Why Centralized Crypto Exchanges (CEXs) May Be In Trouble - January 1, 2026

The main reason why places like Coinbase and Binance did well is because post-Mt.Gox it brought much needed legitimacy in the fiat-crypto exchanges that helped to stabilize the industry's on-ramps - which they were definitely successful in doing. Over time, however:

- Fees became very high, for what you're getting.

- They use a convoluted system for staking that typically ignores the way rewards/governance works on individual projects, often pocketing a huge part of the difference. 

- The centralized status makes them easy targets for governments to attack. The banning of crypto accounts in Hawaii (leading to CB and BNB pulling out), banning of staking rewards in California are good examples.

- They claim to have made "significant progress" on the regulatory/political sides of things but all of the legislation that passed is skewed towards benefitting orgs exactly like them, rather than small Web3 projects or individual wallet holders.

- Outside of the Web3 bubble, what the general public actually sees from exchanges are lobbyists trying defend the actions of FTX and $TRUMP-esque rug pulls and other pump-and-dumps, of which @base is a part of because it treats its customers as extraction targets rather than partners to work with.

- What they're actually trying to do with @base and Farcaster is to "making banking social", in order to justify their high fees instead of working on their fundamentals, which most people are not in the mood for right now, given that we're heading into a recession.

This is where competition comes into play - in the last few years there have been dozens - if not hundreds - of smaller fiat-to-crypto exchanges services that you can integrate directly into wallets and platforms which work just as well for much cheaper. You can buy crypto directly from @TempleWallet using Google/Apple Pay or convert it right from @objktcom if you really need to get that NFT on impulse. Metamask has similar access to 3rd party features that does similar conversions for you.

CB and BNB may have served an important purpose at one point in time, but in a new industry that's evolving quickly every day, they might not have what it takes to make it to the next cycle.

When I think of exchanges, I tend to think of those currency conversions you see at airports where you need to convert your dollars to other types of cash that you happen to need. Sure, it needs some money backing it, but it was never meant to be a bank where you would store all of your money in one place at a time. In-app exchanges are closer to what these things were meant to be and I think that in the long run, that is what will end up surviving in the end.

We might be seeing the end of the idea of the "crypto bank" - where you give some entity money to manage your coins for you. What's the point? That's what cash is for. If you're interested in crypto coins, just buy and hold it yourself. Exchanges are there for conversions, not for Storing-Your-Value. (A piece of propaganda that was invented in the last few years.) Not your wallet, not your coins, as they (used to) say.

---

teia.cafe | Decentralized Radio
teia.art | Arts Collective on Tezos
teia.art/ryangtanaka | Ryan's Music and Artworks


Sustainable Music Northwest (Seattle) | Public Music Concerts and Fair Wages for Musicians [https://www.sustainablemusicnw.org/]

*Episodes are also available on Spotify, Apple Podcasts, YouTube, iHeartRadio and most major podcasting platforms as well.

Transcript

SPEAKER_00: 0:00

Hello everyone, this is Ryan from Tea Cafe. This is episode four of season two. So this one I think we'd be talking about centralized exchanges, so more well known as like Coinbase, Binance, Kraken, those quasi-bank like entities where you're you can basically connect your bank account and convert it into crypto coins. Coinbase, for example, started in 2012 relatively early. But the most uh the first successful exchange was Mt. Gox. And if you kind of look at the history of how that went down, uh has a very turbulent history, let's say, right? Which eventually led to it shutting down. So but that they didn't stop proponents in the industry from trying. Eventually, Coinbase kind of rose to power and became the standard of when where these sorts of exchanges happen. Uh, Binance is also a good one. It's arguable like who's more successful, right? Coinbase. Coinbase was definitely more successful in the Western world, uh, US in particular. Binance was more successful internationally, and they have they both have different pros and cons, but but at the end of the day, they're both very, very successful in its own way, right? They've gotten huge. And there are other exchanges as well. No one can really got you know gotten close to their level at this point. Now, I have to mention, I think that they may be in trouble in 2026, and a lot of this is speculative, but at the same time, um, I think it's something people should be concerned about because uh there are some fundamental issues with the way these things work that um may not be sustainable in the long run. So uh without further ado, here we go into why I think that is so. So, in order to understand like where exchanges are, we have to kind of look at the industry itself and how it got to that point, right? So, in the older days of crypto, there were no exchanges, which means that there was no way to convert uh cash like dollars or whatever fiat currency you happen to use in your country into crypto. The only way um you could really get your hand on Bitcoin, for example, was to mine it directly. And then perhaps if you mined enough, you might be able to s exchange it for a piece of pizza. I talk I talked a little bit about that in the last episode, so you can kinda listen to that one if you want to know more of the details. But in the earlier days, there's really no way to convert cash into crypto. That was a fairly recent thing, and the first platform that made that possible was Monk Docs, and that was in Shibuya, Japan. For a while, a lot of the crypto activity was centered around Tokyo, uh, which is kind of why a lot of people do suspect that Satoshi may have been Japanese. There's no proof either way, but circumstantial evidence points to the fact that a lot of these things did initially happen in Japan. So, but that's kind of besides the point. Uh Mountain Docs grew very quickly, it was very successful at the time, but it got ridden with scandals, there were like accusations of people using Bitcoin for like illegal activity, uh, they weren't doing proper KYC and like checks on like terrorism or illegal activity. Eventually, uh all that became too much to handle and it shut down. So that was sort of a like a dark point in the crypto industry, and it discouraged a lot of people who were in it at the time. But that didn't stop people from trying. Eventually, exchanges like Coinbase and Binance they were better at handling the regulatory side, and it allowed it for people to basically get the same kind of benefits uh in a much safer way. So Mt. Gox was kind of the first iteration. The things that came after, Coinbase and Binance, they kind of perfected the model a bit, and eventually it became fairly stable. And what happened with when when so that took the industry into a new era, I would say. Because like in the past, it was really kind of a nerdy thing that only nerds like people who were willing to mine Bitcoin or talk to some guy on the internet, hey, do you want a piece of pizza for five Bitcoin or whatever, right? Like that was the only way you could really use it. It was fun, and a lot of people have fond memories of that time, but at the same time it wasn't really practical, right? But as soon as the cash parts came in, uh that's when it opened up kind of a door towards mainstream usage. And all of that eventually led up to the hype cycle of 2021, but a lot of things changed in the meantime. So uh we're gonna talk about a little bit of that. So the thing is what prompted this episode was I saw some a criticism of people making against the Coinbase's recent projects uh basically allowing um people to create their own tokens, and they're accusing them of basically insider trading, because a lot of what happens in like when people create their own tokens, right? It's not a secret at this point. You launch a token, you marketed it like crazy, and then you dump on it, right? And they basically systematized it. Uh, the accusation is that, oh, because they know what's uh they have prior knowledge ahead of time that people are doing this, right? So they are taking a cut of these pumps and dumps in a systematic way in order to make money, right? Now, um legally speaking, you could argue that there's nothing wrong with this legally, right? Because everyone's doing this voluntarily, and if you lose money, you lose money, and they're just doing what they can. But underneath that, there is sort of a concern going on because this seems almost like pretty like a desperation play. Because Coinbase has grown very quickly, very fast over the last decade or so, right? They launched in 2012, and then after Mt. Gox fell in 2015 or 2016 or so, uh, they kind of made their move and they grew very rapidly, and now they're a multi-billion dollar company, right? So that was a huge success on their part, but they're having sh they're struggling to maintain re relevance, and it kind of shows in the kind of things they've been working on lately, like Farcaster, right? Farcaster is basically a social media platform revolving around uh crypto, and there's a lot of that like coin like tokenization stuff going on. That's basically what's fuels the whole thing. Money, right? It's just money. I know some people who have like figured out something within the system, they made a pretty good deal of money through that and uh more power to them, but at the same time, like is this sustainable, right? So they're basically trying to make banking social, which is kind of a weird thing, right? Do people really want that? Does the general there's always people who are sort of addicted to the whole dopamine hit of the gambling parts of crypto, right? Among that, that's a very popular uh platform, but the general public are they really gonna go for it? That's that's really the question. And is it success is it uh sustainable? That is also another question that we need to ask. So, okay, so at the time after Mt. Gox fell, and like crypto was sort of in a crisis of uh legitimacy, right? Coinbase and Binance and all those exchanges Kraken, Kucoin, a lot came out at the same time during that time, but um, they were trying very hard to restore trust in the crypto system, and on some level they were actually very successful, and they do deserve some credit for that. They stabilized the industry, they made it so that people feel safe putting in dollars, right? Now, if you use one of these exchanges, you're not too worried about your money just like disappearing into the ether, which has happened in the past before, if you're being honest, because it was kind of the wild west, right, in the earlier days of crypto. So they did stabilize that parts of it. Now, the problem is that as they became more successful, they started charging higher and higher fees, right, in exchange for their services. And uh people were even from the very beginning complaining about that. Like, oh my god, uh, I don't know what it is now, but at the time they're charging like 2%, 3%, it might have been as high as five. Well, if you're if you're doing a lot of uh transactions daily, that's a lot, right? It kind of eats away, and they're complaining about it being too expensive. But at the same time, like who else are you gonna go for, right? Like, so they they had a especially with Coinbase, uh, at least in the US, they had a quasi monopoly because it was kind of the only place you could really trust, at least at the time. So that is changing now, which is part of the problem, but I'll get into that later. So fees, people complaining about the fees. Um, in more recent times, so as you know, a lot of these uh exchanges do participate in validation governance. So, like Coinbase, for example, uh has a significant portion of money into like Ethereum validation because right, it's in their own interest to kind of keep tabs on like the thing that the products that they're selling, right? So they they've had effectively they've become part of the political process of these coins themselves by being validators and such and such. The problem is that they have hundreds, if not thousands, of coins in their portfolio, and they're not maintaining all of them in a good way. So, because I'm involved with Tezos, I see this all the time. Like Coinbase has a fund dedicated to staking to the baking community, but when it comes time to voting or governance, a lot of times they just don't show up. And uh, I do think it's mostly due to neglect. They have a lot to be fair, they have a lot going on in their portfolio, and they may not have the time to prioritize smaller projects like TESLs, but at the same time, it's just like, well, what are you doing, right? Why not? Like, what are you trying to do? You're trying to have some influence on the process, but at the same time, you're not taking it seriously. So that's been causing some issues on the governance side. But the other side is when you stake your coins right in these exchanges, they do give you some interest, right? Like staking rewards, they call it. So for Tezos, if you stake your coins yourself, you can easily get 9 to 10% a year, like as uh interest. When you go on Coinbase, that drops all the way down to 3 or 4%. So that's a huge cut that they're taking. Most people don't understand how any of this stuff works, and they probably don't realize it. But the problem is they're not really representing the markets accurately as they should, right? And so you could make the case that, well, they're a private company and they can do whatever they want, which is true, but at the same time, it's like, well, are they so so that's been a problem, and as time goes on, as more and more coins become minted, more and more projects come out, it's gonna get harder and harder. It's not gonna get any better. And it does raise the question of do you really want these exchanges having that much influence over the process, right? I get that they have a vested interest in the uh seeing the outcomes of it. So, but at the same time, like, shouldn't the community be running the governance process rather than this bank who's can't even be bothered to show up, right? That's that's really what it comes down to. So so that is a complex issue, and you know, it's not gonna make or break anything, I don't think, but it's worth mentioning it. The other issue is that since these centralization centralized exchanges have becoming become more popular, a lot of the money in crypto has also become centralized. Because a lot of people, most people I would say, are probably not they don't if they even know what that means, like are probably not willing to put in the work to do self-custody, which basically means you are holding on to your own coins, right? When you use these services, you're trusting Coinbase or whatever other exchange to handle the money on behalf of you, right? You're you're trusting. It's it's you're trusting it's a custodial wallet, right? They're they're taking custody of your money and you're trusting that they'll do the right thing. So um there are some advantages to doing that, but at the same time, the the outcome is that when all the money is sort of uh concentrated in one place, it makes it very easy for governments to just target them and slap on regulations, right? So one one of the things is uh like what happened in Hawaii, which I'm which is my hometown, by the way, that's where I was born and raised. They outright banned crypto, just outright. And so people would say, like, oh, you can't control crypto. Crypto is a is the like the money of the people and yada yada. But you can totally shut down an exchange, right? Because it's a it's a public company that everyone can see. There is an office, and it's not that hard to send a cease and desist letter, right? On on the government's behalf. So it becomes sort of like a uh bottleneck or a what do you call a point of weakness that uh causes uh security issues as a whole. So if the government can just go in and shut down an operation where all this money is just sitting around, it could become like a pretty big threat to the security of the the coin itself. Imagine if fift like imagine if more than half of the world's currencies were like Bitcoin was inside one bank. If the government went in and seized all the assets, they could t totally just take over the whole thing, right? It's probably not gonna happen, but it's theoretically possible. So the fact that it's not decentralized actually makes it less secure, if you know what I mean. So that's also another weakness of uh using centralized exchanges, and the bit even the Bitcoin people used to say, hey, not your wallet, not your coin, right? Don't use exchanges, do self-custody. They used to say that a lot, but they don't say that anymore because they really like leaned into the whole store of value thing, and it's it's kind of weird they don't say that anymore because most of them have now ended up probably just probably either uh have it sitting somewhere on some exchange rather than doing self-custody. They'll go online and say whatever they want, but but that's kind of the the truth, right? If you look look at uh how these things are handled now, and that's become a big problem because uh people are concerned that Bitcoin is becoming too centralized, and for the reasons I just explained, uh it becomes a security concern. If they can if there's too much of that money being concentrated in one place, then the chances of like one raid by a certain entity controlling the whole thing becomes higher and higher. We're not there yet, but it's getting the chances of that happening is getting higher and higher over time as the money becomes more and more centralized, if that makes sense. So so yeah, again, uh we're not quite there yet, but it's also another thing to be s concerned about. Um okay, so the other parts uh the exchanges will kind of defend themselves saying that they were responsible for doing a lot of the lobbying and enacting common sense quote common sense regulations in Congress or the laws, especially in in the US, where the regulatory laws tend to lag behind a bit. In Japan, uh they already figured all that stuff out years ago. Like you can go to like their equivalent of Best Buy, which is like big camera or a lot of those um electronic music electronics. Bitcoin is already integrated into their payment system. You can use it. Most people don't bother, but it is there. So they figured all that stuff out years ago. And the issue is that they're not really the issue is adoption, not really the laws. But but Coinbase is very, very active in lobbying in DC to kind of protect their own interests. And they will argue that they they they were responsible for making sure that their voice is heard and there's like common sense regulations. But if you look into the details, a lot of those regulations are really skewed towards entities like them, right? Because they're there to represent themselves, right? They're not doing out of the goodness of their hearts, right? So a lot of those laws really only apply to like big um entities like themselves and like the average crypto user, crypto holder out there, they're not really seeing any of that the benefits, right? And so what ends up happening is that when it goes out to the real world, so to speak, people just see stuff like FTX. FDX was the worst, right? And it's it's uh uh crypto's reputation is very not good right now because they sort of conflate what happened with FTX with the kind of lobbying they're doing, thinking that hey, these people are just trying to get away with that stuff, right? Like there's there's a lot of mistrust about the motivations about how these lobbyings go, especially with a very controversial administration in power right now, right? And then you see like Trump coins, basically it was a rug pull, right? We look at the Trump coin, how that went down. They launched it, they hyped it up, and you see a huge spike, and it just sold it off. And the people that screw it get screwed over in the end is the average retail investor, right? So that's just happening over and over. That's the pump and dump motto that they just keep on doing. So uh yeah, and then uh the coin, and then it kind of goes comes back to full circle. The token uh platform that they're they recently launched on base is pretty basically the same exact thing, except that they figured out how to get in on it themselves, right? So that's where the criticism comes from, and a lot of people are not very happy with that. But at the same time, you have to kind of realize that's been the business model for the last couple years. Um that that is what made the money. It's basically a casino. And the general public does see that. Like they're not dumb, they do see it, and you can it's there's no short supply of criticism out there that Web3 has just turned into this a pump and dump casino wheel that or extraction from retail investors is the main goal. And Coinbase, with their recent addition, really just reinforced that stereotype, right? They didn't do anything to like change that. So we had to kind of like more morally speaking, you could say that, well, people are choosing to do this, right? They understand the risks. These are grown adults, and you shouldn't tell them what to do with the money, and there's some truth to that. And I don't think there's really any point in trying to like stop it, right? Because if people are gonna do it, they're gonna do it. But at the same time, it is a little disappointing that that's all we're known for at the moment, right? Considering the promises of crypto were supposed to be much bigger than that, right? So, okay, so going on to the future, there's a problem right now because retail investors are running out of money. Many of them have gambling addictions, let's be real, right? But many of them are going broke, and you don't really see the aftermath of it, but uh there's a lot of people who kind of ruined themselves these last part few years trying to play the crypto game and and basically losing, right? But at some point they're gonna run out of money, and then since we're heading into a recession, people are tightening up their wallets, and they're gonna probably be less interested in taking these like high-risk gambles over time, especially as the price of Bitcoin starts to sag, right? As long as crypto prices are going up, your chances of winning goes higher. But if it's the markets are sagging, um it doesn't make much financial sense, even if you are a gambler, right? So it's gonna become harder and harder for this motto to sustain itself over the next few years, especially as like the US dollar starts going into turmoil. People are gonna have bigger things to worry about. So that's one of the big w uh issues of why centralized exchanges may be in trouble because they leaned very hard into this model, and we're not seeing any evidence that they're thinking about other things. This is kind of all they know. They all the only thing they really know is how to extract value from their customers, right? So Farkaster is kind of interesting, but it when you look at it, it's kind of still the same thing. It's not they're not doing anything new or different, it's just now it's social. So there's that. There's also the issue of people not really needing dig exchanges anymore. If you look at some Tezos, it's like if you have Tempo wallet, uh you can attach Google Pay, Apple Pay to it. Um maybe go on object.com, you can totally use just like fiat money. You can convert, you can use your credit card or debit card to buy NFTs directly from from the site. Like you don't need to convert it into crypto coins anymore. And MetaMask, like all those wallets, like most places have a fiat on-ramp right now that that basically bypasses the need to use Coinbase or any of those exchanges. And I think that's going to become more the norm. These are smaller services, they they're typically cheaper, they have lower fees, and and it's more decentralized because you don't have to go through this central entity anymore. And uh I think over time, and there are hundreds of them, that there's like dozens, if not hundreds, of these services anywhere. It's not hard to do at this point because a lot of people have figured it out. So I'm a little skeptical if these big places can maintain what they have right now because there's all this competition basically doing the same thing they have, they can, and much cheaper and much in a lower, lower cost way. It's just money after all, right? And they're not we're not talking about like anything, and we're not talking about real products, right? There's no competitive advantage, it's just a transaction. So they're gonna have much harder time maintaining their lead that they they gained over the last couple years, and I think we're gonna start to see a shift it more in favor of these like more decentralized services. And if you think about it, if you can connect a uh these are centralized exchanges, right, where you don't have custody over your wallet, they do have decentralized exchanges, right? They're called DEX, right? DEX, and that runs purely off of uh smart contracts that you don't even have you don't even need to use it at all at all. So if you connect the fiat stuff with these decentralized exchanges, you have enough of a service that allows you to bypass those companies entirely. And push comes to shove when like funds are getting low and people are like really trying to pinch pennies for everything. I do think they're gonna end up becoming more appealing in the long run. So that's the biggest threat to these centralized exchanges at the end of the day, competition. So, okay, so those are the reasons why. And the thing is uh I kind of want to end this podcast on a note that uh the when I think of exchange, right? When you hear the word exchange, what do you think of, right? Like in the real world. I tend to think of those currency exchange booths that they have at airports where you can convert to dollars to yen or yen to yuan or yu to yuan or pesos or whatever, right? I tend to think of those kiosks. I don't tend to I've never thought of like Coinbase as being this big centralized banks, which I think they they seem to want to think of themselves as, right? They have this kind of self-image of like, oh, we're we're a big deal, we're like JP Morgan, we're like the the Fed of of digital money, or I don't know, right? But I do think the the reality of exchanges are more is humble the word. It's it's less uh dramatic than that, right? It's just something, a service you go to to convert one thing to another thing. And they're trying really hard to become like the new bank, right? Like new digital bank, they're offering like savings accounts and blah blah blah, but like the the the regular banks do that already, and I think they do it better. Um maybe at some point they'll start offering loans, but what can they really offer that is outcompetes what the banks already do, right? Banks have huge issues, and I know there's a whole episode you could dedicate yourself that to that, but like push come to sub, are you going to take a loan from a crypto bank or a regular bank if your life is online, right? If you think about it, right? Which which evil are you gonna choose? So yeah, so when you're taking out loans, uh you want the risks to be as low as possible, and crypto is really not that right now, especially if it's advertising itself as these pump and dump platforms, yeah. So there's like a kind of incongruity that I don't think is gonna resolve itself very well unless they start like really pivoting hard into a different model. But given how things have turned out and the kinds of people that are backing them right now, I'm not really seeing that happening anytime soon. So that's why you should be very careful about exchanges. And uh personally, I have moved most of my money off of these uh centralized exchanges, and uh it kind of went a lot of it has gone back into cash and traditional assets and things I feel more secure with. But that's a personal opinion, you know, and I'm not saying anyone everyone should do that, but that's just what I did, and it started pulling out of these places and basically kind of going back to the good old days of just holding cash or doing self-custody, right? One or the other. And at least for now, that seems to make more sense to me, especially as we head into like a period of I would say extreme economic uncertainty. But we'll talk about that later, and uh there'll be plenty of time to talk about sort of the the end of the world as we know it. I've been hearing lots of uh news about what's been going on with the dollar, and most of it is not good, but we'll see what happens next. Okay, so thanks a lot for watching, or sorry, hearing me out. I keep on forgetting. I used to do uh live streams, so you're not really watching this, you're just hearing me out. But uh thanks a lot, and see you in the next one. Take care.