This article originally appeared on City.A.M.
As crypto enthusiasts know only too well, the mass adoption of Bitcoin could completely upend the global payments system as we know it. Just as the Internet transformed how we communicate, Bitcoin could revolutionise how we transfer value across borders.
Bitcoin’s surge in popularity since its inception in 2009 has spawned an entire industry made up of tens of thousands of cryptocurrencies, hundreds of exchanges and a vibrant community of netizens eager to participate. However, as Bitcoin’s presence in the public consciousness has grown, the crypto industry has arguably moved further away from Bitcoin’s core principles.
Crypto is undoubtedly still in its nascent stage and is often referred to as the “Wild West” – pump and dump schemes, wash trading and misappropriation of funds are still rampant. We only need to look at the exchange space to see why this is still the case.
The Evolution of Centralised Exchanges
One of the first Bitcoin exchanges, Mt. Gox — once where the vast majority of the world’s Bitcoin was traded — epitomised the crypto ‘Wild West’. Riddled with security and technical flaws, it was a haven for malicious actors.
Its demise ultimately came in 2014 after it discovered that it lost between 650,000 and 850,000 Bitcoin.
The Bitcoin experiment could well have ended there.
But as Mt. Gox’s downfall was getting underway, a new generation of centralized exchanges was starting to emerge. Coinbase, Kraken, and Huobi were all born in 2011-12, followed later by BitMEX, who invented the Perpetual Swap — Binance, AAX, and FTX.
With this new wave of centralised exchange came a clear anticipation of “institutional volume” coming into crypto. It was time for high-performing matching engines, FIX connectivity, and continual product innovation.
The exchanges that have evolved since Mt. Gox have seemingly brought a level of sophistication to Bitcoin trading that early adopters could only dream about. But the mess that followed the FTX downfall far outdid (and continues to outdo) the Mt. Gox saga.
If hacking was the problem for first-generation exchanges, lack of transparency and accountable governance around exchange holdings and customer assets seems to be what plagues the current generation. The next generation of exchanges, therefore, needs to work hard to give would-be adopters a reason to engage in the crypto space.
A Path Forward
CEXs can provide powerful and practical platforms to engage, attract and lead the masses into the new digital economy. But not as it stands at the moment. People are still suffering from the lashes of yesterday’s crypto cowboys and the stampede of contagion that followed. But as the dust settles, there may be opportunities on the horizon.
In my view, it comes down to transparency, accountability and integrity: exchanges should embody these principles without question. But the next generation of exchanges needs to go beyond this. I believe they must evolve in a way that puts human dignity at the centre of how they operate. The ‘Wild West’ world of misappropriated funds, opaque corporate structures and poor management can soon become a distant memory if new market players adopt a customer-first mindset.
On an operational level, exchanges need to continue to innovate to provide the best products and user experience possible. This means shifting away from the zero fees approach and instead embracing fees as part of their business models as a marker of quality.
Exchanges will need to provide proof that they are embodying the principles of transparency, accountability and integrity. It will no longer be a ‘nice to have’ but an essential. Leveraging the properties of blockchain is a crucial part of this and progress has already been made.
While exchanges are increasingly publishing their proof of reserves and proof of solvency, there is scope to go further. For example, every next-generation exchange could use ‘zero-knowledge protocols’ to prove their reserves and liabilities while doing their utmost to maintain user data privacy.
Beyond this, exchanges should not dismiss some methods used in traditional finance for ways to help rebuild trust with the public. Independent custodians have long played a crucial role in safeguarding assets in the TradFi world, and they have their place in the crypto ecosystem too.
Bitcoin is yet to be experienced — or even understood — by the vast majority of people. If we are to unlock Bitcoin’s full potential, the next generation of exchanges must lead the way.