Centralized, decentralized, hybrid, and so on. The choice of crypto exchanges today is broad, but it is not simple. Traditionally, the most obvious difference between CEX and DEX was controllability of the regulator. Centralized sites sought to improve relations with the SEC, sacrificing user comfort, while decentralized defended privacy. A new player, however, the decentralized Everbloom exchange, which has already established relations with several financial regulators, wants to break this balance of forces.
Everything Was so Simple
As the industry matures and develops, youthful maximalism and fashion for anarchy are being replaced by a desire to get closer and even "legitimize the relationship" with the regulators. This is how practically all large and serious centralized crypto exchanges behave today. Coinbase, Circle, Kraken, Gemini—all these sites have submitted or announced plans to apply for a brokerage license from the SEC in recent months. A number of other platforms, including Bitstamp, Poloniex, KuCoin, and LocalBitcoins, for KYC and AML procedures, choosing the first one between user dissatisfaction and regulator discontent.
The procedure for KYC registration on exchanges is often painful. Some exchanges, for example, OKEx, leave it "for dessert," requiring users to fill out KYC forms before withdrawing to Fiat. This is inconvenient, given that the user has decided to withdraw funds and plans to do so as soon as possible, and full verification with documents traditionally takes 24 hours, and often even more. For example, OKEx users complain of delays of up to two weeks, as well as failures in the operation of SMS authentication. Another obvious disadvantage of KYC is third-party access to your personal and financial information, which contradicts the idea of privacy, for which many resort to cryptos in the first place.
Against this background, the advantages of decentralized exchange sites are “free relations” with the regulator and the absence of KYC requirements. “Decentralized exchanges, unlike centralized exchanges, attract users with the simplicity of registration and anonymity of exchange. Abidance with compliance on such sites is just as foggy as the weather in London,” said Alexey Bytev, director and founder of trading-crypto.ru.
Another democratic feature of the DEX ideology is the absence of large players who have incentives and, more importantly, the means to play dirty and manipulate the market to their advantage. “The main niche for decentralized exchange is NOT satisfying the needs of "whales" and professional traders,” Vitalik Buterin wrote on Twitter.
The new entrant, launched in July by Everbloom, is an unusual decentralized exchange, which is not afraid to come close to the cages of the regulators and institutional investors. Previously, the company raised $2 million from Mashable co-founder Frederick Townes, from an early investor in Ethereum Drew Volpe, and from Indicator Ventures. And now, Everbloom seeks to become a licensed brokerage firm and attract major investors, while maintaining the benefits of a decentralized exchange, such as direct transactions and independent control of funds by users.
Everbloom recently registered with the U.S. Securities and Exchange Commission (SEC) and applied for a license to the Financial Services Industry Regulatory Authority (FINRA). The company considers regulatory approval to be mandatory, given the strict position of the SEC in relation to ICO tokens, namely the possibility that many of the ERC20 tokens traded on Everbloom can be considered by the regulator as securities.
“Getting a brokerage license is a long, tedious, and expensive process, but we believe that it is necessary and ultimately will give the company value in the long run and provide us with an edge over competitors,” said Everbloom COO Scott Pirrello.
Freedom of Choice
At the same time, Everbloom remains a decentralized and so-called "noncustodial" platform, allowing users to trade directly from an external wallet (that is, excluding the exchange mediation) and giving users full control over funds. Pirrello calls this a “service-oriented approach” to personal storage when the role of the exchange is to provide the necessary mechanisms for analytics and compliance, as well as accounting software.
According to Andrew Rollins, CEO of Everbloom, such a “self-monitoring system” will attract institutional investors to the DEX, who prefer to have a special repository for their impressive assets and appreciate the freedom of choice. “The attractiveness of decentralized exchanges or exchanges without storage is that [traders] can choose their own solutions for storing funds,” said Rollins.
What about Liquidity?
Another strong feature of Everbloom is that it is a “hub” for order books from various DEXs (currently with EtherDelta, but soon Everbloom will also begin to aggregate orders with 0x). “The idea behind this is to connect different liquidity pools,” Rollins says. This is another advantage of Everbloom over centralized exchanges where large orders cannot be executed for a long time, thereby lowering liquidity. Trey Griffith, CEO of SparkSwap, built on the Lightning Network, believes that in the competitive environment of developing decentralized exchanges, liquidity for large positions should be a key factor in attracting corporate users. “Anyone who accumulates a significant amount is likely to win,” says Griffith.
Prior to receiving a license from FINRA, the exchange will not charge a fee, and Pirrello expects that the response from regulators will take at least a year. That is, during all this time, traders can open hundreds of orders a day for free, sometimes in several books of orders at once (these are about 140,000 offers collected from various DEX platforms). In addition, Everbloom offers closed trading pairs to accredited investors who have gone through KYC elsewhere, which is another catch for institutional investors.
Alexander Nari, Managing Partner of the Newblock Capital Fund, noted that the tools provided by Everbloom for transparent regulatory reporting and compliance are in high demand. He sees the irony in creating intermediaries for decentralized platforms but considers it important to have a “convenient trading platform” for institutional investors. Nari is already trading on Everbloom himself and expects that in the future, his fund will also use this exchange.