You know what they say, “When life gives you lemons, make lemonade.” But when it comes to protecting crypto funds in a centralized exchange (CEX), the old adage should be “When life gives you regulation, make a self-custody wallet.” Self-custody is undoubtedly a better solution for protecting the interests of crypto customers. Regulation alone is not enough.
The following opinion editorial was written byJoseph Collement, General Counsel of Bitcoin.com.
Don’t get me wrong, regulation is important. It’s like a flimsy umbrella on a sunny day, better than nothing, but not something you want to rely on during a monsoon, since Gemini, despite being the “most regulated” CEX, has lost all of its “earned” customer money. Talk about “earning” a bad reputation. Ouch.
But let’s be real here. The crypto world is like a western movie. Honestly, the U.S. government is like a sheriff who has just arrived in town and is trying to make sense of this new frontier, like a teenage party dad trying to figure out what’s going on, only to end up getting in the way.
Having worked full time in crypto for over 5 years as a lawyer, I would venture to say that the problem with CEX is not the regulation (or lack thereof), but the business model itself. When a company controls a customer’s money, there is an incentive to trade or gamble with that money. It’s like a stockbroker playing blackjack with retirement funds. On the other hand, when things go wrong, the customer is left holding the bag (in this case, an empty wallet).
“Regulated” CEX also offers a mix of services like trading, custody, and market making. Unlike traditional regulated stock exchange platforms, many CEX users will be confronted in their trades with the exchange itself, not with other customers of the exchange. This allows CEXs to trade ahead of their customers, a well-known practice by some of the top exchanges in the U.S.
And let’s not forget hacking. To date, about $5 billion in user funds have been stolen in the past three years, and just under $3 billion in 2022 alone. But don’t worry, the DOJ is always there to protect you, and with massive blows to well-known crypto-criminal organizations like Bitzlato, they will make sure your funds are safe.
Compliance with regulations costs CEX billions of dollars in revenue, and that cost is often passed on to customers; CEX spends more money on legal and compliance than on product development. This month Coinbase invested $50M in its compliance department following a settlement with NYDFS, but cut 20% of its workforce. Lawyers are blockers, not UX designers. And if you blindly follow their advice, you risk ending up with a good old cookie pop-up.