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The deep dive: Centralised crypto exchanges

By Puja Sharma

December 17, 2021

  • buyers
  • centralized crypto
  • Crypto
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‘The deep dive’ is our bi-weekly exploration of a relevant topic, hot trend or new product. For Prime subscribers only.

The centralized crypto exchange is when a third party helps conduct a transaction. Buyers and sellers alike trust this middleman to handle their assets. This is common in a bank setup, where a customer trusts the bank to hold his or her money. Cryptocurrency exchanges are a platform that allows the trading of cryptocurrencies for other assets including fiat and digital currency.

How does it work?

The centralized crypto exchange is usually a private corporation that allows trading in cryptocurrency. Investors can buy cryptocurrency using fiat currency on such platforms. These corporations have a physical presence in the form of offices, employees, and infrastructure and hold a license. Such platforms also convert into cryptocurrency into another.

The centralized crypto exchange has an amicable user interface and an easy-to-use platform for the users such as a website or portal, making it a seamless transaction at any given time. It also provides a reliable and secure tunnel for trading.

Who is under the radar?

Centralized exchanges have proven to be scalable, high-performance infrastructures, and their connectivity supports a variety of strategies, including high-frequency trading. This allows centralized exchanges to attract professional investors and institutional investments that the crypto industry needs to scale and eventually achieve mass adoption.

Among the most well-known and trafficked centralized exchanges are Bithumb, Bitfinex, Bittrex, Poloniex, Kraken, GDAX, Coinbase, and Gemini. In India, there are around 10 exchanges that allow trading in cryptocurrency, few notable names of such trading platforms are, CoinDCX, Zebpay, WazirX, CoinSwitch Kuber, and Unocoin.

Why does it matter now?

With the increasing popularity and people investing in cryptocurrencies—investors should be mindful while trading in such a volatile market.

Centralized exchanges are ahead in regards to regulations and security concerns, as they are already subject to regulations and most have KYC verification processes in place. The centralized exchange verification process, for example, is a standardized compliance measure for KYC, Anti-Money Laundering, and counter-terrorism financing laws and regulations.

A rapid intrigue around investment and trading in cryptocurrency has also led to an increase in cyber-attacks which could eventually lead to investors losing millions of dollars, moreover, centralized crypto exchange is a soft target to hackers.

Even the most popular centralized exchanges such as Binance and Bitmart have been hacked. In 2018, Binance was hacked in which the hacker stole over $40 million worth of Bitcoin from one of the largest cryptocurrency exchanges. The hacker(s) ran off with over 7,000 Bitcoin in a “large scale security breach”.

Bitmart also became a victim of hacks for a whopping $196 million. While the centralized exchange reported that it will reimburse the victims, this level of hack shouldn’t have happened in the first place.

Now in some geographies, governments are bringing about reforms and regulations in regards to trading in cryptocurrency. While the US, China are making efforts towards regulating trading platforms, however, emerging nations like India are still catching up on both licensing and regulating trading platforms such as crypto exchanges.

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