Cryptocurrency exchanges sometimes pull the plug on coins and tokens. Why would they do such a thing?

Well, there's usually some reasoning. Crypto exchanges don't take delisting lightly, as it can damage reputations and spur community backlash. But in certain cases, an exchange may feel delisting a specific crypto or a cryptocurrency pair is necessary.

Here are some reasons why an exchange might delist a cryptocurrency.

1. Compliance Issues

Cryptocurrency exchanges must follow regulations—even if the crypto space is supposed to be decentralized and "permissionless." As cryptocurrencies grow more mainstream, exchanges face increasing scrutiny from financial watchdogs.

Crypto exchanges operating in the United States must comply with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. So, they need to verify users' identities and look into weird transaction patterns that could signal criminal activity. If a certain cryptocurrency is used for or associated with criminal, illegal, or dangerous activities, an exchange may decide it's too risky to keep supporting it. For example, Coinbase, Bittrex, ShapeShift, and other crypto exchanges refuse to list or have dropped privacy-focused Monero, which is associated with dark web usage. However, numerous crypto exchanges still support Monero.

Furthermore, now and then, some countries ban or put strict regulations on cryptocurrencies. So, if an exchange operates in one of those countries, they may have to delist any coins that are now illegal there. The same goes for coins that violate sanctions against certain countries or entities.

At the end of the day, exchanges can't risk regulatory blowback by listing non-compliant cryptocurrencies. So if a coin's legal status needs to be clarified or regulators flag it as problematic, a delisting often follows soon after.

2. Inactivity

The sad truth is there are thousands of different cryptocurrencies these days, but only a fraction get significant use. Many are abandoned projects or were just gimmicks to begin with. So it's inevitable for exchanges to delist those their customers have no longer interest in.

It can feel unfair for low-volume coins, as if they never got a real shot. But crypto exchanges ultimately need to serve their active traders. Delisting stagnant coins allows them to focus on the ones people want to buy and sell.

So, if you hold a coin with low liquidity, there's always a risk it'll get removed for lack of use. The best defense is for project developers to try to get more community involvement and trade volume so exchanges see enough activity to justify keeping it listed.

3. Security Risks

Maintaining strong security is crucial for cryptocurrency exchanges. Therefore, if a coin poses potential security risks, they may decide it's not worth the headache to keep supporting it.

For example, some smaller altcoins no longer have very active developer communities. That means there's a higher risk of the coin being compromised in some way if vulnerabilities and bugs aren't getting patched quickly. Crypto exchanges don't want to deal with the fallout if a coin they list gets hacked due to negligence.

Exchanges also have to think about the security on the user side. If a cryptocurrency's wallet software is janky and leads to users getting compromised, they can get in trouble for having listed an insecure coin.

Additionally, the more tokens an exchange lists, the wider the potential attack surface for hackers to target. So, limiting offerings to more secure currencies reduces risk.

And, of course, if a coin suffers a major security catastrophe, like a huge hack destabilizing its blockchain or a depegged stablecoin, that will shake confidence seriously. Crypto exchanges might not want their reputation tarnished by continued association with the damaged coin.

The virtual assets crypto exchanges handle run into billions, so they can't mess around when it comes to security. Delisting cryptocurrencies with questionable security is a tough but reasonable risk management decision. It protects their business and customers.

4. Pump and Dump Schemes

If you are unfamiliar with the phrase, a pump and dump scheme is when a group works together to inflate the price of a cryptocurrency through coordinated buying. Then, once the price peaks, they sell off their holdings and bail, leaving regular investors holding empty bags.

Not only are these cryptocurrency scams super unethical, but they also open up exchanges to potential legal issues around market manipulation. So, if a certain coin is identified as an active pump and dump vehicle, they usually move quickly to delist it.

Often, Telegram groups and Discord servers are dedicated to orchestrating these plots. Crypto exchanges can monitor those channels for evidence of coordinated pumps to know which coins to avoid.

Warning signs of a pump and dump scheme include sudden, dramatic spikes in price and volume for no apparent reason. Likewise, if a coin's activity is focused almost entirely around a small group of wallets, that's shady.

Some less scrupulous exchanges may be slow to delist these scam coins since the pumping action brings in trading fees. But legitimate and safe cryptocurrency exchanges work fast to boot manipulative garbage off their platforms.

5. Competition

Running a cryptocurrency exchange is a business, so competition plays a role in listing decisions. If a new exchange offers better terms for a token, delisting might make sense.

Let's say a competing platform comes along that charges lower trading fees for a given cryptocurrency. That naturally makes the coin more appealing to traders, so trading volume starts shifting over.

In that case, the higher-fee exchange is losing transaction revenue for that coin to their competitor. It may make sense for them to remove it at a certain point instead of trying to match the pricing.

Cryptocurrency exchanges must also consider how new listings could affect their existing market share. For example, if a coin directly competes with a cryptocurrency the exchange already lists, they may not want to shoot themselves in the foot.

For example, if Exchange A lists its native Coin B, it may want to avoid adding Coin C, which tries to accomplish the same purpose. That could dilute demand for Coin B and lead to less trading activity overall.

6. Failure to Pay Listing Fees

One of the several ways crypto exchanges make money is by facilitating the trading of listed tokens and taking a small cut of transactions. These listing fees help exchanges cover the costs of integrating a coin across their platform. That includes setting up hot and cold wallets, building order books, updating charts and pricing data, customer support, etc.

Crypto projects need access to deep pockets to play ball and cover ongoing expenses. Otherwise, no matter how promising the technology, they risk fading into obscurity if they can't afford the toll of cryptocurrency exchange listings. There's always another project waiting that can pay up.

Delistings Don't Have to Be the End for Crypto Coins

The crypto space moves fast, so even once-popular coins can end up on the chopping block for cryptocurrency exchanges. But while delisting stings for investors in the short term, it doesn't have to spell doom. Many projects overcome the hurdle and get relisted or find alternate platforms.

As an investor, you may have to adjust tactics after delisting and do extra research to find trustworthy cryptocurrency exchanges that still support the coin.