Centralized crypto exchanges: what they are and how they work
A centralized crypto exchange is a company-run platform to buy, sell, and store crypto. You do not control the keys, and withdrawals can be frozen.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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- US exchanges must verify your identity.
- The exchange holds your crypto, not you.
- Withdrawals can be frozen.
You open an account, prove who you are, and move in dollars or crypto. The company runs the order book and holds assets.
How does a centralized exchange work?
A centralized exchange runs the market. It matches orders in an order book or quotes prices itself, and it holds customer assets.
How do you use a centralized exchange?
In the United States, exchanges that trade crypto for customers usually must register with FinCEN and follow Bank Secrecy Act anti-money-laundering rules. You provide a government ID before you trade.
What are the risks of centralized exchanges?
The company controls the private keys. You have an account balance, not a direct claim on a coin, and the exchange can freeze withdrawals. Crypto is not FDIC insured.
How is it different from a DEX?
A decentralized exchange, or DEX, is software that lets users trade from their own wallets. The DEX does not hold your coins; it connects you to a smart contract or other users. A self-custody wallet holds your keys and lets you send and receive crypto.
Frequently asked questions
Usually no. Customer crypto is not FDIC insured like a bank deposit.
Buying with US dollars is not taxable by itself, but selling or trading one crypto for another can create a capital gain or loss.
Usually yes, but use the right network and address because a crypto transfer is generally irreversible.
The exchange may freeze withdrawals while it reviews your identity or a suspicious transaction. Contact support with the documents it asks for.
