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Attorneys for Centralized Exchanges

Blockchain attorney Dr. Nick Oberheiden

Attorney Nick Oberheiden
Centralized Exchanges Team Lead
Blockchain attorney Alina Veneziano

Attorney Alina Veneziano
Centralized Exchanges Team Lead

If you run an online cryptocurrency exchange that is under constant federal scrutiny, you need to retain a dedicated team of lawyers with experience in centralized exchanges.

Get a blockchain attorney who will help your exchange navigate the complex and risky landscape of centralized exchanges.

Centralized exchanges are very popular today. Federal agencies have also increased their attention on exchanges, given the underlying risks for customers and crimes like money laundering and terrorism financing. Centralized exchanges have other risks linked to their custodial duties (handling asset custody on behalf of their clients).

If you have doubts about whether using a centralized exchange is ideal for business, we can help you find out! Blockchain Lawyer has blockchain attorneys and consultants with extensive knowledge of blockchain technology with respect to cryptocurrency exchanges.

Our team comprehends the difficulties of having business needs reliant on financial innovation, as is the case with online cryptocurrencies. With federal agencies increasing focus on cryptocurrency exchanges and the unique risks that centralized exchanges face under existing regulations, retaining a legal team with expertise in centralized exchanges is critical.

We can offer legal help ranging from federal defense against any allegations leveled on centralized exchange to advice on the suitability of centralized exchanges for a business. Contact us today and claim your free centralized exchange consultation with your blockchain experts.

Definition of Centralized Exchanges

CEXs (Centralized Exchanges) are simply online platforms that facilitate buying and selling of different cryptocurrencies. CEXs make it possible for persons with fiat currency (like dollars, pounds, etc.) to exchange it for cryptocurrency like Bitcoin, Ethereum, etc.

Centralized exchanges are run by entities that own and control the exchange – hence the name “centralized." These third parties enable the trading process. In CEXs, trades are facilitated using an order book – buy and sell orders placed by users. These orders are executed using special programs.

Since CEXs facilitate trading using third-party entities, they act as custodians for client funds. This gives them a unique responsibility to protect their client’s property. They also attract regulations that would traditionally apply to customer deposit-taking institutions.

Using a Centralized Exchange

Step 1:  KYC/AML and other Checks

Users of CEXs must complete certain identification steps to set up an account. This step includes numerous verification procedures/checks popularly known as KYC (Know-Your-Customer) and AML (Anti-Money Laundering) checks.

The process can also involve CFT (counter-terrorism financing) checks. This can be a lengthy process. However, it is mandatory as per federal regulations enacted to prevent fraud, terrorism, money laundering, and other crimes.

Step 2: Completing Registration

Once your identity is verified and you pass the applicable checks, clients can deposit their money into the centralized exchange. This can be done via a credit card, bank deposit, or cryptocurrency deposits.

Step 3: Trading

Once a client’s account is funded, trading can begin. Different exchanges use different types of wallets (hot or cold wallets).

Centralized Exchange Services and Processes

After signing up and completing complex user verification processes, users can receive a variety of services. Most CEXs are brokers who normally insure customer deposits. US centralized exchanges are required to insure their deposits with the FDIC.

When transactions happen in a centralized exchange, there’s no actual exchange of currency (FIAT or crypto). When customers deposit funds, the exchange becomes a custodian and issues an IOU. These IOUs are automatically tracked by the CEX and converted to actual currency in the end when a user withdraws their funds.

CEXs hold private keys as custodians. They are supposed to keep the funds secure. If a user loses their private keys, a centralized exchange still has the user’s information and funds stored securely.

In regard to actual processes, CEXs allow users to:

  • Buy/sell cryptocurrency
  • Place market orders allowing instant buying/selling or crypto
  • Place limit orders to limit profit/loss

These actions give users the ability to execute trades instantaneously and automatically.

Centralized Exchange Regulation

Like most entities operating via emerging technology like blockchain, regulation is inconclusive. In fact, most regulation on centralized exchanges is tackled at state level and may differ in some states.

However, there are general regulatory rules that apply. For instance, centralized exchanges must have and implement KYC/AML policies as per federal law. What’s more, since they receive customer funds, they need to be subjected to additional regulations imposed on traditional businesses that take customer deposits. Generally, CEXs must be compliant with multiple laws that can differ, creating a need for legal expertise in centralized exchange regulations.

Examples of Centralized Cryptocurrency Exchanges

Coinbase and Binance are the most popular centralized exchanges globally today. The exchanges receive customer funds and monitor user transactions. A CEX like Coinbase offers cryptocurrency brokerage services with advanced trading and staking options. Since Coinbase is a broker, the exchange charges fees.

Coinbase is a secure CEX with many measures such as two-step verification and FDIC insurance for its customers’ deposits. Coinbase users can buy, sell, receive, send, exchange, and withdraw crypto funds. The exchange has trading limits capped based on factors like payment method and a user’s region. Besides Coinbase and Binance, other centralized crypto exchanges include Kraken, Bitfinex, and Bittrex.

What Are the Benefits of Centralized Exchanges vs. Decentralized Exchanges?

Centralized exchanges offer benefits like the ability to stake crypto, earn rewards from holding crypto, learn more about crypto and buy any crypto using FIAT currency.

What Are the Disadvantages of Centralized Exchanges?

Customers pay high transaction fees. What’s more, customers have less control over their deposits since they remain in the custody of CEXs.

Help With Centralized Exchanges

CEXs are arguably the most popular platforms for persons interested in buying/selling cryptocurrencies. While CEXs have numerous advanced trading features, they have significant differences from decentralized exchanges since they maintain custody of client funds.

Centralized exchanges, therefore, face unique obligations that can trigger regulatory issues. Understanding the ever-changing landscape that centralized exchanges operate in can be a daunting task. What’s more, it’s also a challenge deciding if a CEX is a perfect fit for business.

That’s where we come in. We have a seasoned team of consultants and blockchain attorneys that can advise on all matters involving centralized exchanges. Our experts can also resolve centralized exchange issues.

Most importantly, we can defend owners of exchanges as well as customers against federal accusations targeting centralized exchanges and their clients. Be proactive about legal expertise relating to CEXs. Contact us today.