You know the saying: “when life gives you lemons, make lemonade”. When it comes to safeguarding crypto funds on centralized exchanges (CEXs), it is important to remember a different adage: “when life gives you regulations, make a self-custody wallet”. Self-custody is undoubtedly a better solution to protect the investments of buyers in crypto. Regulations can’t do it all.
The following opinion editorial was written by Joseph Collement, General Counsel at This is Bitcoin.com.
We are not kidding. Regulations are essential. They are like a thin umbrella on a sunny afternoon: better than nothing but not something you can rely on during a monsoon. Just ask Gemini, the so-called “most regulated” CEX on the market, which still managed to lose users’ funds. Talk about earning a bad name! Oh.
But let’s be real, the crypto world is like the Wild West. And let’s face it, the US authorities are like the sheriff who arrived in town to find this new frontier. They are like the parent at a teenage party, trying desperately to figure out what is going on, but not getting it right.
As a lawyer for 5+ years in crypto, I’d venture to say that the issue with CEXs isn’t regulation (or lack thereof), but the business model itself. If an entity manages customer money, they are incentivized not only to trade but to gamble with that money. It’s like a stockbroker who plays blackjack with retirement savings. Meanwhile, when things don’t go well, customers are left holding the bag (or empty pockets).
Furthermore, CEXs can combine services like trading and custody. A typical regulated stock exchange is where many CEX customers compare to the exchange in a trade. CEXs can trade in front of and against their customers. This is a fact well-known by the top-tier exchanges in the US.
Hacking must also not be neglected. To date, approximately $5 billion in user funds have been stolen in the past three years. The figure is slightly lower for 2022. But don’t be alarmed, the Justice Department is always there to help. With big hits at well-known crypto prisons like Bitzlato, they can protect your funds.
Complying with regulations costs CEXs billions of dollars in revenue, and the cost is usually passed on to the customer. CEXs spend more money on compliance and legal issues than they do on product improvements. This month, Coinbase invested $50 million in compliance under a settlement with the NYDFS. However, it laid off 20% of its workforce. Lawyers are not UX designers, but blockers. And blindly following their advice can result in being stuck with the same cookie popup.
All things considered, self-custody will be the best option to protect crypto assets. Ethical business practices and non-custodial accounts are essential to protecting the interests of buyers and sellers in the world of cryptocurrencies. Let’s not rely on regulations alone. Let’s move to a more decentralized model, where users have complete control over their funds and are not at the mercy of central entities. Only then, can we truly guarantee the protection of people’s funds in the world of cryptocurrencies.
