Navigating the Exchange Landscape

In crypto, one element stands out as a crucial infrastructure for buying, selling, and trading digital assets: exchanges. Despite the promise of decentralized exchanges, most transactions occur on centralized exchanges such as Binance, Coinbase, and KuCoin.

These platforms play a pivotal role in facilitating the global crypto economy, which is why they’ve become a target for regulators seeking to slow the space’s adoption and development. Even the most heavily regulated and compliant exchange, Coinbase, this week threatened to pull their operations out of the US because of the hostile attitude of regulators.

From the perspective of projects, exchanges play a crucial part in helping their communities support and raise the profile of their protocol. However, listing on exchanges can be complicated and comes at a cost, so each new agreement must be carefully planned and timed.

As Deniz, our CEO, explains, “Securing a new exchange listing is almost always a benefit to the project as it allows the token to be more accessible. There are costs that are associated, which can hinder the runway for projects. Additionally, providing liquidity can be costly, and following the stipulations of particular exchanges can come at the cost of changing certain business structures.”

The lack of regulatory clarity in the crypto space has benefits and drawbacks. While it allows for innovation, it also exposes users to risks from bad actors, as seen in the case of FTX.

This has helped to create a vibrant ecosystem of diverse platforms but also carries the weight of responsibility for users to understand the risks involved in every transaction. The necessity for self-education, rather than relying on the advice of influencers, can make it challenging for people to identify trustworthy exchanges and protect their investments.

Looking to the future of centralized exchanges, Wilson, our COO, says, “Centralized exchanges are receiving increased scrutiny from regulators given the FTX collapse. I believe that centralized exchanges are forward-looking and want to minimize risk. This is why some are withdrawing their US operations and looking for ways to decentralize.”

Simon, our CTO, concurs, “CEXs have amassed very large treasuries and will deploy capital when needed to continue generating revenue. This can come in the form of fighting lawsuits or making systematic changes to their way of operating.”

Another challenge facing exchanges is the constant threat of security breaches. Since user funds are stored in digital wallets, which are essentially digital files, they are vulnerable to hacking and other cybersecurity risks. There have been numerous high-profile hacks and security breaches of cryptocurrency exchanges in the past, resulting in millions of dollars worth of losses.

To address these concerns, exchanges have implemented various measures to safeguard funds. These include multi-factor authentication, cold storage, regular security audits, and insurance coverage for potential losses. However, the constantly evolving nature of cyber threats requires exchanges to remain vigilant and continually update their security protocols to protect user assets.

The combined risk factors of either the exchange mismanaging user funds or external security breaches have fuelled people’s interest in self-custody. It’s becoming more common for users to move funds onto an exchange for a transaction and then return their tokens to their own wallet afterward.

As the space grows, it’s easy to forget that we’re still in the early stages of adoption. As the technology, regulations, and business practices develop, it’s easy for unforeseen difficulties to arise. One such problem arose for us with our new market makers, GSR and KuCoin. Owing to this issue, KuCoin temporarily suspended PBX trading on the exchange for US customers.

It’s a situation we’re working hard to resolve; as Deniz explains, “We want to thank our community for their patience with this issue. We are in communication with KuCoin and GSR to resolve this issue. Unfortunately, there is nothing we can do to force their hand. We will continue to follow up and keep our community updated when there are relevant updates.”

With increasing mainstream adoption and interest from institutional investors, exchanges are likely to play a major role in influencing the future of the space. As the industry matures, finding the right balance between regulation and innovation, and addressing the challenges faced by exchanges, will be crucial for their long-term success and sustainability.