CEXs are “circling the wagons”

    16 Nov 2021

    The “Big Chinese Offensive” on cryptocurrencies has led to a colossal outflow of crypto holders’ funds to decentralized crypto exchanges and DeFi projects, as well as over-the-counter platforms. Now centralized cryptocurrency exchanges are looking for a fitting answer to this challenge.

    Centralized cryptocurrency exchanges (CEX), having felt a threat to their market dominance, are rapidly transforming into “financial harvesters” at the cross-section of cryptocurrency and financial worlds. Unfortunately, at the same time, they are moving in the wrong direction, abandoning the ideology of freedom and decentralization, which formed the basis of the entire crypto phenomenon.

    Binance, for example, said it is ready to move away from the current management model due to pressure from financial regulators. According to CEO Changpeng Zhao, Binance intends to license its operations in the jurisdictions that require it.

    “Four years ago, when we started, we wanted to establish a decentralized management model by placing decentralized teams everywhere, but now we realized that some centralization is necessary for the regulators”, – he said, adding that global financial institutions and investors have already realized the advantages of digital assets.

    But the biggest news is coming from the largest US crypto exchange, Coinbase. First, it announced the introduction of Get Paid in Crypto for US customers, which will allow them to receive a salary in any cryptocurrency on the platform. That is, a person will be able to receive USD payments directly to their exchange account and spend them using a Coinbase debit card. Among other things, the exchange will enable users to automatically convert their money to USDC or DAI and receive interest for storing it on the trading platform.

    But that’s not all. Coinbase is also getting ready to offer US regulators its guidance in overseeing the cryptocurrency industry. In particular, the company will give its own opinion on which cryptoassets should be defined as securities and which should not.

    Coinbase was pushed into the role of a guide after a conflict with the US Securities and Exchange Commission (SEC) over its plans to launch a high-yield savings product for the USDC. After an extended fight with the officials, it decided to give in to the SEC and canceled the product launch. Following this defeat, the company itself began to advocate standardizing exchanges’ approach to listing cryptocurrencies and launching new products in the United States.

    The move is sly but effective. I have seen this happen before: Initially, the pioneers of a new industry are at war with the state regulator, which does not understand it, and is therefore eager to ban everything in sight. However, the most cunning ones then put together their own “professional community” and come up with “standards for industry self-regulation”. They take those standards to the regulator and suggest monitoring the industry for compliance with state interests themselves. As a result, everyone is satisfied, except for the direct market competitors of those “negotiators” who have developed “self-regulation” rules.

    Staying on the topic of cooperation between the exchange and the authorities: Coinbase has applied to register a Futures Commission Merchant (FCM), which will allow the company to obtain a CFTC license. It is the next step towards expanding futures and derivatives trading on the platform. Under US law, companies wishing to offer their clients derivatives must have a CFTC license. To do this, they need to join a self-regulatory organization called the NFA – National Futures Association – which handles registrations on behalf of the department.

    Regarding the company’s development plans, Coinbase will place $ 1.5 billion worth of bonds (two issues with pre-emption rights in 2028 and 2031) and use the proceeds to absorb crypto startups. Or, as the press release states, “the funds will go to overall corporate purposes, including product development and potential M&A deals”.

    Qualified institutional investors and non-residents will be able to purchase the securities. Bonds will be guaranteed by Coinbase Inc. – a subsidiary of the crypto exchange. The parameters of the issue will be determined more precisely after negotiations with potential investors.

    We have already seen something similar. Facebook, Apple, Amazon, Google, and many other IT giants have long been accused of destroying potential competitors simply by buying up promising startups and integrating them into their ecosystems. It seems that the largest cryptocurrency exchange will now do the same.

    Other centralized crypto exchanges are also actively complying with government regulators. KuCoin, for example, blocks users from China and carefully prevents them from bypassing the ban on cryptocurrency transactions.

    And the South Korean crypto exchange Upbit announced that from October 13, it would stop serving users who have not passed the identity check (KYC). Those will be denied access to the trading terminal, depositing and withdrawing funds from the platform. Starting October 10, new Upbit clients are able to access funds and trading only after going through the KYC procedure. Also, from that point, unverified Upbit users their identity can’t open deals worth more than KRW 1 million ($ 842).

    From the business point of view, large cryptocurrency exchanges are making completely balanced and correct decisions. But these same decisions completely contradict the ideology of freedom integral to the concept of cryptocurrencies as conceived by cypherpunks and Satoshi Nakamoto himself. To what extent is it even possible to “be friends” with the state and banks while making money on something created to counteract them? It seems that CEXs are now laying a “bomb of contradictions” under their business, which will sooner or later blow up. And no one can say when the explosion is coming.

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