Navigating the Shift: Are We Moving Towards DEXs?

Cryptocurrency exchanges have long been seen as equivalents to traditional financial institutions, particularly banks. However, regulators are only beginning to actively implement oversight, and their requirements remain somewhat unclear to the market.

Take, for instance, the ongoing debate in the United States regarding the classification of various digital assets as securities. On one hand, U.S. regulators have not established specific listing requirements for cryptocurrencies on exchanges. On the other hand, they impose fines on platforms for violations of securities laws.

In 2023 alone, the SEC launched over 40 investigations related to cryptocurrencies, including lawsuits against exchanges like Coinbase, Kraken, and Binance. By 2024, Crypto.com and KuCoin had also been added to this list of major platforms facing scrutiny.

The CFTC has also been active, repeatedly raising concerns regarding trading in commodity futures, which some of its products associated with cryptocurrencies are believed to fall under.

As a result, Binance faced record fines for alleged derivative violations, KuCoin agreed to a penalty of nearly $300 million, BitMEX paid $100 million, and Bittrex even exited the market entirely.

Another layer of pressure on exchanges involves anti-money laundering (AML) and counter-terrorism financing (CTF) requirements. All exchanges operating in regulated jurisdictions are required to adhere to AML/KYC procedures, yet regulators often struggle to understand how these platforms meet their obligations.

In the EU, where the MiCA regulation and the AMLA are in effect, the cryptocurrency sector has begun to voice concerns about overregulation. Nevertheless, major global exchanges prefer to adapt to the new demands rather than exit the European market. Platforms are implementing the FATF Travel Rule, delisting controversial tokens, and securing licenses in every jurisdiction where they operate, all while maintaining their presence.

Despite these challenges, trading volumes on centralized platforms continue to rise, driven by an increase in active users, the launch of new products, a rise in the value of major cryptocurrencies, and improvements in regulatory environments in various regions.

However, there is also growing dissatisfaction with centralized exchanges. Large centralized exchanges (CEX) are losing user trust for several reasons:

As a result, some customers are considering alternative trading methods or decentralized exchanges (DEX). Yet, it seems that this group still constitutes a minority, as centralized exchanges remain dominant players in the market.

The DEX market is significantly smaller than that of CEX and is likely to remain so. This is due to a multitude of factors, both technical and regulatory.

Firstly, using DEX is inherently more complex and involves certain technical risks, such as vulnerabilities in smart contract code or user errors when connecting wallets or placing trade orders.

Secondly, decentralized exchanges may be even more susceptible to hacking than CEX. According to research from Shard, losses from DEX hacks exceeded $200 million in 2024, with an increase in the number of attacks. There has been a rise in the use of bridges to convert stolen tokens into more liquid and widely-used cryptocurrencies like BNB, ETH, or USDT.

Moreover, in 2024, cross-chain bridges became an even more appealing target for hackers due to the significant amounts of assets they often manage. Attack losses can reach millions of dollars, as seen in cases like Alex Labs ($4.3 million) and Socket ($3.3 million).

Additionally, decentralized exchanges are also under the regulatory microscope. The EU plans to establish rules governing DEX by 2026, and in the U.S., a new law requires them to report user transactions. However, this rule was repealed after Donald Trump took office.

Decentralized exchanges are unlikely to replace centralized platforms, as regulation serves not only to protect investors but also to provide clarity on where to direct complaints and ultimately ensure the safety of funds.

The figures speak for themselves: the daily trading volume on CEX can reach $30–70 billion, while DEX volumes hover around a few billion. Furthermore, centralized exchanges offer a range of financial services in user-friendly formats, including diverse derivatives trading, deposits, and lending, which DEX cannot match in variety.

Finally, cryptocurrencies are considered genuinely «clean» only when they originate from a regulated centralized exchange. Not every exchange is willing to accept assets from DEX, fearing that such platforms are used for laundering money obtained through hacks.

Any changes in regulation negatively impact the availability of cryptocurrency services, but most are already prepared for it. For instance, in the EU, exchanges are complying with stringent MiCA and anti-money laundering regulations.

In the European Union, the Travel Rule restricts deposit capabilities from certain services. However, the business is not suffering as a result, and users continue to stay with the exchanges they are accustomed to.