The world of blockchain brings several new ways of managing your assets.
One of them is centralized exchanges (CEXs), with different products both crypto and fiat money.
Another one is decentralized exchanges (DEXs), which follow the opposite approach of traditional banking.
But as more banks accept cryptocurrencies and CEXs broaden their services, the difference between CEXs vs banks becomes more unclear.
Especially with the fast-paced evolution of blockchain tech.
So, if you want to know the difference and when to use CEXs vs banks, read on.
While CEXs seem to work similarly to traditional banks, they’ve only been around for over a decade. And while banks have thrived for centuries, it’s unknown how they’ll interact with cryptocurrencies. And to know what to expect after mass crypto adoption, we have to know how CEXs and banks work.
Traditional banks are financial institutions that specialize in lending while offering many related services. Depending on whether it’s a retail, commercial, or investment bank, it may offer personal loans, mortgages, savings accounts, debit cards, deposit boxes, and ATMs.
Their biggest strengths are security and stability. In the rare event of bank failure, it’s likely that government agencies back depositors’ funds. Specifically, central banks are responsible for controlling interest rates and the money supply, thus regulating the economy of their country.
CEXs are regulated trading platforms that might be institutions. The name implies that a central authority or company controls both the services and client accounts. Those wallets can be both or and offline, and clients use them to exchange crypto and fiat currencies.
They’re the opposite of DEXs, where users connect their own wallets and share control over the platform.
CEXs and banks can be confused for three reasons: they can both be institutions, are centralized, and offer broad services. But there are fundamental differences, like:
CEXs were originally called CCEXs to differentiate between fiat-only and crypto exchanges. They date back to 2010-2011 with Mt.Gox, BitcoinMarket, and Bitstamp. This last platform is one of the few early exchanges that still operate in 2023.
Fiat CEXs have existed since the Amsterdam Stock Exchange in the 17th century. While banking has ancient origins, modern banks appeared in the 18th century, then commercial ones in the 20th, and digital banking by the 21st.
The first bank to add Bitcoin balances and trading was the Swiss Falcon Bank in 2017. Since then, cryptocurrencies gained relevance for institutions like JPMorgan, Fidelity Investments, and Goldman Sachs. It also led to research on central bank digital currencies (CBDCs), the most successful one being the digital Yuan (e-CNY) launched in 2020.
Now that you know the fundamental differences, let’s compare CEXs vs banks by security, fees, user experience, services, use cases, and accessibility.
The following description considers the most common CEX and bank type. It might not apply, for example, to central banks vs fiat-only CEXs. This comparison is about international crypto-fiat exchanges and traditional retail banks.
There’s no point in showing prices and services if your money isn’t safe first. Security is largely responsible for the mass exodus from CEXs, and it’s the greatest quality of banks. Or at least, as much as centralization allows.
Both banks and CEXs include multi-factor authentication, multi-signature accounts, encryption methods, and audits from third-party agencies. But Banks excel at this feature because of physical security, backup systems, network segmentation, fraud detection systems, and if everything else fails, insurance. It’s worked for them for decades, although with cryptocurrencies that might change.
A secure CEX would assign most of your tokens to offline wallets, or cold storage. Exchanges share how much is online or offline, although in practice it’s not transparent.
Finally, CEXs have stricter (but faster) registration than banks due to risks like cyber-attacks, lack of insurance/PoR, or rapid changes in regulation.
Both banks and CEXs have complex fee structures. In general, banks have higher fees because of maintenance costs like the staff, ATM machines, or building security. Online banks can be cheaper than CEXs in main services (withdrawing, lending) but then overcharge on others like currency conversion.
It’s typical to charge for monthly maintenance (~$20/mo), overdraft (over $30), wire transfers ($10 - $50), out-of-network ATMs (over $2 each), foreign transactions (up to 3%), and savings account withdrawals (up to $5). It’s possible to waive most fees and only pay $0-$50 per transfer.
CEX fees can be broken down into:
Payments always include external fees, which are blockchain networks or fiat payment platforms. Most actions also require a minimum balance.
User experience comes down to product variety, design, and how familiar users are with those platforms. CEXs used to be the least beginner-friendly because of the crypto learning curve and the many services they offer. It’s hard to find a CEX that only offers crypto-fiat trading.
Today, some exchanges have Lite versions that disable extra features by default. It’s also possible to trade without the KYC hassle up to a daily limit. And because they’re less established, exchanges offer more rewards to attract new users.
These make CEXs more user-friendly than banks— unless you’re unfamiliar with cryptocurrencies.
Banks have just as many services, except they don’t appear at once. The default product is a deposit account for payments/ deposits/ withdrawals, and as you open specific accounts, you unlock different loans, investment products, and others.
Customer support is the most neglected CEX feature. Traditional banks also have delays and hurdles, but at least it’s a personalized service that you can get in person. In case of emergency or fraud, banks are more diligent than CEXs.
Both CEXs and banks offer countless services, one more than the other when it comes to crypto and fiat respectively. But because they’re better regulated, eventually banks will offer more services than CEXs. It’s easier for banks to include crypto products than for CEXs to include fiat ones.
Yet, the most novel services will appear on CEXs first. You can find all of these:
Traditional banks offer:
A crypto bank would also offer wallet custody, trading, conversions, and loans.
Exchanges aren’t as versatile as banks for different target audiences. That’s because they’re limited by crypto mass adoption, innovation, and regulation. But banks offer more relevant services whether you’re an institutional investor, business owner, or the average Joe.
CEXs do specialize in different profiles:
Business owners can use dApps and crypto payments, but CEXs aren’t a top choice. Individuals find the most value as well as institutions, although those still prefer the traditional banking system.
Now that you know the general and specific differences, it should be clear that neither CEXs nor banks can replace each other. Depending on the situation, each one’s pros and cons have different weights. The best you can do is to strategically switch using this knowledge.
These are the 5 biggest CEX benefits:
These are the 5 worst CEX cons:
CEXs bring up regulation concerns. Most banks don’t offer crypto services because of the unclear, ever-changing regulations. When they’re too restrictive, CEXs can just relocate to neutral countries. At least banks can guarantee consumer protection and legal compliance.
These are the 5 biggest bank benefits:
These are the 5 worst bank cons:
CEXs offer better crypto services, rates, and liquidity, but your funds might not be there tomorrow. Banks are versatile and stable, but they’re limited and not so competitive. Whether you prefer one or the other, neither banks nor CEXs can prevent the dangers of centralization and trust.
DeFi proposes a third solution where trust isn’t necessary.
It’s a borderless, inclusive financial system that leverages blockchains like Ethereum, Pulsechain, and Polygon. That’s not to say DeFi has fewer risks than CeFi, but at least they’re within each user’s control.
Join The Leading Crypto ChannelJOIN
Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Max is a European based crypto specialist, marketer, and all-around writer. He brings an original and practical approach for timeless blockchain knowledge such as: in-depth guides on crypto 101, blockchain analysis, dApp reviews, and DeFi risk management. Max also wrote for news outlets, saas entrepreneurs, crypto exchanges, fintech B2B agencies, Metaverse game studios, trading coaches, and Web3 leaders like Enjin.