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The winners and losers in the shifting CEX landscape
Recent months have begun showing some cracks in the dominance of some of the largest cryptocurrency exchanges in the world. Key players in the space, such as Binance and Coinbase, have come up against regulatory challenges and stiff competition that threaten their leading positions. Meanwhile, younger and more nimble exchanges, such as KuCoin and FTX, have been picking up pace. Could they challenge the status quo in the rapidly changing market for digital assets?
Both launched in 2017, KuCoin and FTX now sit in the third and fourth spot of CoinMarketCap’s list of Top Cryptocurrency Spot Exchanges, which ranks and scores centralized exchanges based on traffic, liquidity, trading volumes, and confidence in the legitimacy of their reported numbers. The fifth spot is taken up by leading Asian exchange gate.io.
Today, the top spot is firmly occupied by Binance, by far the largest crypto exchange by daily trading volume, with more than $25 billion traded every 24 hours. In second place, Coinbase’s 24-hour trading volume is much more modest at close to $5 billion, but still more than double KuCoin’s $2.24 billion.
Regulation looms large
Founded in 2017 in China by Changpeng Zhao (better known as CZ), a developer who had previously created high frequency trading software, Binance quickly grew to become the largest cryptocurrency exchange by trading volume. However, in recent months the exchange has faced regulatory scrutiny.
In July, Binance was forced to suspend withdrawals into Pounds Sterling (GBP) in the UK, after the country’s financial watchdog, the Financial Conduct Authority (FCA), banned the exchange from conducting regulated activity for failing to comply with its anti-money laundering reporting standards. The same month saw Thailand's financial watchdog file a criminal complaint against the exchange for operating a digital asset business without a licence. Today, Binance is under fire in nine jurisdictions for regulatory reasons.
As global regulators target the largest and most well-known exchanges first, the smaller and more nimble ones are left with room to expand and incorporate the necessary standards. Those that take these steps are more likely to stand up against scrutiny when the regulator’s oversight finally reaches them.
We are already seeing some challengers emerge that are taking regulation and compliance very seriously, cognizant of the fact that a regulatory crackdown is unavoidable sooner or later. For example, US-based exchange Bittrex complies with all US laws and reports to FinCEN, the Financial Crimes Enforcement Network. The exchange has not run afoul of the regulator in the US and prioritizes safety and security for its customers. Earlier this month, the YLD token listed on Bittrex, joining 306 other cryptocurrencies available on the exchange.
This expansion of their offering is another feature of the smaller and nimbler exchanges that is propelling their growth trajectory. For example, KuCoin now offers 476 coins and tokens, including, as of Monday, October 18, the YLD token.
Gate.io, the fifth largest exchange by volume and one where the YLD token listed back in June, offers 961 coins and tokens, nearly three times the number offered by Binance and almost nine-fold the Coinbase offering.
In addition, Coinbase has been criticized by some analysts for lagging on crypto innovation, including altcoins, derivatives and NFTs (although a peer-to-peer NFT market place is promised by Coinbase soon). In contrast, the smaller players in the market, such as KuCoin, have been focusing much of their efforts on these innovative areas of digital finance.
Pressure from DeFi
Of course, there is also the growing field of decentralized finance (DeFi) to contend with. This year has already seen the total value locked (TLV) of the DeFi ecosystem grow to $200 billion, doubling since June, but some analysts predict this is just the beginning of a 10-fold increase, or more.
As the popularity of DeFi grows, decentralized exchanges (DEXs) such as Uniswap and Sushiswap also stand to benefit. Already, we are seeing the two largest decentralized swap exchanges by trading volume rapidly growing, with daily trading volumes between $1 billion and $2 billion, according to CoinMarketCap.
While DEXs remain a small part of the ecosystem compared to some of the centralized behemoths dominating the landscape, their growth is yet another sign that competition is well and truly heating up. In the rapidly moving world of digital assets, even the largest exchanges cannot afford to rest on their laurels.
It remains to be seen how the key players in this market respond to these constant changes and pressures. As with everything crypto, perhaps the market hierarchy will look very different in a few months’ time. One thing is clear: those vying for the top spot in the crypto exchange arena must embrace innovation and move quickly to respond to client needs and demands, while remaining on the right side of the law.
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