Binance, one of the most prominent cryptocurrency exchanges in the decentralized finance (DeFi) industry, was recently hit with one of the biggest fines in crypto history. As part of its plea deal, the company is set to pay a $4.3 billion fine, and its co-founder and former CEO, Changpeng Zhao (CZ), had to step down from his position.
Following the Binance debacle, Bittrex Global, another crypto exchange, has decided to stop its operation in the United States.
So we ask the experts: What can DEXs learn from their centralized cousins in 2024?
Binance Plea Deal Highlights Importance of DEXs in Crypto Space
DEXs manage to solve several problems either caused or suffered by CEX centralized exchanges (CEXs) like Binance and FTX.
“In an ideal world, there would be no central entity to incur penalties or fines if the DEX is actually decentralized. However, in practice there are usually parties involved in getting the DEX off the ground or even further operating some critical infrastructure (see Uniswap Labs).
These entities can follow the law and continue to forgo hosting front-ends that facilitate trading of fraudulent tokens or other prohibited activity.”
Anndy Lian, the author of NFT: From Zero to Hero, added that the recent Binance news highlighted how important decentralized exchanges are for cryptocurrency.
“Binance is facing legal challenges from various regulators around the world, who accuse the platform of violating financial laws and facilitating illicit activities.
“This has raised concerns among users about the security, privacy, and accessibility of their funds and data on centralized platforms. DEXs, on the other hand, offer a more decentralized and trustless alternative, where users can trade directly with each other without intermediaries or censorship.”
Moreover, DEXs allow users to have access to a much more comprehensive range of crypto assets and services like derivatives, lending, and non-fungible tokens (NFTs) that may not be available or compliant on centralized platforms.
DEX Regulatory Compliance – A Must
Regulatory compliance is one of the most crucial aspects DEXs must remember to prevent a recurrence of events similar to those surrounding Binance, Lian told Technopedia.
Adhering to regulatory standards ensures legal scrutiny and oversight, fostering trust among users, exchanges, and authorities.
“While DEXs may not have a central authority or entity that can be held accountable, they still need to respect the laws and rules of the land, especially when it comes to anti-money laundering, counter-terrorism financing, consumer protection, and taxation.”
Unfortunately, the recent events surrounding Binance have forced an array of negative headlines to circulate in the cryptocurrency industry; however, the fact that the Binance case has been settled provides some stability and certainty within the space, Ben Weiss, the CEO and co-founder at CoinFlip, noted.
“The issues facing Binance have shown that where a company is based won’t impact the basics of sanctions screening and AML/KYC.
“I believe decentralized exchanges are going to also be expected to perform the basics of AML/KYC and sanctions screening, and just because an exchange is decentralized doesn’t mean governments won’t expect their laws and regulations to be followed.”
Lian added that DEXs could use the Binance case as a case study to strengthen their operations by implementing appropriate measures and mechanisms to ensure AML/KYC compliance, geo-blocking, governance, and auditing. Moreover, DEXs can also collaborate and communicate with regulators and policymakers to ensure nothing goes unnoticed.
DGB’s Bleznak said:
“It has taken a long time for the true (crypto) believers to accept that code is not law… law is law, and we have not just a responsibility but an obligation and civic duty to uphold the rule of law.
It is important, no matter how decentralized we make these systems, to keep this perspective. Further, we should all act morally outside of the rule of law and choose not to cut corners or let our greed get the best of our decision-making.”
Education and Staying Up-to-Date Are Key
According to Lian, one of the key challenges faced by DEXs is the lack of awareness and understanding among users about the risks and benefits associated with decentralized trading, which is why educating users is another key aspect DEXs must consider.
“Decentralized trading can offer users more freedom, choice, and control over their assets and transactions, but it also requires more responsibility, knowledge, and skill.
“Users need to be aware of the potential pitfalls and dangers of decentralized trading, such as volatility, liquidity, slippage, scams, and bugs. Users also need to be familiar with the technical aspects and mechanisms of decentralized trading, such as wallets, keys, gas fees, swaps, and pool.”
However, this can be easily achieved through “comprehensive guides, interactive tutorials, and community engagement initiatives,” DGB’s Bleznack explained.
Another initiative DEXs could consider is partnering with educational platforms and influencers in the digital assets industry, which could broaden their reach.
However, because DEXs leverage the power of smart contracts, staying up to date with the latest technological developments is another key aspect DEXs should keep in mind in the new year, CoinFlip’s Weiss added.
“The biggest challenges for DEXs are related to the user experience, such as complicated interfaces and thin liquidity. That said, DEXs are innovating rapidly such as by using layer 2 solutions to increase scalability and capacity.”
In addition, DEXs can also leverage emerging technologies like Layer 2 scaling solutions, sharding, and cross-chain interoperability to address some of the current challenges they may face, like high transaction fees, network congestion, and limited asset diversity, Bleznak said.
“Implementing these technologies can enhance the user experience by reducing transaction costs and improving transaction speeds.”
DEXs Have Big Potential to Democratize Finance
CoinFlip’s Weiss noted that DEXs “have a lot of potential to democratize finance” because they eliminate the intermediaries present in traditional finance and are especially important in countries that have historically had little banking and financial infrastructure.
“DEXs are harder to navigate than CEXs from both a user learning curve and user interface perspective.
“That said, because the wallets are non-custodial, DEXs can be a more secure option than a CEX but only if the user has the sophistication level necessary to navigate a platform that will more likely have a complicated interface and require knowledge of crypto.”
DEXs Can Strike a Balance Between User Privacy and Security
Moreover, DEXs can balance user privacy and security by leveraging advanced cryptographic techniques like zero-knowledge proofs, which enhance privacy while maintaining security.
User privacy is one of the main advantages of DEXs as users can trade anonymously without disclosing their personal information or financial data, Lian added.
“However, user privacy can also pose risks and challenges, such as fraud, theft, hacking, and abuse. Therefore, DEXs need to implement robust security measures to protect users and their funds, such as encryption, multi-signature, smart contracts, and insurance.
“DEXs can strike a balance between maintaining user privacy and implementing robust security measures by adopting a risk-based approach, where they apply different levels of verification and protection depending on the type, size, and frequency of transactions.”
In navigating the challenges posed by the recent Binance lawsuit, decentralized exchanges must prioritize regulatory compliance, emphasizing adherence to legal standards that will build trust among users, the exchanges themselves, and regulating bodies.
Educational initiatives are crucial to raising awareness about the risks and benefits of decentralized trading, requiring DEXs to provide comprehensive guides and engage with the community.
Meanwhile, staying abreast of technological advancements, leveraging emerging solutions, and finding a balance between user privacy and security will be key in unlocking the vast potential of DEXs in 2024.