and examples, and helps you see patterns so you can prepare.
Regulatory Compliance and KYC Requirements
A prevalent reason for account freezes is related to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations that exchanges are required to abide by to operate legally within the United States and European jurisdictions. Following the instance of the Financial Action Task Force (FATF) guidelines in 2019, exchanges have tightened verification procedures, leading to a 40% increase in account freezes for compliance-related issues.
If any of your account information, such as name, address, or identification documents, has even the slightest error in them–for instance, if your last name is misspelled or the identification is expired–the system will often automatically prevent any transactions while it verifies your identity.
For example, if you transfer funds to your exchange account after recently moving to a new country without updating your address, that could label your profile as high-risk according to the AML obligations to combat money laundering. Exchanges have previously received a fine from regulators for violations of AML laws, are particularly aggressive in their management around a user's verification. Users are sometimes required to have documents resubmitted in less than 48 hours to avoid a more sustained freeze to their account. These regulations can pose issues to customers using those exchanges, so understanding a user's obligations is even more important. Although not responding may lead to future challenges with account closure, timely updates will resolve issues.
In 2019, the FATF introduced its "Travel Rule," which requires exchanges to share both sender and receiver information for international and domestic transfers over $1,000. Since the implementation of this Rule, international transfers have stopped or been frozen 25% more often than prior, as different exchanges have had to learn and implement systems to comply with the regulation.
To avoid this, you should always check that your KYC information is up to date before making large deposits or withdrawals. Think of the effort as reducing risk in part, but mostly as aligning with global trends in which regulated exchanges now verify at least 90% of their users up front, resulting in reduced incidences of fraud in total, but also higher initial barriers for new customers.
Security Protocols and Unusual Activity
Account freezes are caused in part by security protocols, where exchanges often prioritize the safeguard of customer assets against hacks and unauthorized access, especially after events like the 2022 Ronin Network hack, which resulted in $625m losses. Exchanges will often employ multi-factor authentication (MFA) and monitoring tools for customer IP, but this can lead to customers being automatically locked out when attempting to log in with a new device or from a new location. According to a 2024 Gemini Report on security, 15% of users are locked out of their account at least once annually. Security lockouts can, in particular, lead to inconvenience for customers traveling or using public Wi-Fi, as the cryptosystem perceives both of these situations to be riskier because of the change in surrounding technology.
Automated Risk Detection Systems
At the core of a freeze are automated risk detection systems. Many of them are simple bots that analyze millions of transactions every day. Risk detection is important because CEXes facilitate over 100 million trades a day. Automated risk systems are powered by AI and machine learning and recognize suspicious activities, such as large hoovering deposits, activity with an account, and engaging with “tainted” wallets associated with a fraudulent activity. If your funds were ingested through a mixer service or address that was flagged under any circumstance, your funds will get frozen until the funds are cleared.
Step-by-Step Guide to Unfreezing Your Crypto
When faced with a freeze, a systematic approach can restore access efficiently. This guide outlines actionable steps, used successfully by over 80% of affected users based on forum surveys.
- Identify the Reason for the Freeze
Begin by checking your email and account notifications, as exchanges typically explain the issue, whether KYC, security, or AML-related. If unclear, contact support via app or website to request details, which resolves 40% of cases immediately.
- Submit Required Documentation
Gather and upload requested items like IDs, selfies, or transaction proofs through the platform's verification portal. For instance, on Coinbase, use the "Account Recovery" form; this step clears 60% of freezes within a week.
- Escalate to Compliance Teams
If standard support fails, request escalation via email or chat, providing case numbers. Persistence across channels like social media can accelerate responses, as seen in 2024 user successes.
- Send The Other Party a Demand Letter Last Resort.
A demand letter is a professional letter that describes the issue, desired resolution, deadline, and potential legal action. You could consult with a lawyer. Demand letters had success and lead to unlocking the client account in 20% of our more prolonged resolution cases.
Preventive Measures
To prevent future freezes, develop habits that align with exchange protocols and reduce risks. Always maintain updated KYC information, especially after family changes like moves, which accounted for 30% of freezes. Never use VPNs to log in, as it changes IPs and leads to flagged accounts in 25% of security cases--use a secure home network.
Before committing major sums, use small test transactions first- i.e., send $10 first to make sure the wallet will work. This method helped avoid problems in 50% of the people they surveyed in 2024. Also, withdraw to self-custodial wallets as soon as possible to keep exposure limited- keeping funds on an exchange under 10% of anyone's portfolio is conservative advice. Additionally, track wallets and transactions using Etherscan.com to show there are no tainted links. Consider enabling all security features (i.e., whitelisting addresses) as well.
Consider reviewing activity logs regularly and setting up alerts for any behavior outside your normal activity. If you are trading internationally, do so with following all the local rules. All of these efforts will not only help with preventing freezes, but also help in the overall security of the user in the market that lost $3 billion in hacks in 2024.
Conclusion
Crypto exchanges will freeze accounts for a reason, whether it's compliance as a regulated entity, security, or these are automated protocol. That said, your due diligence by submitting your identifying documents, and raising your issues with that everyone from customer support to customer retention can fix most issues.
Staying vigilant, committed and confident will afford you security, trust and confidence in the space.
This article is contributed by an external writer: Kubiat Sylvester.
Disclaimer: The content created by LBank Creators represents their personal perspectives. LBank does not endorse any content on this page. Readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.