If you are thinking of investing in cryptocurrency, the first thing you may need to consider is where to keep your crypto assets. You also need to consider which crypto exchanges to use if you are interested in buying or selling cryptocurrencies like Bitcoin or Ethereum. In the end, you only have two options to choose from: decentralized exchange (DEX) and centralized exchange (CEX).
Decentralized exchanges (DEXs) are peer-to-peer marketplaces without a central authority. DEXs allow cryptocurrency traders to transact directly without handing over management of their funds to an intermediary or custodian. These transactions are often facilitated on blockchain networks by self-executing agreements written in code called smart contracts. Examples of decentralized exchanges include exchanges such as Coinbase, Binance, Crypto.com, BlockFi.
The other option you have is a centralized exchange or CEX. Unlike DEX, centralized exchanges (CEXs) are organizations that coordinate cryptocurrency trading on a large scale. Most of these exchanges use a business model similar to traditional wealth exchanges like the New York Stock Exchange. Kraken is one of the well-known centralized exchanges. Others are Bithumb, Bitfinex, Bittrex, Poloniex, Kraken, GDAX, Coinbase and Gemini.
For those new to the crypto investing world, centralized exchanges are exchanges that do not allow their users to control the private keys of their crypto assets, but instead keep those keys on a centralized server. Additionally, transactions on centralized exchanges are not anonymous, making it easier for the government to identify the owners of the crypto assets. The centralization of centralized exchanges also leads to single points of failure, which ultimately opens up the possibility of hacking by malicious actors.
In recent years, decentralized exchanges have grown in popularity as a custody-free way to trade assets without the need for a middleman. However, CEXs offer some benefits, including more liquidity and stronger regulatory assurances, which may be particularly attractive to institutional clients. However, the question is how safe are the assets kept in centralized exchanges. Can centralized exchanges protect your crypto assets from government censorship or confiscation?
Recent events in Canada are a reminder that centralized exchanges cannot protect crypto assets from the government. Before we dive deep into February’s Freedom Convoy protest, it’s important to remember that centralized exchanges, just like other financial institutions, are mandated by the government to know their customers under KYC rules. KYC or Know Your Customer is common practice when opening an account with a bank or exchange and proves that you have your government-issued ID like a passport.
In early February, Canada’s “Freedom Convoy” protested in Ottawa against COVID-19 vaccination regulations and restrictions. Then, a few days after the protests, Canadian Prime Minister Justin Trudeau called the Emergencies Act for the first time since that law came into force in 1988. Part of this campaign aimed to restrict cryptocurrency transactions in order to cut off the flow of money that protesters are using to fund the illegal protests.
For the uninitiated, the Emergencies Act is a decades-old statute that empowers the Canadian government to take extraordinary temporary measures in response to public emergencies when all other existing legislation fails to adequately address the crisis at hand.
“This is about keeping Canadians safe, protecting people’s jobs and restoring trust in our institutions,” Trudeau said.
The value of your transactional freedom
After the enactment of the law effectively authorized banks and other financial institutions to freeze accounts related to the trucker convoy, protest supporters then attempted to circumvent these economic blockades by raising funds through cryptocurrency donations. In response, the Canadian government ordered financial institutions to halt transactions from 34 crypto wallets linked to “Freedom Convoy” anti-mandatory trucker protests. The Canadian government has also blacklisted several dissident bitcoin wallets.
It should be noted that decentralized cryptocurrencies such as Ethereum and Bitcoin cannot be frozen directly on the network. Consequently, the Canadian government has begged centralized entities such as payment processors and crypto exchanges to freeze funds associated with specific digital currency addresses. And while it’s unclear how successful they’ll ultimately be in this effort, many industry watchers believe that’s still a gross overstatement. In a post by popular Twitter users @punk6529 tweeted, “Without transaction freedom, you have no other constitutional rights.”
They also state that in order to disseminate information freely, one might need a website, brochure or advertisement. Similarly, freedom of worship may require the renting of space for worship, the purchase of food and supplies, and the payment of religious officials’ salaries. Put simply, exercising one’s rights can cost money, and the state cannot penalize people and deprive them of those rights without due process, which generally means proving that a particular law has been violated.
Key players from space also chimed in after learning of the passage of the emergency law, including Ethereum founder Vitalik Buterin, who acknowledged the complexity of the issue.
“If the truck drivers block the roads and that shuts down the economy, fine, then blocking the roads is illegal,” Buterin said at a recent industry conference. “But when the government isn’t willing to obey the law … and they just want to talk to the banks and deprive people of their financial livelihood without due process, that’s an example of what decentralized technology can do, which is difficult.”
Why Centralized Exchanges Can’t Protect You and Your Crypto Assets
Regardless of where you fall into the debate, the prevailing view is that sooner or later these attempts at asset freezes will actually happen.
Luckily we have non-custodial platforms and decentralized platforms like portal which allow individuals to act freely without censorship. Portal swaps move verifiable execution of cross-chain contracts to layers 2 and 3, enabling transactions as fast as their centralized alternatives while maintaining Bitcoin’s robust security.
Days after the enactment, Jesse Powell, CEO and co-founder of Kraken, one of the largest crypto exchanges, strongly advocated that people should take their coins out of stashes as a precaution, tweeting, “100% yes it has/will happen and 100 % yes , we will be forced to comply. If you are concerned about this, do not keep your funds with a centralised/regulated custodian. We can’t protect you. Get your coins/cash out and only trade p2p.”
Jesse Powell, who donated a bitcoin to the Freedom Convoy, admitted that his own crypto exchange, Kraken, cannot protect users from crypto freezing by the authorities. Whether it’s Canada or another country, centralized exchanges like Kraken will be “forced” to comply with law enforcement. Users who want greater control over their assets need to get their cryptos out of centralized exchanges.
While centralized exchanges may not protect you from government censorship of your digital assets, some crypto providers are not going down without a fight. In late February, the Ontario Supreme Court ordered self-custodial crypto wallet provider Nunchuk to freeze and disclose information about the assets involved in the anti-mandate Freedom Convoy 2022 movement. Nunchuk is a bitcoin wallet that lets you securely manage your bitcoins from multiple devices.
In response, Nunchuk denied the request, stating, “Dear Ontario Supreme Court, Nunchuk is a self-custodial, collaborative, multisig bitcoin wallet. We are a software provider, not a custodian financial intermediary.