Skip to main content

Centralized Cryptocurrency Exchanges (CEX)

Centralized cryptocurrency exchanges (Centralized Exchanges, CEX) are digital trading platforms that act as intermediaries between buyers and sellers of cryptoassets.

Unlike decentralized solutions, a centralized exchange is operated by a legal entity that controls:

  • trading infrastructure,
  • custody of user assets,
  • identification procedures,
  • compliance with regulatory requirements.

An exchange effectively performs the functions of a broker, a clearing center, and a custodian simultaneously.

Trading Mechanics: Order Book​

Trading on centralized exchanges is conducted through an order book mechanism. A similar mechanism is used on traditional financial exchanges.

An order book is an electronic list of active buy (bid) and sell (ask) orders, sorted by price.

The trading process includes:

  1. Submission of an order by a user:
    • a limit order (at a specified price),
    • a market order (at the current best available price).
  2. Matching of orders by the exchange’s matching engine.
  3. Execution of a trade when prices coincide.

Thus, trades are executed within the exchange’s internal infrastructure rather than directly on the blockchain.

The actual transfer of assets between users occurs within the exchange’s internal ledger (off-chain), while blockchain transactions are recorded only when funds are deposited or withdrawn.

User Identification: KYC and KYB​

Most major centralized exchanges require compliance with:

  • KYC (Know Your Customer) — identification of individuals,
  • KYB (Know Your Business) — identification of legal entities.

These procedures typically include:

  • submission of identification documents,
  • identity verification,
  • source-of-funds verification (in certain cases),
  • sanctions screening.

Without completing identification, users may either be denied access to trading or face restrictions on deposit and withdrawal limits.

CEX platforms operate within a regulated environment and are subject to financial compliance requirements. Moreover, a CEX may fully restrict services to residents of certain jurisdictions in order to comply with regulatory obligations.

Ownership of Assets​

Assets held on a centralized exchange are effectively controlled by the exchange itself.

The user:

  • does not possess the private key,
  • cannot directly sign blockchain transactions,
  • does not control the storage address.

Instead, the user holds a claim against the exchange equal to the balance reflected in the internal accounting system.

From a blockchain architecture perspective, this means that funds are held under a custodial storage model.

The principle “not your keys — not your coins” directly applies to assets stored on a CEX. In certain circumstances, an exchange may partially or fully restrict a client’s access to their cryptoassets.

Advantages of Centralized Exchanges​

CEX platforms provide a high level of convenience:

  • intuitive trading interfaces,
  • high liquidity,
  • rapid trade execution,
  • fiat on-ramps and off-ramps,
  • margin and derivatives trading,
  • customer support services.

The largest centralized exchanges in the world include: Binance, Coinbase, OKX, Bybit, Kraken, and others. These platforms serve millions of users and account for a significant share of global crypto market trading volume.

Infrastructure and Systemic Risks​

Despite their convenience, centralized exchanges entail significant risks.

Hacking Risk

The history of the crypto industry includes several major attacks:

  • Mt. Gox (2014) — loss of hundreds of thousands of BTC,
  • Bitfinex (2016) — large-scale breach resulting in asset losses,
  • Coincheck (2018) — theft of NEM tokens,
  • KuCoin (2020) — major compromise of hot wallets.

In most cases, users did not control the private keys and depended on the exchange’s compensation policies.

Bankruptcy Risk

Centralized exchanges are exposed to operational and financial risks.

The most high-profile example is the bankruptcy of FTX in 2022, which resulted in the freezing of funds belonging to millions of clients.

Such events demonstrate that users of a CEX bear counterparty risk comparable to that found in traditional banking.

Regulatory Risk

Exchanges may:

  • freeze accounts,
  • restrict withdrawals,
  • cease operations in certain jurisdictions.

These decisions are made centrally and are not dependent on the user’s consent.

Balance Between Convenience and Control​

Centralized exchanges offer:

  • ease of access,
  • high liquidity,
  • developed financial infrastructure.

However, this convenience comes at the cost of relinquishing direct control over assets.

CEX platforms represent a model similar to traditional financial institutions, where trust in the platform operator plays a central role.

Conclusion​

Centralized cryptocurrency exchanges constitute a core infrastructural component of the modern crypto market.

They provide liquidity, user-friendly trading environments, and integration with the traditional financial system.

At the same time, assets stored on a CEX are held under a custodial storage model, creating counterparty, operational, and regulatory risks.

Choosing to use a centralized exchange implies a conscious trade-off between convenience and direct control over one’s funds.