Seems like the crypto community is in a tizzy once again! After the 2022 FTX fallout, they’ve got their knickers in a twist about the state of centralized exchanges, or CEXs for all you cool kids out there. And if emphasize is the right word, they are not mincing their words!

They’re demanding all sorts of things, like proof of assets and liabilities. Yeah, that’s right, they want to make sure these CEXs aren’t just making it rain with monopoly money. And why stop there? They want customer funds segregated too. Can’t have those CEXs dipping into your hard-earned crypto stash now, can we?

But wait, there’s more! They’re even calling for voluntary registration as broker-dealers. Does sound fancy, right? It’s like they’re saying, “Hey, if you want to play with the big boys, you gotta play by the rules.”

I don’t know about you, but it sounds like the crypto community is cracking the whip and making those CEXs shape up. It’s like a parent-teacher conference, except instead of discussing little Timmy’s grades, they’re discussing the fate of your precious crypto assets. So buckle up, folks, lets’s see whether anyone will trust the trust engine that is blockchain, following the collapse of FTX.

Why not just get regulated?

Cryptocurrency exchanges in the United States are in a bit of a regulatory pickle. They can’t become broker-dealers because the SEC doesn’t consider the digital assets they facilitate as securities. 

Yet, if they were to become broker-dealers, they would trigger a bunch of disclosure and custody requirements that would make their heads spin faster than the price of Bitcoin.

It’s a catch-22 that has left exchanges like Coinbase feeling like the kid who got picked last for dodgeball. Sure, they’ve licensed money transmitters, but that’s about as useful as a screen door on a submarine when it comes to complying with SEC regulations.

Meanwhile, our neighbours to the north have figured it out. In Canada, crypto exchanges can become registered broker-dealers after undergoing a rigorous two-year regulatory process. This not only gives them street cred, but also allows them to have operational controls, financial controls, compliance, proficiency requirements, risk management, insurance requirements, and custodial requirements similar to traditional stock-trading counterparts. And, if users have a dispute, they can resolve it through the Canadian judicial system without having to break out their passports or shell out for a fancy international lawyer.

Of course, not all exchanges are created equal. Offshore exchanges like Binance can select governing jurisdictions far away from users’ residences, making dispute resolution difficult and expensive. It’s a bit like playing a game of whack-a-mole – just when you think you’ve got them pinned down, they pop up somewhere else.

At least SEC Chairman Gary Gensler has a sense of humour about it. He’s joked that it’s hard to tell what’s security and what’s not. Maybe the SEC needs a magic eight-ball to help them out.

All kidding aside, the lack of clarity around regulations for crypto exchanges is a serious issue. It’s a barrier to entry for new exchanges, it hinders innovation, and it leaves users vulnerable to fraud and other forms of malfeasance. 

Regulators are the ones to step up and provide clear guidance so that everyone can play by the rules. Until then, exchanges will continue to operate as matching engines, and we’ll all be left wondering if we’re playing dodgeball or Russian roulette.

Are user funds protected by law?

Are your cryptocurrency funds really safe on exchanges? Well, not really. Sure, some exchanges like Coinbase claim to have crime insurance to protect your assets from theft and cyberattacks, let’s read the fine print , shall we?- this policy doesn’t cover unauthorized access due to a breach of credentials. And that’s not even the worst part.

If you’re a U.S. customer, your fiat deposits are covered up to $250,000 by the Federal Deposit Insurance Corporation, which sounds great until you realize that the same protection doesn’t extend to your digital asset holdings. Yes, you heard that right – your precious cryptocurrencies are not protected.

Maybe you’re thinking of trying out another exchange, like OKX. Well, think again. They explicitly state in their terms of service that the digital assets of users are not protected by deposit protection or deposit insurance scheme. In other words, if the exchange goes bust or gets hacked, you may not get any of your deposited assets or funds back.

Coinsquare clients have slightly better protection, with insurance policies covering $1 million of their fiat Canadian dollar deposits. But hold your horses, that doesn’t cover your digital assets either. Coinsquare has been pushing for an expansion of coverage, but it’s not happening any time soon.

So why can’t insurance companies cover our beloved cryptocurrencies? It’s because they can’t fully underwrite the risks in the crypto world. Most insurance policies right now only cover a limited amount and a specific area of risk, like insider jobs.

Are proof of reserves legitimate?

Have you ever wondered if your funds are actually safe and sound in your favourite exchange? Well, fear not, because proof-of-reserve audits are here to save the day! Or are they?

OKX, for instance, boasts about publishing monthly proof of reserves that show their asset coverage to liability is greater than one-to-one. Sounds good, right? However, not everyone is convinced. Take former Kraken CEO Jesse Powell, for example. He thinks proof-of-reserve audits are nothing but “hand-wavey bullshit.” Ouch, that hurts!

Better yet, there’s more! Auditors themselves are struggling to verify liabilities and leverage in the crypto space. As crypto expert Graves puts it, “The problem right now, as I understand it, is the auditors don’t know how to audit. They have no idea how to deal with this stuff.” Well, that’s reassuring!

On the bright side, Coinbase is one of the few crypto exchanges that actually have an auditor. They work with Deloitte, but let’s be honest, that’s probably because they’re a publicly traded company. Other exchanges haven’t been as lucky in finding auditors to conduct proof-of-reserve audits.

So, what’s the verdict? Should we trust proof-of-reserve audits, or are they just smoke and mirrors? You be the judge. However, as for me, I’ll keep my fingers crossed and hope for the best. After all, in the crypto world, anything can happen.

Can we still trust CEXs?

Are you tired of CEXs (crypto exchanges) running amok and making headlines for all the wrong reasons? You’re not alone. 

The recent collapse of FTX has brought the spotlight back to the lack of regulation in the crypto world. It’s about time we talk about the elephant in the room – the lack of regulatory pathways and the chaotic frameworks that are raising trust issues.

Some could argue that clear regulatory frameworks can enhance trust in CEXs, but the reality is far from ideal. The regulatory frameworks in the US and other parts of the world are so convoluted that obtaining a broker-dealer license is almost impossible.

Let’s face it, we need a superhero to save us from the regulatory mess that we find ourselves in. 

Lawmakers are finally starting to take notice. In a White House briefing on Jan. 27, they vowed to establish safeguards and priorities for blockchain research. However, while this is a step in the right direction, CEXs still face an uphill battle to demonstrate legitimacy to their users.

For all that, don’t worry! There’s a silver lining. Essential corporate safeguards are still in place, according to Graves. So, for the time being, we can trust that CEXs won’t run away with our hard-earned crypto. Meanwhile, until the regulatory frameworks become clearer, trust in CEXs may continue to waver.

In the meantime, it’s important to do your own research and due diligence when using CEXs. Don’t put all your eggs in one basket and spread your crypto investments across multiple exchanges. And remember, when it comes to CEXs, trust but verify.