What is a Centralized Exchange in Crypto?

Centralized crypto exchanges host as much as $76 trillion in trading volume annually, making them a hugely popular choice for both crypto beginners and seasoned traders. But what is a centralized exchange (CEX), and how does it differ from other types of crypto exchanges?

In this guide, we’ll explain how centralized exchanges work, explore their history, and compare CEXs to alternatives.

Main Properties of Centralized Exchanges

At their core, CEXs provide a marketplace where buyers and sellers can trade cryptocurrencies, often with the added convenience of fiat currency on-ramps, enabling users to convert traditional currencies into crypto and vice versa. Many exchanges support bank transfers and debit cards for crypto purchases. Without centralized exchanges, buying crypto can be more challenging.

Using buy and sell orders, access crypto-fiat trading pairs, and purchase Bitcoin (BTC) with US dollars with a credit card, and later sell your BTC and get USD deposited into your bank account. In between trades, the exchange provides custody for your crypto and cash.

However, exchanges have evolved over the years, and many now offer a wide variety of services alongside basic buying, selling, and trading. For instance, Coinbase offers staking services and ways to earn a yield on deposits. The platform also supports crypto derivatives trading (crypto futures trades).

What Makes an Exchange Centralized?

The term “centralized” refers to the structure and control of the exchange. Typically, a single entity controls a centralized exchange, meaning all the services and assets stored there are under the control of one entity, and a central management team determines the rules and policies for the exchange. This includes setting parameters for who can access the exchange, with many requiring identification documents for registration or having regional restrictions.

In effect, centralized exchanges require permission to use. Later, we’ll contrast this structure with decentralized exchanges, which are permissionless.

Although individual CEXs can restrict users based on location or other factors, centralized exchanges play a crucial role in providing an easy way to buy and sell crypto assets. Let’s explore some of the key features common to centralized exchanges.

• Custody of Funds: Centralized exchanges typically hold and manage user funds. For example, Coinbase uses partner banks to hold USD funds for US customers. The exchange also provides custodial storage for crypto assets.
• Price Discovery: CEXs attract more users, with higher liquidity allowing users great accuracy in price discovery compared to other types of exchanges.
• Regulatory Compliance: Centralized exchanges are usually subject to regulatory oversight in many jurisdictions. This can provide added consumer protection for users but may also restrict cryptocurrency trading activities.
• User Experience: CEXs often prioritize user experience, offering easy-to-use interfaces and a customer support team.

Centralized vs. Decentralized Crypto Exchanges

Centralized and decentralized exchanges are two popular, but very different ways of managing your crypto assets. A centralized crypto exchange offers the easiest solution when you need to buy or sell crypto using traditional currencies. However, once you have specific crypto assets, you have an additional option: decentralized exchanges (DEXs).

Unlike centralized exchanges, decentralized cryptocurrency exchanges use a liquidity pool for trading inventory and task a smart contract called an automated market maker (AMM) with managing the price of tokens in the pool.

Users access decentralized crypto exchanges using their wallet address as their “identity” on the blockchain. This allows permissionless access. Anyone can use a DEX to trade. For example, if you own ETH or SOL in a self-custody wallet, you can connect to a DEX and trade your ETH or SOL for thousands of other tokens.

Centralized Cryptocurrency Exchanges Through History

Bitcoin launched in 2009. By 2010, the first exchange had launched, paving the way for price discovery for this new asset class. Today, more than a thousand exchanges operate worldwide, according to some estimates. Since the industry’s humble beginnings, centralized exchanges have evolved rapidly, introducing much-needed security improvements and additional crypto-related services.

The Early Days

The first of many cryptocurrency exchanges, Bitcoin Market, was established in 2010. Most trades relied on PayPal for settlement, and the exchange was crucial in helping the market find a price for this new asset. At the platform’s launch, Bitcoin was trading at about $0.003.

However, it was Mt. Gox, founded in 2011, that became the first major centralized exchange. Based in Japan, Mt. Gox became the global hub for Bitcoin trading. Unfortunately, it also became infamous for a long-lasting hack that began in 2011. By 2014, the exchange filed for bankruptcy.

Security concerns surrounding Mt. Gox led to the formation of new exchanges, such as Kraken (2011) and Coinbase (2012), both of which remain leading exchanges today.

Growth and Diversification

Centralized crypto exchange development has centered on new services, but new coins and tokens paved the way. An ever-growing selection of crypto assets represented opportunities for traders, investors, and exchanges. Litecoin (2011), XRP (2012), Dogecoin (2013), and Ethereum (2015) brought a broader range of buyers.

Ethereum’s support for smart contracts ushered in a wave of new crypto projects, many of which had individual tokens. From a handful of assets, the crypto market blossomed into thousands of tradable assets. Centralized exchanges acted as gatekeepers, approving select tokens for listing on their respective digital platforms.

Regulatory Challenges and Innovations

As the crypto market grew, particularly following the ICO (initial coin offering) boom of 2017–2018. Crypto fell under the watchful eye of regulators worldwide. As early as 2014, FinCEN issued guidance for cryptocurrency exchanges, and those operating within the US needed to be registered as Money Service Businesses (MSBs). Additional guidance led to Know Your Customer (KYC) rules that require exchanges to verify user identities and the source of funds.

Despite these challenges, CEXs continued to innovate, offering new features such as staking, margin trading, launchpads, and crypto derivative trading.

Centralized Exchanges: A Timeline of Key Platforms

Drawbacks of Centralized Exchanges

While centralized exchanges offer user-friendly interfaces, making it easy to buy, sell, and trade cryptocurrencies, they also present several drawbacks to weigh.

One of the primary concerns is the centralization of user funds. When users deposit their cryptocurrencies into a CEX or buy crypto with fiat currency, the exchange holds the crypto assets on their behalf. Unsurprisingly, exchanges are common targets for hacking and phishing attempts. Crypto’s relative anonymity makes exchange accounts an attractive target for thieves and scammers who must launder the proceeds.

Another significant drawback centers on regulation. While banks and other financial institutions abide by similar rules worldwide, cryptocurrency exchanges often exist on the fringes of regulatory oversight due to location or a lack of regulatory clarity. With less scrutiny than traditional financial markets, the crypto market has a poor reputation concerning fraud and market manipulation.

Although many of the larger crypto exchanges have acted proactively to combat fraud and implement robust security, CEXs have still fallen victim to major security breaches and fraud. These unknowns make it difficult to name the best centralized crypto exchange. Most comparisons center on trading fees, services, and selection.

Notable Centralized Exchange Breaches and Frauds

Mt. Gox: In one of the most infamous incidents in crypto history, Mt. Gox, which handled a majority of Bitcoin transactions at its peak, suffered a prolonged hack that began in 2011. By 2014, Mt. Gox had lost an estimated 850,000 Bitcoins, leading to its bankruptcy and the loss of Bitcoins belonging to both its users and the exchange itself. Nearly a decade later, the US Department of Justice (DOJ) identified key actors charged with the theft.

Bybit 2025 Hack: In February 2025, Bybit experienced the largest crypto hack in history, with over $1.4 billion in assets, including 401,347 ETH, stolen from its cold wallet in a sophisticated hack against a multisignature wallet interface. The hack was attributed to North Korean hackers, who employed social engineering attacks and complex laundering methods to move the stolen funds.

Whether through a high-profile hack or a targeted phishing scam, the centralization of funds creates a risk. Many experienced crypto investors prefer to move their digital assets to a non-custodial crypto wallet.

Should You Store Crypto on a Centralized Exchange?

“Not your keys, not your coins.” This famous saying in the crypto community highlights one of the primary risks of using a crypto exchange to store digital assets. Crypto wallets use a private key (a long hexadecimal value) to prove ownership of assets on the blockchain. If cryptocurrency exchanges hold your cryptocurrency, they hold the private keys as well. Fraud, hacks, insolvency, or account restrictions can all put your crypto at risk.

The simplest solution is to withdraw your crypto to a wallet you control. These wallets, which can be apps or hardware devices, are called non-custodial wallets or self-custody wallets. When using a self-custody wallet, you can also interact with decentralized crypto exchanges.

• Decentralized Exchanges (DEXs): DEXs allow users to maintain control of their private keys and funds at all times. Users execute cryptocurrency transactions directly from their personal wallets, reducing the risk of losing assets due to exchange vulnerabilities.
• Cold Storage: Cold storage solutions, such as hardware wallets, offer an offline method for storing cryptocurrencies. These wallets store private keys on a physical device rather than on a device connected to the internet. Examples include Ledger and Trezor wallets, both of which have been protecting crypto assets since 2014.

• Software Wallets: Software wallets, often referred to as hot wallets, are applications that run on a computer or mobile device. While they are connected to the internet, many offer strong security measures, including encryption and two-factor authentication. Examples include Best Wallet, MetaMask, and Trust Wallet. Some wallet apps, such as Best Wallet, integrate DEX trading,

Centralized exchanges can be extremely useful for newcomers and prolific traders, but some consider them a double-edged sword: they drive crypto adoption but also introduce significant risks. For maximum security, consider using CEXs for trading and then withdrawing your assets to a non-custodial wallet, with cold storage offering the ultimate protection.

FAQs

[Q1]What is a centralized exchange in crypto (CEX)? [/Q1] [A1]A centralized exchange (CEX) is a platform that facilitates the trading of cryptocurrencies and other digital assets. CEXs act as an intermediary and provide a user-friendly interface for buying, selling, and trading crypto.[/A1] [Q2]Which is the most trusted centralized exchange?[/Q2] [A2]Trust varies by user, but Coinbase is often considered one of the most trusted due to its regulatory compliance and easy-to-use interface. The exchange is publicly traded, adding more transparency to its structure and financial health.[/A2] [Q3]Are centralized exchanges safe to use?[/Q3] [A3]CEXs offer convenience and liquidity but also present risks such as hacking, fraud, and phishing scams. When not trading actively, users should consider withdrawing assets to a non-custodial wallet for enhanced security.[/A3] [Q4]Is Coinbase a centralized exchange?[/Q4] [A4]Yes, Coinbase is one of the most popular centralized exchanges. Coinbase Global, Inc. runs the exchange and crypto custody services, and its company shares trade on the Nasdaq stock exchange.[/A4] [Q5]Is Binance centralized or decentralized?[/Q5] [A5]Binance is a centralized exchange. It was founded in 2017 and has rapidly become one of the largest CEXs by trading volume, offering a wide range of crypto-related services.[/A5]

References

1. Coinbase Global, Inc. Class A Common Stock (COIN) (Nasdaq)
2. Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity (U.S. Financial Crimes Enforcement Network)
3. Russian Nationals Charged With Hacking One Cryptocurrency Exchange and Illicitly Operating Another (U.S. Department of Justice)
4. North Korean hackers cash out hundreds of millions from $1.5bn ByBit hack (BBC)