Centralized cryptocurrency exchanges (CEX) and decentralized cryptocurrency exchanges (DEX) are one of the main entry points for people into the crypto and web3 space. People use them to buy virtual assets, exchange virtual assets, trade cryptocurrencies, and perform many other kinds of transactions. A successful CEX or a DEX project should comply with all the financial and crypto regulations to be a place where people can safely perform their transactions and keep their assets secure.

What is the main difference between CEXs and DEXs?

From a legal structuring standpoint, the key difference between CEXs and DEXs lies in the answer to the question, "Who owns the users' assets?".

In CEXs, users' assets are controlled by the exchange's owners as the user transfers them to a custodial wallet of the exchange. In DEXs, users control their assets by holding custody of their wallets, while the token swap protocol only manages user transactions autonomously.

How is the legal structuring of a CEX different from a DEX?

Owners of the CEX bear the responsibility for the assets stored in the centralized custodial wallet of the exchange. This is quite similar to how banks operate with their client's funds. That's why CEXs need to obtain special crypto licenses and implement customer verification procedures, like Know-Your-Customer (KYC) and Anti-Money Laundering (AML) procedures. These requirements include, but are not limited to:

• drafting certain policies and procedures like AML/KYC, cyber security, private key storage, risk management, and data protection policies;
• appointing an auditor;
• appointing an anti-money laundering officer or officers (the requirements of which depend on the jurisdiction);
• appointing a qualified manager (the requirements of which depend on the jurisdiction); and
• regularly providing submissions to the regulator (audited financial statements, reports on KYC/AML, etc.).

In the case of a DEX, neither the company nor the owners can access the user's assets. The token swap protocols of the DEX are, in most cases, ownerless and non-custodial. That's why the regulations that apply to CEXs don't apply to DEXs. But that doesn't mean there's no legal structure needed for a DEX.

What regulations apply to CEXs?

Since centralized exchanges hold custody of users' assets, similar to how traditional banks do, many regulations and licensing schemes will apply to them.

A legal professional should define the exact list of the regulations that apply to the specific exchange upon examining the exchange's business model, and this will also be influenced by the jurisdiction for incorporation that the founders will choose.

The list below outlines the most common regulations that will apply to a centralized cryptocurrency exchange, and includes examples of each.