What is a CEX (centralized exchange)?

A centralized exchange (CEX) is a cryptocurrency trading platform operated by a company that acts as an intermediary between buyers and sellers, managing user accounts, custody of assets, and order matching through centralized infrastructure. CEXs provide the most common entry point for individuals and institutions to trade cryptocurrencies.

Centralized exchanges serve multiple use cases:

• Cryptocurrency spot trading for immediate settlement
• Derivatives trading including futures and options
• Fiat-to-crypto conversions (on-ramps and off-ramps)
• Crypto-to-crypto trading pairs
• Margin trading with leverage
• Staking services for proof-of-stake tokens

Unlike decentralized exchanges where users maintain control of their private keys, CEXs operate with a custodial model. Users deposit funds into exchange-controlled wallets, trade on the platform, and withdraw to external wallets when needed.

How centralized exchanges work

Users create accounts on a CEX by providing identification documents to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. After verification, users deposit cryptocurrency from external wallets or purchase crypto using fiat currency through bank transfers, credit cards, or other payment methods.

The exchange maintains an order book that matches buy and sell orders from users. When a user places a market order to buy Bitcoin at the current price, the exchange's matching engine pairs this with existing sell orders. The transaction executes instantly within the exchange's internal system, with the exchange updating account balances in its database.

Example: A trader deposits $10,000 USD to Coinbase. They place an order to buy 0.5 BTC at market price. Coinbase's matching engine pairs this buy order with sell orders from other users. The trade executes in milliseconds, and the trader's account shows 0.5 BTC and reduced USD balance. The Bitcoin remains in Coinbase's custody until the user withdraws to an external wallet.

The centralized model enables features that decentralized exchanges struggle to provide:

• High-speed trading: Order execution in milliseconds
• Advanced order types: Limit orders, stop losses, trailing stops
• Leverage trading: Margin positions up to 100x on some platforms
• Customer support: Direct assistance with account issues

CEX vs DEX (decentralized exchange)

The fundamental differences between centralized and decentralized exchanges determine which platform suits different trading needs:

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Centralized exchanges prioritize user experience, liquidity, and regulatory compliance. Professional traders and institutions typically prefer CEXs for high-volume trading due to superior execution speed and deeper order books.

Decentralized exchanges appeal to users prioritizing self-custody and censorship resistance. DEXs eliminate counterparty risk since users never deposit funds to exchange-controlled wallets.

Benefits of centralized exchanges

Centralized exchanges provide several advantages that explain their dominance in cryptocurrency trading volume. Understanding these benefits helps explain why CEXs handle over 90% of global crypto trading despite the availability of decentralized alternatives.

• High liquidity and execution speed enables efficient price discovery. Major CEXs like Binance and Coinbase process millions of transactions daily with tight bid-ask spreads. Orders execute in milliseconds rather than waiting for blockchain confirmation. A trader buying $1 million in Bitcoin receives immediate execution at predictable prices.
• Fiat currency integration solves the on-ramp problem. CEXs partner with banks and payment processors to accept deposits via wire transfer, ACH, credit cards, and local payment methods. Users convert USD, EUR, or local currencies directly to crypto without navigating peer-to-peer markets or complex DeFi protocols.
• Regulatory compliance and insurance provides institutional-grade security. Licensed CEXs implement KYC/AML procedures, segregate customer funds, and maintain insurance coverage against security breaches. This regulatory framework enables institutional participation and builds trust with retail users concerned about platform security.
• Advanced trading features support professional trading strategies. CEXs offer margin trading, futures contracts, options, and sophisticated order types unavailable on most DEXs. Professional traders access leverage, hedging instruments, and API connections for algorithmic trading.
• Customer support and dispute resolution helps users recover from mistakes. CEXs employ support teams to handle account issues, frozen withdrawals, and trading disputes. Users who lose 2FA access or encounter technical problems receive assistance, unlike DEXs where lost keys mean permanently lost funds.

Common centralized exchange use cases

Different market participants use CEXs for distinct purposes based on their needs for liquidity, compliance, and infrastructure.

Retail cryptocurrency trading

Individual investors use CEXs as their primary interface for buying and holding cryptocurrency. New users typically start with regulated platforms like Coinbase or Kraken that offer simple interfaces for converting fiat to crypto. The custodial model eliminates concerns about wallet security for users uncomfortable managing private keys.

Professional trading and arbitrage

High-frequency traders and arbitrage firms execute thousands of trades daily across multiple CEXs. These traders exploit small price differences between exchanges, requiring the millisecond execution speeds only centralized infrastructure provides. A trading firm might simultaneously buy Bitcoin on one exchange and sell on another to capture a 0.1% price differential.

Institutional asset management

Investment funds, hedge funds, and corporate treasuries access crypto markets through CEXs that provide institutional custody, compliance reporting, and OTC trading desks. An asset manager allocating $100 million to Bitcoin uses CEX institutional services rather than DEXs to satisfy fiduciary requirements and maintain audit trails.

Fiat on-ramps and off-ramps

Businesses accepting cryptocurrency payments often use CEXs to convert crypto revenue to fiat currency. A company receiving Bitcoin payments immediately converts to USD to avoid price volatility. This requires CEX infrastructure that connects to traditional banking rails.

Derivatives and leverage trading

Sophisticated traders use CEX derivative products to hedge positions or speculate with leverage. A Bitcoin miner might short Bitcoin futures on a CEX to lock in selling prices for future production. Traders seeking 10x leverage on price movements access perpetual swap contracts only available on centralized platforms.

Cross-border payments and remittances

Some users rely on CEXs for international money transfers by converting local currency to crypto, transferring between exchanges, and converting back to the destination currency. While not the primary use case, this exploits CEXs' ability to handle both crypto and multiple fiat currencies.

Centralized exchanges and payment infrastructure

The primary operational challenge for CEXs is connecting cryptocurrency trading to traditional banking systems. Users expect to deposit local currency and withdraw profits to bank accounts, but most banks remain cautious about serving crypto businesses due to regulatory concerns.

CEXs expanding internationally must establish banking relationships, obtain money transmitter licenses, and implement compliance procedures in each market. Building these connections independently takes months per country and requires ongoing regulatory maintenance.

Payment infrastructure providers like Due solve this by offering APIs that connect to local payment rails across markets - SEPA in Europe, PIX in Brazil, SPEI in Mexico, and ACH in the United States. A CEX integrates once with Due's API and gains access to 80+ countries worth of fiat on-ramps and off-ramps with built-in compliance, instant settlement, and mid-market FX rates.

For crypto exchanges scaling globally, Due's payment infrastructure determines how quickly they can enter new markets and whether they can offer competitive deposit and withdrawal options that match local user expectations.