With Coinbase’s regulatory disillusionment playing out for all to see and a game of litigation tag well underway, times look tough for the world’s second-biggest CeFi exchange.
Of course, they are not the only ones. Kraken, Bittrex, and Binance have all been touched by the regulators’ enforcement spree not an ideal time to be a centralized exchange in the U.S.
For many, the knee-jerk reaction has been towards self-custody and decentralization, with “not your keys, not your coins” echoing across social media and blog posts. But centralized exchanges continue to exist, servicing hundreds of thousands of daily users that opt for their ease of use.
“I think if you’re looking at the scandals from last year, saying, ‘Oh, I’m going to run away from the centralized regulated, heavily scrutinized exchanges,’ I think you’ve made a mistake,” said Oliver Linch, CEO of Bittrex Global.
“Crypto needs to come out of the shadows and say what we’re doing and how we’re doing it. You wouldn’t put your money in an unregulated bank. Why would you put your money in an unregulated exchange?”
However, instead of precise regulation and oversight, such is the case for the U.S., broken trust in centralized exchanges still needs to be addressed for the industry to move forward.
Chengpeng Zhao (CZ), CEO of Binance, has long been a vocal advocate for transparency. Amid FTX’s settling dust, he proclaimed a renewed need, calling for industry players to release audited proof of their reserves.
However, Binance remains a black box, their own Proof-of-Reserves (PoR) report shrouded in doubt as to its validity, the auditor resigning from engagement with PoR reports soon after its publishing.
In March 2023, the Public Company Accounting Oversight Board (PCAOB) stated the reports.
“As a general matter, these PoR Reports purport to provide an asset verification for an asset type at a particular moment in time, subject to significant limitations based on the procedures performed,” they stated.
“For example, the procedures undertaken likely do not address the crypto entity’s liabilities, the rights, and obligations of the digital asset holders, or whether the assets have been borrowed by the crypto entity to make it appear they have sufficient collateral or ‘reserves’ over customer demands.”
They explained that because the report is a snapshot of just the reserves of the entity at one given time, they could not assure whether they were valid.
While this could be another coordinated attempt at debasing the validity of cryptocurrency entities, as is the trend, they are among many to question the audits. Some regard the reports as only showing part of the puzzle, doing little to improve transparency.
“Proof-of-reserves only really tells you a wallet address with a set number of money in that wallet address,” said Nathan Cha, Marketing lead at the decentralized exchange, dYdX. “It doesn’t tell you anything about a company’s balance sheet or outstanding loans, whereas, in DeFi, you can audit that in real-time.”
Despite this, CZ’s point that transparency breeds trust is a good one, and centralized entities plan to implement additional measures to communicate a fuller picture.
“I think we’re headed in the right direction,” said Himanshu Sahay, CTO and Co-Founder of Arch. “I think with proof-of-assets, proof-of-liabilities, and soon proof of solvency. We’re going to see a step in the right direction where CeFi won’t have such a disconnect and more clarity.”
“Most people on the consumer side have no idea what the assets are being backed out to. You could say we’re getting yield. But unless it’s from a very well-known source, like AAVE or maker, people don’t really know what’s going on with the yield. So I think there needs to be more clarity on what happens with the assets.”
“I think, with time and hopefully no more negative experiences, we’ll be heading in the right direction.”
Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.
Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.