Crypto: after the FTX scandal, why are centralized exchanges in turmoil?

News JVTech Crypto: after the FTX scandal, why are centralized exchanges in turmoil?

Since the collapse of the second largest crypto exchange, a threat hangs over all centralized exchanges. These online platforms dedicated to buying, selling and storing Bitcoin and other cryptocurrencies of all kinds are going through a massive crisis of confidence.

Centralized crypto exchanges in decline since the fall of FTX?

Centralized exchanges (CEX) are platforms that allow users to buy, sell and trade cryptocurrencies online. These are usually a go-to tool for beginners looking to get into crypto, due to their intuitive interface. In fact, these crypto exchanges generally take on the aspect of online banking by offering various savings and debit card services in cryptocurrency.

With the speculative bubble of recent years, platforms like Crypto.com, Binance, Coinbase and FTX have multiplied their number of users by hundreds and therefore have sat at the table of the giants of this world. However, since the crash of the famous FTX platform, the situation seems to be getting worse for these “crypto banks”.

However, most of them are private companies, which means they are not subject to the same rules and regulations as traditional financial institutions. This can expose them to risks such as fraud or major hacks.

As a result, centralized exchanges are often criticized for their lack of transparency and security, and the fall of FTX due to its CEO’s “poor accounting management” provides arguments for the opponents of this model. Thus, many users and investors in cryptocurrencies no longer trust all their platforms.

Massive withdrawals target crypto platforms

The first centralized exchange in the ranking, Binance, is largely suffering from this global change in user sentiment. The platform recorded a pharaonic withdrawal amount of $3.6 billion in just 7 days.

“If you have a bad experience with a bank, you are likely to have the same preconceptions about each of them. If a politician is found to be corrupt, you would think that all politicians are… Human nature is such that people tend to generalize. Sorry Changpeng Zhao, CEO of Binance.

With the fear of another failure, many users are withdrawing their cryptocurrency from the platforms to secure their money. In this way, crypto-wallets such as Metamask or Ledger, but also decentralized exchanges, are gaining ground by becoming the first-choice tools for buying, selling and storing virtual currencies. As an example, Ledger recorded its best month since its existence last November, during the collapse of FTX.

This choice is widely understood by Binance’s CEO: “Investors want to withdraw their money from Binance? Either! They can do it. It’s their freedom… We keep all users’ cash and crypto in a 1:1 ratio. he explains.

If his massive withdrawals don’t necessarily worry the CEO of Binance, it’s clear that they have a significant impact on the company. In fact, the main advantage of these platforms lies in the fact that they have a lot of liquidity. Thus, when a user wants to make an exchange (buy or sell), it is almost instantaneous since the company has a share. In a way, if the payouts are too large, the speed and efficiency of transactions on the platform will be affected.

Centralized exchanges, the paradox of crypto

The unfortunate events in FTX also point to an ideological paradox. Satoshi Nakamoto created Bitcoin to provide an alternative to the traditional banking system and remedy the excessive possession of wealth by a small number of people. Bitcoin was therefore designed under the prism of a decentralized cryptocurrency, meaning that there is no central entity that controls how it is issued and used.

It’s hard to say for sure what its creator, Satoshi Nakamoto, thinks about centralized exchanges, as he created Bitcoin over a decade ago and has since disappeared from the public eye. However, since Bitcoin was designed as a decentralized cryptocurrency, Satoshi may not be a big fan of centralized exchanges, which by definition are centralized institutions that replicate the pattern of a Bank 2.0.

Nevertheless, it is important to note that if these centralized exchanges had not existed, Bitcoin and the various cryptocurrencies would certainly not have had the success they have today. CEXs have really contributed to the massive adoption of the industry by providing a simplified experience compared to the use of decentralized exchanges, blockchain analyzers and wallets.

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