Why newer exchanges don’t want custody of your cash

While the cryptocurrency markets grow, the need for exchanges increases. However, newer exchanges on the market are taking notes from their centralised custodial competitors on how not to be responsible for their clients’ cash. Making non-custodial and decentralised transfers the new wave in cryptocurrency exchange.

The new wave in crypto exchange

There is a sustained and increased requirement for non-custodial and decentralised exchange platforms for the cryptocurrency trader and investor. Moreover, there is no single reason for this shift in exchange need.

Some users don’t like the centralised exchanges because they are fundamentally against the ethos of the decentralised cryptocurrency innovation. Others don’t like the idea of giving up their anonymity to the ‘big banks’ that centralised exchanges have become. There are several other reasons, but the fact remains that centralised exchange platforms aren’t providing the services that some traders and investors need. Enter the non-custodial and decentralised exchanges.

What is in it for them?

Non-custodial and decentralised platforms have benefits (if not the profitability) that centralised exchanges don’t. For a non-fiat exchange, the bureaucracy that plagues big names such as Kraken, Coinbaise, and Binance is less pervasive because there is no interaction with the traditional centres of finance that have to maintain strict controls over knowing their customers and stringent anti-money-laundering measures.

Decentralised exchanges tend to stay away from fiat/crypto trading pairs with good reason. The same can be said of non-custodial platforms. However, some are choosing to offer fiat exchange, with all of the red-tape that implies, as a way to facilitate the buying in and cashing out of the crypto space. A niche in the market previously only filled by the centralised exchanges.

Another reason for an exchange to be non-custodial or decentralised is the security costs. Centralised exchanges have to be continually updating and adjusting their protocols to fend off better and more sophisticated technological attacks on their platforms. By their nature, the centralised exchanges hold millions in customer coins on their exchanges, which make them prime targets for hackers with a massive payout at the end.

As a mostly unregulated market, cryptocurrency business is hampered by the lack of insurance solutions (or the insurance that is available is prohibitively expensive). By never taking custody of their clients funds they negate the necessity of being insured against cryptocurrency theft as a result of hacking; this reduces the cost of running an exchange.

Why don’t customers want a centralized exchange?

They do want a centralised exchange, but only when it suits their needs. Centralised exchanges have higher liquidity, higher trading volumes, excellent security (as a necessity), access to fiat exchange, and other features that a customer may want. What they don’t have is unfettered ability to add new and smaller coins, the ability to maintain anonymity (not if they still want to deal with banks),

Why clients want alternatives depends significantly on the type of cryptocurrency investor or trader they are. As cryptocurrency has gained ground in the mainstream of personal finance, it has attracted different kinds of investors, different people from those who originally entered the market in its infancy. There are those that choose to hold on to their investment (HODLers in crypto speak), those who continuously trade in small coins that may only change minutely (but an obscure token that goes from 6 satoshis to 12 satoshis has still doubled in value and made a significant profit). Others trade in larger ranges over a more extended period. Some stick to Bitcoin/Fiat, some only have bitcoin because there want it to buy altcoins. There are as many kinds of a crypto trader as there are traders in other markets such as forex, and stocks.

Centralised exchanges can’t work in a way to best fulfil the needs of all of them.

Which one should you use?

That is an answer that cannot be answered by anyone but you. Moreover, it depends entirely on what you want to do on the exchange you choose. It is highly probable that one exchange type will best suit your needs for a particular trade over another kind.

Thanks to the new wave of emerging decentralised exchanges like IDEX and Etherdelta, and non-custodial exchanges like Shapeshift, Switchain (all coin or token exchange only), and Terrexa (fiat-crypto-fiat only, no coin-coin exchange), there are other options that don’t require you to give up control of your investment.

It is possible that non-custodial and decentralised exchanges could become the primary way for people to make their exchanges and purchases, as the cryptocurrency market matures.

Watch this space and expect to see more exchanges emerging that don’t want custody of your coins.


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