Centralized crypto exchanges are dying, so long live centralized crypto exchanges?
The journey of the FTX cryptocurrency exchange in 2022 from a $40 billion company with a superstar CEO to collapse and bankruptcy amid allegations of fraud and money laundering summed up for some everything wrong with centralized exchanges for a blockchain technology that values decentralization.
After the FTX collapse in early November, around $13 billion was withdrawn from centralized exchanges, according to blockchain research firm Chainalysis. At the same time, decentralized exchanges (DEXs) that allow users to trade peer-to-peer and retain direct ownership of their assets saw trading volumes more than double to $51 billion in the week of the FTX collapse from $20 billion the week before, blockchain aggregator data showed DefiLlama.
This appeared to be the precursor to a major shift in trading patterns and sparked comments that centralized crypto exchanges – including Binance, the world’s largest – were a sunset sector, to be overshadowed by the emerging world of peer-to-peer decentralized trading.
Except that hasn’t happened, at least not yet. DefiLlama’s aggregated total trading volume on DEXs now hovers around 10% of the total on centralized counterparties.
Bye bye beach
Some crypto commentators say that centralized platforms will remain the next safe haven for crypto investors, just not those operating like FTX out of the Bahamas, or Binance, which has been called a “ghost company” due to the difficulty of defining exactly where it is. based and legally responsible.
“We will see the decline of offshore centralized exchanges … setting up offices in less regulated territories such as the Bahamas,” said Lee Jang-woo, adjunct professor of global entrepreneurship at Seoul-based Hanyang University. Discard. Lee said tightly regulated centralized platforms will expand and more will be run by traditional institutions.
Singapore’s DBS Digital Exchange appears to be an example of what Lee is up to, but for now the DBS platform, or DDEx, only handles trades from institutional investors and high-net-worth individuals.
See related article: Trucking industry as real-world crypto use? How blockchain can replace system that leaves American truckers out of pocket
The exchange – part of DBS Group, one of Asia’s largest banks – has taken a cautious and measured approach to developing a digital asset platform since its inception in 2020, according to Lionel Lim, CEO of DDEx.
“We believe that the market has decisively shifted its focus towards trust and stability, especially in the wake of several scandals that have rocked the industry,” Lim said in a February 15 press release to announce that Bitcoin trading volumes on DDEx increased by 80% a year. -on-year in 2022, while the number of Bitcoin held in its custody doubled.
The release did not disclose what these percentage gains amounted to in actual Bitcoin, but that the number of customers registered on the exchange doubled last year to 1,200. It trades Bitcoin, Ether, Bitcoin Cash, XRP and added Polkadot and Cardano tokens in October 2022.
Super centralized me
Lim’s view is shared by Jez Mohideen, CEO of Laser Digital, the digital asset of Japan’s financial giant Nomura Holdings.
“What has happened in the last two or three months, especially after FTX, there is no doubt [crypto investors] looking for solutions,” Mohideen said in an interview. “You find very few [crypto] entities where there is a prospect of transparency, a decent degree of due diligence and risk management.”
This need for transparency will bring forth the next dominant trend in crypto trading, said Paik Hoon-jong, CEO of South Korea-based blockchain fintech firm DA:Ground. “Government or Wall Street-led exchanges that are 100% reliable and 100% legally compliant will rise above,” Paik said.
Last September, Wall Street stalwarts Citadel Securities, Sequoia Capital, Fidelity Digital Assets and others teamed up to set up EDX Markets (EDXM) – a cryptocurrency exchange serving institutional investors that aims to open to retail in the future.
EDXM says it differs from most current crypto exchanges that act as a market maker, trading platform and depository at the same time, a setup with clear conflicts of interest, as seen in the FTX implosion.
Many of the recent crypto failures were the result of not following some of the regulations required in traditional finance, Mohideen said. “I think the traditional players or more institutional players will come in [crypto] appreciates and extrapolates the best of the traditional practices to the crypto side.”
National trade
In addition to traditional banks and brokerages entering cryptocurrency trading and custody services, countries and cities are also looking at the landscape of opportunities and managing risk.
Indonesia plans to open a “national” cryptocurrency exchange in June, according to the country’s Trade Minister Zulkifli Hasan. The ministry is expected to supervise trading on the platform and custody of investor assets.
South Korea’s Busan city is also working to establish the country’s first city-backed digital asset exchange this year.
Tentatively called the Busan Digital Commodities Exchange, the platform will tokenize commodities such as gold and real estate on the blockchain, with plans to expand services to cryptocurrencies and other digital assets.
See related article: Former FTX CEO Nishad Singh pleads guilty to fraud charges: Bloomberg
China, after experimenting extensively with the digital yuan, launched its first non-fungible token (NFT) exchange called the China Digital Trading Platform (CDEX) last month.
Platforms that guarantee higher compliance and security will also be preferred by institutional giants – “having institutional liquidity is definitely a game changer,” Paik said.
As nations and cities move into crypto, government-backed regulators crack the whip on the existing industry.
This month, US financial regulators ordered Paxos Trust Company to stop issuing the Binance USD stablecoin. Paxos was also told that it could be subject to investigation for issuing an unregistered security. It followed regulators ordering the shutdown of cryptocurrency exchange Kraken for failing to register the program.
Also in February, India, the current holder of the presidency of the G20 nations, said it was working with the International Monetary Fund and the Financial Stability Board to develop international regulatory standards for cryptocurrencies. The group includes the world’s 20 largest economies, which account for around 90% of global GDP.
What about DeFi?
Nonetheless, Web3 natives assure that blockchain-led sectors will eventually nest in decentralization.
“We cannot forget that blockchain is rooted in decentralization,” said Dinesh Goel, co-founder of Web3 play-to-earn game One World Nation. “With institutional and state platforms, central governments still have power, and that’s not what many crypto-natives believe.”
However, decentralized platforms are still vulnerable to security breaches. Sandbank’s Paik says: “We’re still seeing a lot of hacks and exploits on DeFi or DEXs, and people won’t feel safe trading on these platforms until this is resolved,” Paik said.
According to Chainalysis, over 82% of the $3.8 billion in hacked cryptocurrencies last year was stolen from decentralized platforms.
“Sure there have been security issues, but a lot of the recent crisis is due to a lack of accountability and overexploitation,” said Julia Zhou, head of ventures and market-making at crypto trading firm Alphalab Capital.
Zhou remains optimistic about the prospects of DEXs as they are relatively new and their auto market making model – the algorithmic robots used in DEXs for transactions – has great scope to innovate.
“Many of the products may seem overfunded at first, but will eventually become more user-friendly,” she said.
See related article: What is CeDeFi, and why it is the future of finance
Security vulnerabilities seen in DEXs are mostly caused by programming errors, and DEX aggregator 1inch Network says the primary countermeasure against hacks is regular audits. Frequent audits and disclosure of audit reports will help platforms detect flaws in their smart contracts before they are exploited, 1inch wrote in its blog post.
Both Hanyang University’s Lee and Laser Digital’s Mohideen agreed that they expect more highly regulated and centralized trading platforms to strike a balance with decentralized exchanges.
Lee said centralized and decentralized platforms complement each other and need each other to evolve. “Centralized exchanges won’t be able to list a variety of cryptocurrencies as they become more regulated and controlled, but on decentralized exchanges you can trade virtually anything that’s coded,” Lee said.
“But of course you can’t trade fiat money on decentralized exchanges, and centralized exchanges will be the window for that – eventually they will grow hand in hand.”
