What a Centralised Exchange Is

A centralised exchange, or CEX, is a company that runs a trading venue for crypto. Well-known examples include Coinbase, Binance, Kraken and OKX. Naming them here describes how they work; it is not a recommendation.

How it works

• You open an account, and in most countries the exchange must verify your identity before you can trade, under anti-money-laundering rules.
• When you deposit crypto, it moves to addresses the exchange controls. Your balance becomes an entry in the exchange's own database.
• Trades happen inside the exchange's order book, which matches buy orders with sell orders at the prices people set. They do not touch the blockchain at all.
• Only deposits and withdrawals are real blockchain transactions.

What you get, and what you give up

An exchange offers things self-custody cannot: turning your local currency into crypto and back, deep markets for large assets, account recovery if you forget a password, and a support team. In return, the exchange holds the keys. Your balance is a promise from a company, and it is only as good as that company's honesty, security and solvency.

How it fails

In November 2022 the exchange FTX halted withdrawals and filed for bankruptcy within days. Customer deposits had been used by a trading firm connected to its founder, and when customers rushed to withdraw, the money was not there. Customers waited years for the bankruptcy process to repay them. Exchanges have also been hacked, have frozen withdrawals during market stress, and have closed accounts or left countries at short notice.

Some exchanges publish "proof of reserves", which shows the assets they hold at a moment in time. It is useful, but it is not a full audit: it may not show everything the exchange owes, or whether the assets were borrowed to pass the check.

Habits that reduce the risk

• Use an authenticator app or a security key for two-factor login, not text messages.
• Turn on a withdrawal address allowlist if the exchange offers one.
• Reach the exchange by typing its address or using its official app. Fake exchange sites and apps are common.
• Think about how much you leave on any single exchange, and whether you are ready to hold your own keys for the rest. The course Protecting Your Keys covers that trade-off.