Why Centralized Cryptocurrency Exchanges Are Seeing A Mass Exodus
Centralized cryptocurrency exchanges are seeing a significant drop in user numbers as traders begin to seek more fertile soil.
Overall, Binance has seen a gradual decline in its user base over the past few months in response to a number of regulatory setbacks.
At the end of June, the UK's top financial authority - the Financial Conduct Authority (FCA) - went through with Binance, the largest cryptocurrency cash exchange, by banning the platform from conducting regulated activities. This is the second time in a year that the FCA has taken action against the UK stock exchanges after banning the sale of crypto derivatives to retail customers in January.
This has compounded the already significant regulatory challenges for these platforms - many of which have forced users from certain regions (particularly the US and China) to be banned or severely restricted from their access to services.
Shortly after the FCA announcement, the exchange lost several payment processors (including Checkout.com and Clear Junction) to a devastating blow. This was later followed by a stern warning from the Polish regulatory authority, the Polish Financial Supervisory Authority (PFSA), warning that the stock exchange in Europe was not regulated.
In response, the exchange has shrunk its trading volume - it's down nearly 50% in the last month, according to data from Nomics. This could be due to the exit of a number of institutional traders who have migrated from the exchange to platforms with less heat.
Photo credit: Nomics
With many centralized cryptocurrency exchanges now being targeted by multiple nations' tax authorities - including the UK HMRC and the US IRS - there are growing concerns about how the privacy of otherwise law-abiding individuals could be compromised when using these platforms.
In view of these challenges, a growing proportion of cryptocurrency traders are now deciding to conduct their business on decentralized platforms, as these naturally cannot be regulated, censored or closed.
According to DeFi Pulse's DEX trading volume tracker, trading volume on the 20 most popular decentralized exchanges has increased more than 800% in one year. With Uniswap in particular, you can achieve a monthly trading volume that is now comparable to some of the largest centralized exchanges.
This benefited in particular those who live in regions with limited access to financial infrastructure or who cannot use centralized services due to regional restrictions.
But it's not just regulatory challenges that are pulling merchants away from centralized platforms. Decentralized alternatives are fast becoming the preferred option for traders looking for a more immersive trading experience - as decentralized exchanges now offer features that centralized platforms simply cannot compete with.
This is best demonstrated by the advent of decentralized derivatives trading platforms such as Premia. As a fully decentralized platform for creating and trading options, Premia enables users to create bespoke options and then trade them on its decentralized exchange, regardless of where they are from. By allowing users to draw options for a return, Premia is separating from the centralized options exchanges that reserve this feature for themselves.
Automated Market Makers (AMM) like Uniswap and PancakeSwap are also poignant examples of DEXs that, at least in some ways, exceed the capabilities of centralized exchanges. Since they are completely decentralized and permissionless, they allow anyone, anywhere, to trade virtually any ERC-20 or BEP-20 token (or) - this function is not achieved by any centralized platform. In addition, they allow anyone to participate in the process of providing liquidity, giving everyone access to a relatively safe source of income in the form of exchange rate fees.
As more people try to avoid the privacy concerns and regulatory challenges that come with centralized trading platforms, it may not be long before decentralized options become standard. And since Ethereum's high fee problems are to be addressed with the so-called "London Upgrade" on August 4, 2021, users have another reason to move away from centralized platforms.
Image by mohamed Hassan from Pixabay
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