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The State of Centralized Exchanges

Centralized exchanges will remain a viable onramp to crypto, bringing in new users as the industry continues to grow.

Gemini-The State of Centralized Exchanges

Summary

Centralized cryptocurrency exchanges (CEXs) have come a long way since the launch of Bitcoin in 2009. Centralized exchanges have played, and continue to play, a vital role in the acceptance of cryptocurrency by governments, businesses, and institutions around the world. Read on to learn more about CEXs vs. decentralized exchanges (DEXs). Understanding the history of centralized exchanges and their security standards, regulatory frameworks, and product offerings will help you make knowledgeable decisions when investing in cryptocurrencies and digital assets.

Centralized crypto exchanges have come a long way since they first emerged in 2010, and are now the most widely accepted platforms used to buy and trade cryptocurrency safely and securely. By working with regulators, tightening security, and improving the user experience and product, centralized exchanges (CEXs) have played a large role in developing public and institutional trust in blockchain technologies and their underlying cryptocurrency assets.

Centralized exchanges are platforms which facilitate the buying and selling of cryptocurrency, either for fiat currencies, like the US dollar, or between digital assets, like BTC and ETH. They function as trusted intermediaries in trades, and often act as custodians by storing and protecting your funds. Leading exchanges facilitate every aspect of the digital asset trading experience: from security, to fair market pricing, to regulatory compliance, consumer protection, and access to various digital assets. As of September 2020, 95% of digital asset trades are executed through centralized exchanges, which represents approximately $228 billion USD a month.

Trading On a Centralized Exchange

Before you can start trading on a centralized exchange, most CEXs will verify your identity and complete Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter Terrorism Financing (CFT) checks. These all-important procedures help exchanges prevent criminal activity from taking place on their platforms. Once your identity has been successfully verified, you can deposit funds onto the exchange via wire transfer, ACH transfer, or with a debit or credit card or by depositing cryptocurrency such as bitcoin (BTC) or ether (ETH). Once you fund your account, you may begin trading. Reputable exchanges hold the majority of users’ funds offline in hardware “cold storage” wallets — crypto wallets that are not connected to the internet — and some CEXs insure assets that are kept in online (or “hot”) wallets. Exchanges also often use multi-signature wallets, which require multiple entities to sign a transaction before funds can be accessed. It’s important to research the security history of an exchange before you entrust your funds to the platform.

Services Offered By Centralized Exchanges

Exchanges enable you to buy and sell cryptocurrency in several ways. You can place a “market order” and buy or sell cryptocurrency instantly at the market price. Alternatively, you can place a “limit order” which allows you to set a specific price at which you’d like to buy or sell an asset. When the price of the asset reaches your set price, the order will execute. Additionally, some exchanges offer specific trading platforms for professional traders with added functionality like margin trading.

Exchanges also offer digital wallets to store cryptocurrency. If you choose to store your cryptocurrency on an exchange, you are trusting the exchange to hold your private keys and keep your funds secure. This means that you don’t need to worry about losing your wallet or private key. However, you should always do your own research to ensure that the exchange has proper security measures in place to protect your funds. Some exchanges offer custody services for financial institutions and investment firms who invest in cryptocurrency, but do not want to manage their own private keys. These types of assets are typically kept in cold storage.

The Regulation of Centralized Exchanges 

Centralized exchanges are subject to the regulations of the jurisdictions in which they operate, though these can vary considerably. In some countries, a single financial regulator has oversight of cryptocurrency businesses. In the United States regulation is more fragmented; some issues, such as licensing, are managed on a state-by-state basis, while other aspects of exchange policy, like KYC data collection and AML issues, are mandated by federal law. This means that exchanges must work with a variety of federal and state actors to remain compliant.

The Impact of Decentralized Exchanges On Centralized Exchanges

Decentralized exchanges (DEXs), which do not use trusted intermediaries and instead facilitate the exchange of crypto assets by matching and executing trades through smart contracts. DEXs do not act as custodians of your funds, which means that you are always in control of your private keys, whereas centralized exchanges hold your private keys on your behalf.

Decentralized exchanges have grown in popularity in recent years, which has only added to the robust global infrastructure for digital asset exchange. While an exciting technological innovation, DEXs are unregulated and generally do not allow you to transact with fiat currency. DEXs typically suffer from poor liquidity and low trading volume, which represent a significant challenge for their widespread adoption in the blockchain industry. An exception to this rule is Uniswap. Despite DEXs’ increasing popularity, centralized exchanges remain the easiest and safest way for new and intermediate crypto users to acquire and trade crypto assets.

Over the last decade, some centralized exchanges have evolved from unregulated platforms to regulated, secure, and trusted entities that are the backbone of the digital asset ecosystem. And for many investors in digital assets, CEXs are critical for buying, selling, and holding crypto. Centralized exchanges have played an essential role in connecting new users with cryptocurrency, and will remain a viable onramp to crypto as the industry continues to grow.

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