The Other Side of Blockchain Technologies: Centralized Cryptocurrency Exchanges
Cryptocurrencies are famous for their aspect of decentralization. However, in a world where everything is institutionalized, even blockchain technology needs to go through some paeriod of acceptance so it can be widely accessible. Up to a point, this is achievable through centralized exchanges (CEXs). In fact, within the first years after Bitcoin first launched in 2009, exchanges that offered it were not always secure and regulated. But what about today?
One for all – the rise and fall of Mt. Gox
Indeed, this is their primary function, but to be able to offer those services, a CEX goes through several stages. Before becoming able to facilitate cryptocurrency buying and selling or trading thereof, a CEX has to ensure that its legality is real.
Let’s take Bitcoin as an example – its first year on the market was the best for two kinds of people. The first one were miners who could obtain it easily. The second one were people on the forum Bitcointalk founded by Satoshi Nakamoto who is responsible for Bitcoin’s creation. Early adopters could learn the ways of mining bitcoin on their personal computers and make peer-to-peer trades. At the time, there were no regulations over cryptocurrencies, and understandably so – this was a market that had yet to grow.
Sometime during 2010, bitcoin prices started to reach their first peak of, get ready for it, 39 cents. The same year, we saw Mt. Gox launch, though it became more well-known in the years to follow.
However, the investigation by the U.S. Department of Homeland Security in 2013 put the exchange under scrutiny for having violated US money transmission laws. Though it registered officially later on, Mt. Gox turned out to have swept some major issues under the rug.
Just a year later, in 2014, it became clear that management had attempted to conceal numerous hacks over the years sending the exchange into disarray. Under the false pretense of technical issues, bitcoin withdrawal periods extended noticeably. Just a few days later, it was time for the exchange to close its doors for good. Turns out, as revealed by a leaked document, that almost 750,000 bitcoin had been stolen and another 100,000 went missing – an amount worth $460 million at the time. What followed were the exchange’s bankruptcy and liquidation.
“Not your keys, not your crypto”
Many more victims appeared throughout the years (including Binance), and so it became clear that private keys had to be kept private by the key owners themselves, and not the platform. This was sealed by the words “not your keys, not your crypto”. With private keys being prone to hacks, the only thing to do was to secure them.
Thus, slowly, but surely, exchanges began working with regulators to prevent criminal schemes from coming to fruition. Compliance with KYC & AML (know your customer and anti-money laundering) regulations took time to develop. So did those with CFT (counter-terrorism financing) laws. Over time, Bitcoin’s nefarious reputation began to change and turned into the gold mine we know today. Other blockchain platforms are now spreading like wildfire and the majority of them take some time until they enter centralized exchanges.
Even though that may be the case, the facts remain and one of them is that it is up to both crypto owners and traders to make their choice. They are left with the responsibility to research both the cryptocurrency and the exchange before making deposits. After all, it is your keys and your crypto, but it’s just as much your money and your wallet.
CEX and crypto – BFF
The idea in life of being best friends forever may seem silly to some, but in the crypto-verse, it is nothing short of the future. That is, as long as blockchain technologies and central exchanges manage to provide the security and peace of mind they are providing at this time.
In its nature, a centralized exchange offers the opportunity for traders to conduct trades from fiat currency to cryptocurrency, and vice versa, but it can also offer fiat and crypto pairs. We are all familiar with the first function – trading CFDs of shares, indices, commodities, crypto, and more.
On decentralized exchanges, transactions are primarily done through smart contracts and atomic swaps. This cuts out the middleman and implies a non-trust system is in charge. On centralized exchanges, the middle man is present, but their role is that of a supporter to ensure all transactions are processed correctly. Regulators and overall security (including how it reacts to hacker attacks) are the denominators of safe exchanges and ones that may not be as reliable.
What keeps them running, at the end of the day, is trading volume, so if traders do not trust an exchange, it won’t prosper. However, to trust it, they usually do their research, and therefore, it would have to be well-regulated and with as much transparency as possible, without the potential for security breaches. Should all these conditions be met, the user experience will be kept at the desired level, and business will continue.
And when it’s time to trade, you can bathe in tight spreads, or even go for a walk after automating your trading. Research, choose, trust, enjoy – once the circle is complete, it means the CEX has managed to do its job properly and provide you with what you’re looking for.