OTC crypto deals, part 2: Minimize your risks

By Pavel Cherkashin

There is no 100% guaranteed way to protect yourself in large deals. However, here are some tips that will help minimize some of the risks:

· Limit the number of intermediaries. I shared my observations about intermediaries in the OTC market in an earlier post. At this stage in the market, a lot of people are ready to do anything to cut a lucrative commission on a deal or simply commit fraud. Minimizing the number of intermediaries reduces the risk that the deal involves somebody with bad intentions or poor professional skills.

· Make sure you understand the technical aspects of the deal well enough. To avoid scams like double spending, buyers or their representative should have sufficient technical knowledge about how cryptocurrency transactions are made. To avoid falling prey to double spending, buyers need to have a quick internet connection and make sure enough time has passed to ensure the transaction is complete before they leave the bank office.

· Hire qualified lawyers, preferably on both sides. Just by looking at the contract template and text, professional lawyers can judge who is in front of them. Often, scam artists are poorly qualified when it comes to legal issues and they avoid working with established lawyers. The participation of at least one qualified lawyer in the deal brings more trust.

· Get your contract right. This point is tied to the previous tip. A professional lawyer specializing in crypto deals will get it right for you. Make sure you cover known risks by including statements that establish the transfer procedure, limit the buyer’s rights to revoke the bank transfer, and so on.

· Both sides should pass the KYC. Each party should know for sure who they are dealing with. This can be issue because many sellers prefer to stay under the radar, but at some point, it makes sense to reveal identities on both sides.

· Use the services of large OTC desks. Although OTC desks will never offer a discount as big as one can get directly, they provide more security and professionalism. OTC desks always sell at the market exchange rate and take fees. In direct deals, the discount depends on market expectations: If the price is expected to go down, the discount will be bigger. It can go as high as 10%, depending on transaction volume. That discount can be very enticing, but the higher risk may not be worth it.

· Take reasonable precautions to ensure your personal safety. No matter how secure the deal is, there is always a risk of physical attack on the owner of a flash drive with keys to millions of dollars in bitcoins. For developing countries with huge amounts of cash in circulation it is obvious that personal protection measures are needed, but sellers in the developed world might be shocked that something like this is still an issue with all the advancements and technology.

Here are a few examples that will give you an idea of what documents based on best practices look like:

- Digital assets purchase agreement

- Escrow agreement

- Breakdown of fees and commissions

- Irrevocable master fee protection agreement

Please note that these documents are just examples and we are not liable for any issues that might arise from using them. Please seek professional legal services to make sure your contract covers all the necessary aspects of your deal.

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Pavel Cherkashin is a cofounder and a managing partner at Mindrock Capital and a managing partner at GVA Capital. A former angel investor and entrepreneur, he now invests in cryptocurrency, artificial intelligence, blockchain and self-driving tech.