You know what they say, “when life gives you lemons, make lemonade”. But when it comes to protecting your crypto funds on centralized exchanges (CEXs), the old adage should be “when life gives you regulations, make a self-custody wallet.” Self-custody is undoubtedly a better solution to protect the interests of clients in crypto. Regulation by itself is not enough.
The following opinion editorial was written by Joseph Collement, General Counsel of Bitcoin.com.
Don’t get us wrong, regulation is important. It’s like a flimsy umbrella on a sunny day: better than nothing, but not something you want to rely on during a monsoon. Just ask the folks at Gemini, who despite being the “most regulated” CEX out there, still managed to lose all their “Win” clients’ money. Talk about “earning” a bad reputation! Oh.
But let’s be real here, the crypto world is like the Wild West. And let’s be honest, the US government is like the sheriff who just came to town, trying to figure out this new frontier. They’re like the dad at a teen party, trying to figure out what’s going on, but eventually getting in the way.
Working 5+ years full time in crypto as a lawyer, I would venture to say that the problem with CEXs is not regulation (or lack thereof), it is the business model itself. When an entity takes control of client funds, they are incentivized to trade and gamble with that money, much like a stockbroker playing blackjack with their retirement savings. Meanwhile, customers are left with the bag (or in this case, the empty wallet) when things go wrong.
“Regulated” CEXs also combine services such as trading, custody, and market making. Unlike a traditional regulated stock exchange platform, many CEX users are pitted against the exchange itself in a trade, as opposed to another client of the exchange. This gives CEXs the ability to trade in advance of and against their clients, a well-known practice perpetrated by top-tier exchanges, including in the US.
And let’s not forget about hacking. To date, around $5 billion of user funds have been stolen in the last 3 years, with just under $3 billion in 2022 alone. But don’t worry, the Justice Department is always here to help. protect it. With their massive hits on well-known crypto criminal organizations like Bitzlato, they will make sure that your funds are safe.
Complying with regulation costs CEX billions of dollars in revenue, and the cost is often passed on to the customer. CEXs are spending more money on legal and compliance issues than on product development. This month, Coinbase invested $50 million in its compliance department under an agreement with NYDFS, but cut 20% of its workforce. Lawyers are blockers, not UX designers. And if you blindly follow their advice, you risk ending up with the old cookie popup.
In all seriousness, self-custody is the way to go to protect your crypto funds. Honest business practices and non-custodial wallets are the key to protecting the interests of investors and clients in the world of cryptocurrencies. Instead of relying solely on regulations, let’s move to a more decentralized model, where users have full control over their own funds and are not at the mercy of centralized entities. Only then can we truly guarantee the safety of user funds in the world of cryptocurrencies.
What do you think about self-custody as a solution to protect crypto funds? Do you agree that this is a better alternative to relying solely on regulations, or do you think a different approach should be taken? Share your thoughts in the comments below.
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