What are Crypto Exchanges?
Putting it very simply, today’s crypto exchanges provide an easy way for people to buy, sell, and trade cryptocurrencies and other digital assets. Most offer simple ‘fiat onramps’, enabling you to either deposit into an account and then easily spot trade, or even just buy crypto directly using your debit/credit card (higher fees are usually charged for this).
The bigger crypto exchanges, like Binance and Coinbase, have also expanded into other areas of the cryptosphere, offering stand-alone wallets, their own tokens and blockchains, and a range of DeFi products – but we’ll cover those in detail on their own pages.
Before we go any further, it is useful to understand that although the platforms we are going to talk about are all commonly called ‘crypto exchanges,’ that isn’t strictly accurate. Most do offer true exchange services, but more commonly act as brokers.
That is, traditionally, a financial or commodity exchange acts as a market maker, matching trades. However, most crypto exchanges today act more like banks or brokers because they directly transact with clients – i.e., they take your deposited funds into their accounts and then give you other funds out of their accounts. This is important to remember for reasons we will explain later.
The Difference Between Centralised and Decentralised Exchanges
There are two main categories of crypto exchange: centralised (CEXs) and decentralised (DEXs). Simply put, centralised exchanges are operated by a single entity, like a company, with a traditional (though sometimes very opaque and convoluted) structure. On the other hand, decentralised exchanges operate entirely on smart contracts, and are often run by DAO (decentralised autonomous organisations). They have no centralised structure.
On the whole, centralised exchanges tend to be much more user-friendly, with websites and user interfaces that are very much like traditional banks and trading platforms. They normally provide on-exchange custodial wallets, meaning you can let the platform take custody of your assets – much like how you keep money in a bank account.
This is very convenient but means you are trusting another party with your funds. Unfortunately, because the crypto space is not very well regulated in many countries if the company goes bust, as happened with famous exchanges like Mt.Gox and more recently FTX, you can lose your funds.
Decentralised exchanges are much safer to use because they do not take custody of your funds, but tend to be rather user-unfriendly, with more complicated interfaces. However, they are improving. They also tend to be much cheaper to use, so it can be worth taking the time to get to grips with them.
You can find out more about decentralised crypto exchanges on the DeFi page.
Popular Centralised Crypto Exchanges
Below are some of the most popular centralised crypto exchanges:
Are Crypto Exchanges Safe?
This is an incredibly tough question to answer. In a nutshell, they should be, and they probably will be at some point. But, there’s no way to ignore that using centralised crypto exchanges can be risky. So, let’s take a quick look at some of the famous crypto exchange disasters, and what you can do to avoid being caught up in one.
Mt Gox, Quadriga and FTX
In terms of safety, while the collapse of Japan-based Bitcoin exchange Mt. Gox in 2014, and Canada-based trading platform Quadriga in 2019, can be at least partially attributed to the immaturity of the sector, the collapse of FTX in 2022 is a different story.
FTX.com and FTX.US combined, were at the time, the world’s second-biggest crypto exchange. Founded by prolific American crypto entrepreneur and Democratic donor Sam Bankman-Fried (SBF), the exchange collapsed spectacularly in November 2022 – going from a $32 billion valuation to essentially zero in a matter of days.
The twisted web that SBF wove between FTX, his trading firm Alameda Research, and hundreds of other corporate entities is beyond the scope of this guide, but the fact that such a high-profile exchange collapsed has changed everything. FTX sponsored sports arenas and teams, advertised at the Super Bowl, lobbied congress and its US division was, apparently, compliant with US regulatory authorities. But it still collapsed, taking the deposits of millions with it.
Lessons Learned: How to Use Crypto Exchanges Safely
The main takeaway from past crypto exchange dramas is that you can’t really trust anyone. This sounds cynical, but it’s true. Unlike banks that are based in specific countries, have to comply with well-established regulations, and provide deposit insurance, even centralised crypto exchanges based in stable countries are not well regulated.
Their vulnerability isn’t necessarily their fault – it is currently virtually impossible to obtain complete insurance coverage for crypto deposits, and because of the volatile nature of crypto assets, a temporary liquidity issue can rapidly turn into a terminal solvency crisis. Despite this, the convenience and ease of use of centralised exchanges mean they are still a useful option for buying and trading cryptocurrencies and digital assets.
- Research an exchange carefully before using it. Read about its history, who runs it, where they are based, and who regulates it. You can check out our handy guides to the major crypto exchanges here.
- Never leave more crypto on an exchange than is needed for your trading or immediate use. Always transfer your crypto to a non-custodial wallet as soon as possible. Check out our crypto wallet guides here.
- Always keep up-to-date with the latest crypto news. Be ready to act quickly if there are signs of trouble. You can keep up with the latest crypto news here.
Are Crypto Exchanges Legal?
Like so many things in crypto, the legality of exchanges can be something of a gray area. As such, most crypto exchanges will provide services to users in most countries. However, certain countries do have clear restrictions.
For example, only crypto exchanges registered in the United States are legally allowed to provide services to US residents, which is why international exchanges like Binance have established separate exchanges to service the United States. Even so, there are further restrictions on a state-by-state basis. Other countries, like China, have outlawed crypto exchanges altogether.
Because crypto regulations and laws are constantly evolving, you should always check the current status of your local regulations before using a crypto exchange.
Crypto Exchanges and Tax
No one likes to think about tax, but you should keep it in mind when using crypto exchanges. Depending on where you live, and which specific cryptocurrencies you buy, sell and trade, you may have tax reporting responsibilities. And, there’s no denying it, crypto tax reporting can get complicated – especially in the United States. But, if you don’t report your crypto affairs, it can lead to a whole world of grief.
Given this, you may want to seek expert advice from a financial advisor before you start trading or investing in crypto. Some crypto exchanges will provide specific tax reporting help (again, especially those serving US residents). But, remember, you can’t hide. Centralised crypto exchanges are legally required to provide information about their users to tax authorities in many jurisdictions.
Fan Token Exchanges and Platforms
Although fan tokens can be purchased and traded on many crypto exchanges, there are also some dedicated platforms. These provide specialised marketplaces, customised for fan token owners and traders.
The biggest of these is Socios.com. It runs on the Ethereum-based Chiliz blockchain, and uses the CHZ token to power its ecosphere. You can use CHZ to purchase fan tokens directly via the marketplace on Socios.com, and also trade CHZ on crypto exchanges.
Some larger crypto exchanges, like Binance, have also established dedicated fan token platforms. You can read more about fan tokens on our dedicated guide page.