Decentralized crypto exchanges received a powerful impetus for development amid the crackdown on cryptocurrencies in China and the overall growth of the DeFi sector. Now the main goal for them is to survive the increased attention from hackers and government regulators. Which of those is worse remains to be seen.
In the wake of the latest wave of Chinese repressions against the cryptocurrency businesses and cryptocurrency owners, crypto exchanges Binance and Huobi first announced discontinuing registration of new users from mainland China and then began blocking Chinese IP addresses. In essence, these major exchanges (as well as several dozen smaller exchanges) simply left the Chinese market.
22,000 BTC (~ $ 930 million) and 800,000 ETH (~ $ 2.2 billion) were withdrawn from the Huobi exchange in the first two hours following this news. And it didn’t end there. Investors are taking huge amounts of assets from Asian centralized exchanges – users have no choice but to switch to DEXs, which do not require documents or phone numbers and do not block personal accounts on governments’ request.
It is worth noting that Chinese businesses actively adopted crypto for international trade to bypass currency restrictions, so the Chinese are the ones using cryptocurrencies as a means of payment (as opposed to an investment instrument) the most. Which means that for them, transferring money to other assets is not an option.
For that reason, businesses in China are now shifting their attention to decentralized exchanges. And while the centralized exchanges are shrinking by billions of dollars, the top DEX platforms are showing some decent growth. For example, on September 27, “Chinese defectors”, for a number of reasons, turned to the dYdX decentralized crypto exchange. The rapid growth in daily trading volume soon followed, and the platform quickly overtook all its closest DEX competitors.
All of the above is excellent news for decentralized exchanges whose trading volumes unexpectedly dropped by 34% in the third quarter after a steady increase over the entire past year.
Another thing to keep in mind is that the launch of ETH 2.0 and a decrease in Etherium commissions will likely lead to a new boom for DEX platforms and a significant reshuffle of crypto market players.
The visionaries of the crypto market have foreseen it all happening. Back in August, Jack Dorsey, the CEO of Twitter and Square Inc., announced plans to create his own decentralized exchange.
Square’s specialized division, internally called TBD, is set to open a non-custodian business specializing in decentralized financial services. The division will focus on Bitcoin.
According to project manager Mike Brock, TBD is supposed to be a reliable platform that will make it easier to manage a non-custodial wallet from anywhere in the world, open-source and without Square’s centralized control.
Now, due to the pressure from China and increased regulations by the US, the centralized exchanges will lose a significant chunk of the market. But this does not mean an easy and carefree life for their natural competitors – decentralized crypto exchanges.
The US Securities and Exchange Commission (SEC) launched an investigation into DEX back in the summer, and American DeFi developers are increasingly receiving letters asking for information about their work. Earlier, the head of the regulator Gary Gensler mentioned plans to take control of all cryptocurrencies and DeFi.
Most likely, in the changing market circumstances, government regulators will try to get to DeFi as soon as possible. There is already a precedent for the closure of a DEX from back in 2019. Then, the authorities recognized the main developer as the culprit. The SEC was blunt, figuring that if something works like an exchange, it must then have a license. Its absence was a violation of the law. And those involved who got caught were subsequently punished.
Of course, the SEC can do the same this time around. But it seems that they are still studying the issue to create some general rules that would seriously limit DEXs’ “free rain”.
Sadly, many large decentralized exchanges have already started restricting themselves. In the last days of September, the 1inch decentralized exchange aggregator began to block the access of US residents based on IP addresses. Under the terms of service, US customers couldn’t interact with it since April this year. But only now are they receiving notes that they are likely in a prohibited jurisdiction and have to bypass the ban using VPN services.
Although the project representatives claimed that fear had nothing to do with the decision. According to them, it resulted from the company preparing to launch a specialized service for the US. “1inch Network is in the process of Series B fundraising, which has already reached $ 175 million (way ahead of the projected $ 70 million). A significant portion of the funding will go towards developing and launching a new product titled 1inch Pro, specifically targeted at the US market and global institutional investors in compliance with all the regulations.”, – says the project statement. 1inch is still the largest DEX-aggregator with a market share of over 66%.
Prior to that, in July, the world’s largest decentralized exchange, Uniswap, canceled the trading of 129 tokens to comply with regulatory requirements. As a result, the platform was accused of centralization by its user community. However, lawyers explained that the American authorities, if they wish, have enough leverage even over a decentralized service.