The blockchain industry’s promise of transparency and accountability is being undermined by repeated failures of centralized exchanges (CEXs) to comply with regulations. Recent investigations, including one into Korea’s largest exchange, Upbit, highlight a troubling pattern of negligence. As these institutions fall short of basic compliance standards, they risk not only their reputations but also the credibility of blockchain technology as a whole. It’s time to address these challenges and chart a path forward for responsible growth.

 

Jan. 18, 2025 – Korean Authorities are investigating Upbit for alleged violations of the Specific Financial Information Act.⚭ Images generated with AI.

Ben Rogers — Co-founder of VaaSBlock

Ben Rogers is a seasoned authority on blockchain strategy, digital marketing, and business growth. With a proven track record across various industries, he has established himself as a thought leader in the Web3 world. Ben’s extensive experience in transforming businesses from concept to commercialization includes fostering partnerships and implementing innovative strategies that drive exponential growth. He has spearheaded initiatives leading to record-breaking market adoption, token valuations, and industry partnerships within the blockchain sector. His hands-on approach ensures companies are not only technically proficient but also operationally credible and compliant with industry standards. Ben plays a pivotal role in elevating blockchain projects to new levels of credibility and operational excellence, making him a key figure in shaping the future of blockchain governance.

 

Crypto Exchanges: A continuous pattern of Failure.

It is disappointing to see yet another case of a centralized crypto exchange (CEX) falling short of basic expectations.

This week, Korean regulators launched an investigation into Upbit, the country’s largest cryptocurrency exchange, for alleged violations of the Specific Financial Information Act. The charges primarily relate to inadequate Know-Your-Customer (KYC) compliance — a cornerstone of regulatory requirements worldwide.

While Upbit’s alleged infractions might seem small in the grand scheme of things, they are part of a deeply troubling pattern. Centralized exchanges, which are supposed to act as the gateways to the blockchain industry, are repeatedly proving themselves to be irresponsible and reckless. Globally, fines for compliance violations across 10 major crypto exchanges have totaled over $5 billion in recent years, and executives have faced over 30 years of cumulative jail sentences.

This pattern of continuous failure is unacceptable. It’s especially troubling because these failures are not decreasing as the industry matures; they seem to be increasing. Crypto exchanges must ask themselves: how can we expect trust in blockchain technology if the custodians of that technology continually betray it?

A History of Failures

The Upbit investigation is just the latest in a long string of scandals. Across the globe, centralized exchanges have repeatedly drawn regulatory scrutiny, fines, and criminal charges. Here are some of the most high-profile examples:

• Binance (USA): Fined $4 billion for systemic violations of the Bank Secrecy Act, with its CEO facing criminal charges and imprisonment.
• FTX (Global): Imploded in 2022 due to fraud and mismanagement, resulting in billions of dollars in customer losses and multiple executives facing jail time.
• Kraken (USA): Fined for failing to register as a securities broker, highlighting the lack of regulatory compliance even among top-tier exchanges.
• Binance (Australia): Investigated for misclassifying retail clients, exposing users to unnecessary risks and failing to comply with local regulations.
• Other Incidents: From exchange hacks to insolvencies, the industry is littered with examples of negligence and greed.

These failures not only harm investors but also damage the reputation of blockchain technology as a whole. Blockchain was designed to promote transparency, accountability, and trust. Yet, its primary custodians—the exchanges—are often its biggest violators.

Are CEXs feeling above the Law?

Centralized exchanges (CEXs) play a critical role in the crypto ecosystem. They are often the first touchpoint for new users and institutions entering the space. Yet, many of these companies operate as if they are exempt from the rules. There are several reasons why CEXs repeatedly fail to comply with regulations:

1. Profit Over Principles: The relentless pursuit of short-term gains drives exchanges to cut corners, compromising compliance and security.
2. Regulatory Arbitrage: Many exchanges establish operations in jurisdictions with lax oversight, assuming they can evade global standards.
3. Lack of Accountability: The decentralized ethos of blockchain has, ironically, allowed some centralized entities to believe they can operate without scrutiny.

This behavior is not sustainable. The longer exchanges continue to operate irresponsibly, the harder it will be for the industry to gain legitimacy.

Can CEXs actually follow the Rules?

The real question isn’t whether crypto can be saved—it’s whether centralized exchanges can follow the rules. The evidence so far is discouraging. While some exchanges have taken steps to improve compliance, the overall culture remains troubling.

Regulatory fines and jail sentences should be deterrents, but they often aren’t. Instead, these penalties are seen as the cost of doing business. This attitude undermines the credibility of the entire industry. If CEXs want to survive and thrive, they must:

1. Adopt a Culture of Compliance: Compliance shouldn’t be an afterthought. It must be embedded in the DNA of every exchange.
2. Invest in Solutions: There are countless tools and services available that make compliance easier. From KYC platforms to fraud detection systems, the technology exists—the willingness to use it doesn’t.
3. Lead by Example: The biggest players in the space must set the standard for others to follow. When leaders fail, the industry fails.

The survival of CEXs depends on their ability to adapt. If they don’t, decentralized alternatives may eventually replace them.

A Path Forward – Tools and Services to drive change.

The good news is that solutions exist. The technology and expertise required to make CEXs responsible and compliant are readily available. Companies like VaaSBlock are leading the charge by offering tools that make it easy for exchanges to do better.

At VaaSBlock, our RMA certification provides a comprehensive framework for assessing the credibility of blockchain projects. Exchanges that earn the RMA badge demonstrate a commitment to transparency, governance, and compliance. Beyond VaaSBlock, the market is full of tools and services that can help exchanges:

• Fraud Detection: Platforms that use AI to identify suspicious transactions in real-time.
• Compliance Solutions: KYC and AML tools that ensure exchanges meet regulatory requirements.
• Training Programs: Initiatives to educate employees about compliance and ethical business practices.

The resources are there. The money is there. What’s missing is the will to act.

“There is no excuse for this to be continuously happening” said Ben Rogers, CEO of VaaSBlock, “These companies are well-funded and have talented teams. The only possible explanation is culture, and it’s time for that to change.”

Conclusion: A Call to Action

The blockchain industry is at a crossroads. The original promise of blockchain—transparency, accountability, and decentralization—is at risk of being overshadowed by the failures of centralized exchanges.

The time for excuses is over. CEXs must step up and take responsibility. They must invest in compliance, adopt better practices, and lead by example. The survival of the industry depends on it.

If exchanges don’t change, the consequences will be severe. Trust will erode further, and the adoption of blockchain technology will stall. But if they rise to the challenge, they can rebuild trust and usher in a new era of credibility for blockchain.

The tools are there. The time is now. It’s up to the exchanges to decide which path they will take.

About VaaSBlock

⚭ This article has been co-created by VaaSBlock Consulting Team and our LLMs.

ℹ Sources: coinspeaker.com | justice.gov | thecorporategovernanceinstitute.com | sec.gov | asic.gov.au