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Experts predict that centralized markets will be subject to increased regulation following the downfall of FTX, and this means a high possibility of cryptocurrency regulations around the world. This could potentially lead to the elimination of many players, but there would be good cryptocurrency regulation benefits as well that we should put into balance.
The crypto market has been called the Wild West of finance. Recent events in this space would shock even the most ardent cowboys.
A quick reminder: We faced an unprecedented liquidity crisis on Nov. 8th, after it was revealed that FTX, the second largest cryptocurrency exchange in the world, suffered a liquidity crunch. This occurred because they had been facilitating shady transactions with Alameda Research.
This is because the world economy continues to be difficult in 2022. The crypto sector has suffered a series of meltdowns that have had a huge impact on investor confidence and the financial outlook. A growing number of prominent crypto projects, including Voyager, Voyager Capital, Vauld, Terra and others, have crashed within months.
The downfall of FTX has been particularly damaging to the industry. As evidenced by the fact that the price of major cryptocurrency assets plummeted after the company’s collapse, and still shows no sign of recovery. Within 72 hours of the announcement, Bitcoin’s price plummeted to $20,000, and then to $16,000. Many experts suggest that Bitcoin could drop to $10,000-$12,000 in the near future. This story has been repeated by many other assets.
What is the future for cryptocurrency exchanges
A pertinent question raised by recent turbulence is what the future holds for digital assets exchanges, in particular central exchanges (CEXs). Cointelegraph reached out to Dennis Jarvis, the CEO of Bitcoin Exchange and developer of Bitcoin.com, to get a better understanding of the subject.
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CEXs, he said, are facing a huge uphill battle, particularly with low revenues and stricter regulation. Given the current state of affairs, he stated that more and more people will gravitate towards self-custodial storage solutions.
“It is obvious that you don’t trust these central intermediaries. Although CEXs will always have a place, they will play a small role over the long-term in the crypto ecosystem.
Cointelegraph spoke with Alex Andryunin from Gotbit, the CEO of an exchange market maker. He said that there is already a surge in institutional interest in DEX trading. He also highlighted the fact that, just a few months back (September), the DEX-centric profits of his clients were at $8 million. However, they jumped to $11.8 million in the subsequent months, signaling an increase of 50% despite the turmoil across the entire cryptocurrency industry. He also said:
“I think Binance and Coinbase, Kucoin and Kraken’s business model will survive the continuing turbulence. Binance does not have any competition from large entities such as Coinbase. There are currently no large competitors for Binance. Binance US continues to grow even in the U.S. while Coinbase, Gemini, and Crypto.com all saw their DAU drop as of Q3 2022.
Gracy Chen is Bitget’s managing director. She believes we will see trading platforms enter a consolidation stage, with more scrutiny than ever. She believes this will provide an opportunity for exchanges that have strong balance sheets and effective risk management practices to consolidate their market share.
Cointelegraph was told by Sheri that “Ultimately, we believe there shouldn’t be more than 10 central exchanges with strong competitiveness in the sector.”
Robert Quartly Janeiro is chief strategy officer of cryptocurrency exchange Bitrue. He shares a similar outlook. Cointelegraph discussed with him that the collapse of FTX could and should be viewed by the industry as a historic event that will force exchanges into greater professionalism and transparency in their day-to-day operations.
“It is incumbent on crypto exchanges that they provide a better experience for investors. They need to become more trustworthy and better places to trade. Some will not make it, but the real pedigrees are likely to succeed. It is important to remember that exchanges exist to protect investors’ money and create a market. They are not meant to be the market. He added that FTX had done it wrong.
Is it possible for DEXs to fill the void in this area?
Experts agree that as long as central exchanges like Binance, Coinbase and others maintain sound balance sheets, there’s no reason why they shouldn’t be able to profit from the competition. Jarvis believes these large crypto entities will feel the heat from DeFi protocols as they move forward. Jarvis also believes that many people are beginning to realize the inherent problems of trusted intermediaries. He continued:
“I believe that you will see a lot of CEXs start to invest in the DeFi version of their CeFi product. This will be difficult for them because DeFi products have been around for a long time.
Chen is also optimistic about Decentralized Finance (DeFi) and believes there will soon be new opportunities. Chen states that most centralized crypto services, including lending/debt, will cease to be available in the near future, noting that the CeFi lending system has been deemed untrustworthy.
“DeFi is a great opportunity for growth. “Custody services, transparency, and top-shelf risk management policies will be the norm for central services,” she stated.
Andryunin also pointed out that the majority of DeFi protocols are still too complicated for retail traders. He also stated that the majority of platforms operating in this sector today provide a poor user experience.
“Users should be able to comprehend metamask and other extensions.” Many are also having difficulty with fiat/crypto input. “Even if the average retail trader uses DeFi,” he said.
Crypto’s future is in the union of DeFi & CeFi
Julian Hosp (founder of the decentralized exchange DefiChain), stated that transparency is key to how customers choose exchanges in the future. He said that pure DeFi would continue to be difficult to use by most customers and pure CeFi would be too trustable for them.
“Solid exchanges may have more power, but we will see more platforms combining DeFi with CeFi to create CeDeFi. This allows customers to enjoy the same amazing user experience from CeFi while still having the transparency and control of DeFi. This will be the path forward for crypto.
Exemplifying his views on the subject, he said that DeFi liquidity won’t be concentrated on any one blockchain. Instead, it will likely spread to multiple protocols and ecosystems over the next months and years.
Chen thinks that DeFi might offer trustless custody services and CeFi would provide better products with better margins. However, the CeFi area does not have mature regulations nor on-chain custody services.
In the future, it will be crucial that the new and old crypto financial paradigms come together so that DeFi platforms have access to a liquidity superhighway. This is crucial because the market lacks concentrated capital. This will require existing players from both the central and decentralized sectors to work together.
History should be a lesson
It is clear that the recent FTX crisis serves as a reminder that people shouldn’t store their wealth on opaque exchanges. Nana Obudadzie Oduwa is the creator of Oduwacoin. She stated that cryptocurrency enthusiasts need to realize how critical it is to store their assets in cold storage or in hardware wallet solutions.
“Cryptocurrency is the future of money. Blockchain-based technology is helping to rewrite transactions much like the internet did for the telecommunications industry. It’s not safe for people to put their money in the hands of exchanges unless they have proof that their funds are insured.
Quartly Janeiro believes it is crucial to have institutional credibility and capability in the crypto landscape. Add that, much like what happened with Lehman Brothers in 2008, liquidity can be a problem with any asset type.
“Coinbase and other entities will continue to attract clients, but the size of an entity does not impair it from risk,” he stated.
Jarvis also asserts that crypto’s core principles have been compromised by technological innovation, market share, and money over the past few years. According to Jarvis, the recent wave of crypto-insolvencies is an ongoing painful episode. But it’s probably for the better since it will put the industry on a more stable path. One that is rooted in transparency and decentralization. As we look to a future that is based on decentralized cryptocurrency tech, it will be exciting to see how this market develops and grows.
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
