In 2014, it was discovered that Japan-based crypto exchange Mt. Gox, one of the biggest Bitcoin exchanges at the time, has lost 800, 000+ Bitcoins in a series of hacks for over two years. According to a leaked corporate document, hackers had made away with 744, 408 BTC belonging to Mt. Gox customers and an additional 100,000 bitcoins belonging to the company – totalling over €460 million. Today, those bitcoins could be priced at over $58 billion. This marked the first major hack of its kind and the start of centralized exchanges losing the credibility and trust of their users.
Since then, the centralized crypto exchange industry has been marred with several similar hacks and thefts, leaving the sector fractured and tattered. Notwithstanding, the poor security procedures employed, serious issues relating to the source code of the exchange’s website, and issues arising concerning operations have also exacerbated the downfall of many CEXs. However, the biggest case of a failed CEX yet is FTX, once the third-largest crypto CEX, which saw the conviction of Sam Bankman-Fried for fraud and related crimes in November last year.
The Downfall of FTX and Lost Trust In CEXs
In 2021, FTX crypto exchange was the fastest-growing company in the blockchain space, rising to become the third-largest centralized crypto exchange in the world. All came tumbling down a year later as a report on Coindesk revealed that the majority of the assets held by Alameda Research, a sister company to FTX and also run by SBF, were part of the cryptocurrencies invented and controlled by FTX.
This fast-tracked FTX’s insolvency, and in November 2022, amidst calls and reports that the owners of the exchange had embezzled and misused customer funds, FTX filed for bankruptcy. Subsequently, the U.S. government brought civil and criminal charges against Sam Bankman-Fried and top executives for misappropriating over $8 billion in customer deposits. SBF was sentenced to 25 years in prison and ordered to pay $11 billion in fines.
This put the world on notice about what goes on behind the scenes at crypto exchanges. And the crypto world would never be the same again.
The collapse of FTX started a chain of liquidations and failures in the space, with top lending firms Celcius and Voyager crashing out as well. The failures sparked kind of a revolt against centralized crypto platforms and intensified the debate about how cryptocurrencies should be regulated, including proposed federal legislation.
The magnitude of FTX bankruptcy and the crypto market collapse led to many investors choosing to withdraw their money completely – with the rhetoric of “crypto is a scam” running wild till today, despite the improvements made in the space. As is human nature, investors could not trust centralized exchanges anymore due to the amount of money lost and the pain caused by Mt. Gox, FTX, Celsius, Voyager, etc.
A change is needed in the space, and centralized exchanges should be at the forefront of convincing investors (old and new) that the crypto market has learnt from the 2022 crisis and implemented the lessons learnt. In addition, CEXs should work on rebuilding the lost trust amongst investors, and while onboarding new users, to ensure the crypto field continues to spread its benefits globally, instead of being a niche product only used by a few.
Luckily, several industry solutions have been developed in the past two years to help regain users' trust, with CEXs implementing these solutions, driving people back to a once defeated and depleted crypto ecosystem.
Regaining Users’ Trust and Building Investor Confidence
As alluded to, the collapse of FTX and the aftermath caused radical changes across the crypto ecosystem –b especially in the regulation of the industry. Withal, crypto exchanges have been forced to make changes to their platforms and operations to ensure user trust and investor confidence remain unshaken. New centralized exchanges coming to the foray have had to tweak and introduce tough security measures for user funds and improve functionality to enhance confidence in the space.
Boxwind, a centralized crypto exchange set to launch later in the year, is one of the new CEXs revolutionizing trading and solving the trust issues brought on by FTX’s collapse. The exchange is designed with advanced functionalities for new and experienced investors, providing spot and derivatives trading of over 300+ digital assets. The user-friendly terminal, on-ramp and off-ramp solutions, as well as the high-quality customer service and competitive pricing, aim to drive the support of users to the platform.
Crucially, the exchange aims to eliminate the anxiety and fear that crypto users have in terms of losing funds through the managing team’s mismanagement. Let’s break down how Boxwind and upcoming CEXs could restructure crypto trading to regain users’ trust and build investor confidence:
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Fully licensed platform
In early June, Boxwind announced its application for a license from the financial regulatory body in Bahrain. The acquiring of licenses lends credibility and legitimacy to CEXs. By having a license from a respected regulatory body, users can establish trust and get reassurance that their funds are well secured, epitomizing transparency and fostering trust and reliability of the exchange.
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Participating in the crypto community
Months before its official launch, Boxwind is already making appearances at some of the biggest crypto conferences around the world, which builds investor confidence and shows the impact the CEX is having in the crypto community. Boxwind featured at Token2049 in Dubai this year and plans to make an appearance at the upcoming second edition in Singapore. The exchange was also represented at the Blockchain Life Spring Event 2024, which saw top speakers, leading companies, and the global crypto community from 120 countries meet to discuss the future of Web 3 technologies.
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Proof-of-funds model
The mismanagement of funds by FTX called for more transparency on how customers’ funds are checked and balanced across CEXs. Boxwind will introduce a proof-of-funds model to ensure customer funds are fully backed at a reserve ratio of 1:1, meaning customer funds are always protected and secure. This means that for all the assets held in Boxwind’s custody, the exchange will show proof and evidence that the funds cover all the users’ crypto assets.
In addition, Boxwind will provide snapshots of the on-chain balances of customers’ funds and an independent audit conducted by a third party to verify the exchange actually has all the assets it claims to have.
Finally, Boxwind will also ensure regular audits of its operations and management by third-party auditors, build strong partnerships across the Web 3 ecosystem, and provide insurance for customers. These will be crucial steps in enhancing customer trust and investor confidence in the exchange as well as promoting transparency and candidness so that the exchange is not mismanaging customer funds.
Final Words
While the CEX ecosystem has been affected by multiple security and mismanagement issues in the past, many exchanges are working to regain users’ trust and build back investor confidence. The steps taken to ensure centralized exchanges work as they should are still a long road ahead with more needed to be done – both on the regulators' side and the exchanges themselves.
Other steps that are gaining traction to ensure transparency and security of users’ funds include the introduction of non-custodial wallets to centralized exchanges, building independent client reserves and regular security audits to boost customers’ confidence in their storage practices.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
