Earlier this week, decentralized cryptocurrency exchange CryptoBridge abruptly announced that it was shutting shop, leaving just two weeks for its customers to retrieve their funds. Around the same time, the Waves DEX also shut down to resume operations as a hybrid exchange.
While Waves ostensibly decided to “merge all the infrastructure teams” together and focus on one product, CryptoBridge went out of business completely. The decentralized platform cited market conditions and increased regulations as driving factors for its closure. So, should other crypto trading platforms, decentralized or not, be worried?
DEXs and the regulatory uncertainty surrounding them
DEXs are cryptocurrency exchanges that allow users to retain ownership of their funds and private keys. Specifically, they provide peer-to-peer services that allow transactions between two interested parties directly on the blockchain.
This feature distinguishes DEXs from centralized exchanges — which see significantly more use, accounting for more than 99% of the global cryptocurrency trade volume. Unlike decentralized platforms, centralized exchanges (such as Coinbase, Kraken, Binance, Bittrex, etc.) act as middle men, connecting people willing to trade cryptocurrencies while holding their assets and private keys on company-owned wallets.
Related: Can Crypto Exchanges Ever Be Truly Decentralized?
While the majority of cryptocurrency traders still have an easier time trusting a third party with their private keys, DEXs offer some unique benefits over centralized exchanges, namely security, since they rely on smart contracts instead of servers. Another important advantage is anonymity and lighter Know Your Customer requirements — at least, that was the case until recently, as CryptoBridge mentioned strict regulations as part of the reason for its closure.
Nevertheless, compliance is not an entirely new term for DEXs. As the phenomenon rose in popularity last year, many well-known cryptocurrency exchanges like Binance and Huobi decided to use their brand to launch their own decentralized marketplaces while applying the same compliance principles, which are increasingly important for keeping crypto trading juggernauts afloat against the backdrop of regulatory scrutiny.
Zachary Kelman, managing partner at law firm Kelman PLLC, told CryptoX that there is a lot of confusion around DEXs because “most people tend to think of complex organizational structures simply as publicly identifiable brands, and in turn overlook the underlying legal reality.” He went on to add:
“For example, people may say ‘Did you hear what happened to Bittrex?’ but it is not clear whether they are talking about a US-based corporation, a Maltese entity, or the Liechtensteinian company currently operating its international exchange. This situation becomes more confounding when applied to DEXs.”
A properly organized DEX, Kelman continued, “is not a corporate entity, a foundation, or even a group of people,” but a “computer code.” He elaborated:
“There are secondarily liable parties, like the web hosts, and perhaps more directly liable parties, like the creators of the DEX or the inventors and profiteers of some kind of DEX-underlying asset, but at some point, a DEX can enter into a sort-of ‘regulatory twilight zone’ where it is not clear whom to hold responsible for regulatory non-compliance. Non-lawyers typically think of companies as pure brands and can have a difficult time grappling with this reality.”
A cautious DEX that expected regulatory scrutiny from the get-go
CryptoBridge was founded in July 2017 as “a gateway which provides access to BitShares: a high performance, scalable blockchain” that, in turn, allows users to trade established cryptocurrencies as well as “up-and-coming tokens and altcoins.” To fund the development of the software platform, CryptoBridge launched a native token called BridgeCoin, allegedly distributing 50% of all trade revenue to its stakeholders.
The company said it intentionally avoided holding an initial coin offering due to the regulatory difficulties it would have posed in the United States. “Though we are not from the US we would still like to stay legal under most jurisdictions and a public mineable cryptocurrency is exempt from such regulation,” the CryptoBridge team wrote.
In October 2019, the exchange announced that all its new and existing and customers were required to submit user verification before continuing to deposit and withdraw funds in order to protect both themselves and CryptoBridge from “being held responsible for any illegal intentions or money laundering activities.” The statement read:
“We are facing the 5th EU Anti-Money Laundering Directive (AMLD5) and will adjust our gateway services to pave the way for CryptoBridge moving forward.”
That month, CryptoBridge’s website was visited about 320,000 times, with the majority of clicks coming from Russia and Bulgaria, data provided by Similar Web shows. Then, on Dec. 2, the DEX announced that all of the firm’s services and servers will be terminated within two weeks. Users will be able to withdraw funds from the exchange until Dec. 15 — the last day of operation. The statement reads:
“Please note that user verification is required by EU law for all withdrawals. We highly recommend that you start the process as early as possible as verification can take a few days.”
The company cited market conditions, increasingly strict regulations and lack of funds as reasons for its decision to close and not pursue further development. As a CryptoBridge spokesperson confirmed to CryptoX, the exchange is headquartered in Copenhagen, so once AMLD5 began including wallet custodians into its scope of regulation, it was forced to terminate operations. Additionally, there were other reasons according to the spokesperson:
“As our gateway decentralization efforts and resources were insufficient to materialize a solution before January 1 2020 on account of greatly reduced trading volume and listings, and with much stricter AML regulation to take place which we explicitly didn’t like, our decision was to stop operations.”
‘Hard closure’: Users are left angered as CryptoBridge erases social media
After the announcement was made, CryptoBridge immediately shut down all of its social media channels. As the CryptoBridge spokesman explained to CryptoX, the move was advised by the exchange’s legal team:
“Suggestion from the legal team was to minimize negative publicity and efforts required to contain it on social media which was primarily being used as one-way method of informing the public, but in situations like this it’s hard to filter out the FUD as opposed to real issues requiring assistance. We’ve therefore decided to focus our efforts on the most appropriate way of handling support which is through our wallet. Lack of resources due to downscaling further supported this decision.”
The decision to precipitously delete all social media channels resulted in noticeable distress among users while also spawning a number of impersonators on Twitter. For instance, an account named CryptoBridgeEU began posting messages that conflicted with the platform’s original announcement, claiming that CryptoBridge’s closure was only temporary. As CryptoBridge’s representative told CryptoX, the team has already reported the account, adding that “Email and support tickets through the official wallet are the remaining methods of communication.” However, Kelman told CryptoX that, to him as a lawyer, CryptoBridge’s decision making seems indicative of other underlying factors:
“When I see this I am immediately concerned that the project might have deliberately exposed itself to regulation with which it cannot or does not wish to comply, and its promoters see themselves as liable for it and are either panicking or attempting to do the best they can to wind up the operations.”
Moreover, users report having problems with withdrawing procedures. CrpytoBridge trader and Reddit user u/Apollohasgas told CryptoX that they cannot transfer their funds out of the platform:
“About 6 months ago I logged on to Cryptobridge and deposited about $800.00 via BTC (In addition, I had maybe $500.00 left in the account from prior trades). After accepting my deposit, I purchased some cryptocurrencies. Subsequently, when I tried to transfer my funds out of CB, I was only then informed that I must comply with their new KYC before any funds would be relinquished.”
According to the trader, enacting Know Your Customer and Anti-Money Laundering procedures “was not an oversight but clearly intentional on Cryptobridge’s part.” After u/Apollohasgas provided CryptoBridge with their personal information including full name and residential address as well as scans of their driver’s license and passport, the platform’s administration requested a copy of u/Apollohasgas’ latest tax return. “I did not comply with that request,” the trader told CryptoX, adding:
“I then contacted CB support asking for help and expressing my frustration that so much of my personal information was being requested. I never heard back from them. Cryptobridge is a scam. I have come to learn that many in the crypto community are aware of this.”
u/Apollohasgas also suggested that some users will just accept that their funds are being confiscated “rather than supply the requested personal information.” Indeed, another Redditor, u/KeepitRaul, told CryptoX that he chose not to withdraw his funds. u/KeepitRaul then went on to say that the manner in which CryptoBridge has “left everyone in the lurch” made him think the entity is “something close to an exit scam,” but clarified:
“Maybe a ‘hard closure’ would be a better term. There is still enough time to get your funds off but I have read that verification is a long process that takes time (they even mention 2 days in their notice) and they’ve probably chosen this route so that many people, like myself, don’t bother.”
DEXs are still attractive, but implementation is tricky
According to experts, CryptoBridge’s departure marks a scenario in which other trading platforms are left in danger of facing similar symptoms. Cal Evans, founder of compliance and strategy firm Gresham International, surmised:
“The closure of CryptoBridge is a sign that the new EU regulations are having an impact. If the new collection of data is married with the storage of data (GDPR) this becomes a massive undertaking for a smaller firm. It also removed the anonymity from DEX exchanges which, in essence, kills their business model.”
Similarly, Kelman told CryptoX that he “wouldn’t be surprised if we see similar news given the difficulty of successfully going all the way from the idea of a DEX into the DEX ‘regulatory twilight zone’ without getting caught in the headlights of anxious regulators.” He did, however, say that a “properly implemented DEX” still has a lot of potential to dominate crypto markets.
Indeed, DEXs continue to gain popularity in the crypto space. Last week, major U.S. cryptocurrency exchange Poloniex purchased the largest decentralized exchange on blockchain network Tron (TRX), which will now operate under the new name “Poloni DEX.” A month prior, controversial British-American entrepreneur John McAfee launched his own DEX.
Meanwhile, Waves has relaunched by shutting down Waves.DEX and moving all activities to Waves.exchange, which is marketed as a “hybrid” platform. The new exchange is allegedly non-custodial, meaning that user funds are not held on company-owned wallets — just like with most DEXs. Notably, the company claims that it “has no plans to introduce KYC for trading or cryptocurrency transactions.”
CryptoBridge’s team, on the other hand, does not have any plans for the future. “Current team is planning to disband after the termination process is over,” the exchange’s representative told CryptoX.
