The frenzied pace of development of cryptocurrency has given rise to an entirely new economic environment. At the center of this environment are crypto exchanges, websites that enable consumers to purchase, sell, exchange, and store cryptocurrencies. The growth has been so unbridled that within a ten-year period, exchanges went from being specialist web noticeboards to multi-billion-dollar institutions providing conduits for cross-border flows of capital.
But as the industry evolves, a basic question has been posed: Are cryptocurrency exchanges banks, or are they technology businesses? This is no theoretical question—it is at the very core of regulation, trust, innovation, and digital money's future.
The Special Role of Crypto Exchanges
In contrast to brokerages or conventional banks, crypto exchanges are hybrid institutions. They are not only digital asset trading platforms, but also custodians of customer funds and technology infrastructure enabling decentralized transactions. It is this multi-role nature that makes it challenging to place them under current financial or technology regulations.
Essentially, crypto exchanges are playing two crucial functions. One, they are creating liquidity for the cryptocurrency space, so buyers and sellers can trade. Two, the majority of exchanges provide custody functionality, storing cryptocurrency in wallets on behalf of users that do not necessarily possess the technical sophistication to store private keys securely. These two functions—facilitating and providing custody—put them at the nexus of tech and finance.
The Argument for Treating Exchanges as Banks
It is one camp that holds the notion that crypto exchanges are more like banks than technology firms. This is based on the type of services they provide and the risk they take.
Banks are secure guardians of customers' funds. They maintain deposits, carry out transfers, and offer financial infrastructure. Likewise, most crypto exchanges are custodians of digital assets as agents for tens of millions of customers. This positions them as guardians of value with a responsibility to keep clients' money secure from theft, hacking, or mismanagement.
The downfall of big exchanges like FTX in 2022 brought out the vulnerability of customer trust when there is no sufficient security. Customers who held exchanges as havens for their money suddenly could not cash out. The bank run analogies are inevitable. Bank depositors panic when banks fail. Users panic equally when exchanges fail.
It is due to this that regulators in various jurisdictions believe that crypto exchanges must be bank-like regulated, including audits, reserve capital requirement, and strict customer protection policy. With the bank-like regulation of exchanges, governments would like to promote financial stability as well as avoid possible disasters for retail investors.
The Case for Treating Exchanges as Tech Companies
On the contrary, widely held is the notion that crypto exchanges are in fact technology firms, rather than banks. They are, in practical terms, constructed on software platforms, algorithms, and digital infrastructure. Their worth lies in technological innovation and not in balance sheets or conventional finance services.
Technology firms are characterized by adaptability, scalability, and pace of innovation. Crypto exchanges are not different. They're constantly introducing new products—derivatives trading, staking, NFT marketplaces, etc.—copying the energy of the tech industry. To force them into the strictures of rules on banks threatens to crush the same innovation that makes them appealing.
In addition, exchanges do not hold customer deposits. Decentralized exchanges (DEXs) like Uniswap or PancakeSwap are software only. They never hold assets; they merely connect buyers and sellers directly via smart contracts. There is no need to hold such platforms to the same level as banks, as they are neither centralized nor custodial like banks.
The "tech company" approach puts the need for growth first. If exchanges are handled much like banks, tiny startups will never survive the cost of compliance. This may result in a couple of big players controlling the industry and stifling competition—a reversal of the decentralized ethos of cryptocurrency itself.
Finding the Balance: A Hybrid Identity
The truth is, crypto exchanges are neither strictly banks nor strictly tech businesses. They exist somewhere in the middle, and mature regulation must fill this middle ground. Labeling them squarely in one area overlooks their complexity.
For instance, custody-holding centralized exchanges may have banking-like regulation to ensure that customers are suitably protected. Decentralized exchanges that never handle money, by comparison, should be regulated like software platforms and even more on code security, user transparency, and tech audits than financial regulation.
This combined identity is not a weakness but a characteristic of the crypto sector. The task is to create regulatory regimes that balance both aspects—financial fiduciary and technological momentum—without immobilizing either.
The Role of Trust and Transparency
No matter whether they are viewed as banks or technology firms, one thing is certain: trust is the blood of crypto exchanges. Customers deposit not only funds but trust in platforms' safety and stability. Any violation of that trust—be it due to hacks, poor management, or dirty dealing—destroys the entire system.
Transparency is thus the order of the day. Exchanges need to reveal how they store money, if it is commingled, and how they manage risk. Proof-of-reserves audits, where exchanges confirm that they do indeed have the assets they are representing, are becoming more important by the day. Such practices are reflective of finance and technology's levels of transparency and imply that exchanges need to borrow the best of both disciplines' practices.
The Global Regulatory Context
Countries handle the regulation of crypto exchanges in highly divergent ways, demonstrating how there is no consensus.
Exchanges are treated by regulators as financial intermediaries in the United States and have AML and KYC obligations. However, the lack of a clearly delineated national system generates uncertainty.
Conversely, Singapore and Switzerland use the more balanced approach, whereby exchanges are being treated as both financial service providers and as technology innovators. These places concentrate on regimes of licensing that enable exchanges to stay under specified safeguards and support innovation.
Lack of international harmonization makes it difficult for international transactions. Should they be regulated by banks in one country and viewed as software platforms in another location? This combination of regulation makes it more complicated to operate and brings questions about the future of cross-border crypto markets.
Technology-Driven Risks and Responsibilities
One of the reasons exchanges can't be allowed to be treated like regular banks is because of the specific technology risks they have. Cyber attacks, smart contract exploits, and the threat of system failure are problems specific to the virtual space. In contrast to banks, that have to contend with physical locations and fiat-based systems, exchanges have to continually update their guard against hacking.
Exchanges' digital-first model also implies they run 24/7 across borders. Access worldwide is an asset, but there are risks as well. A technical flaw or exploit can propagate to millions of users globally in seconds, generating harm infinitely larger than a single-country banking calamity.
Therefore, though financial regulation is necessary, treating exchanges as banks without fixing their techno-vulnerabilities overlooks the larger picture. Regulations need to include cybersecurity protocols, code audits, and digital resilience protocols specific to the crypto ecosystem.
Innovation vs. Regulation: The Ongoing Tension
The fundamental tension in this argument is innovation versus regulation.
If exchanges are handled like banks, they can stabilize but lose their nimbleness. Innovation might be throttled, and the crypto market would start to resemble the traditional financial system—the one it was trying to shake up.
If exchanges are handled as pure tech firms, innovation would bloom, but investor risk could run amok. With no oversight, the risk of scams, hacks, or crashes is ever-present.
The challenge for regulators, industry actors, and users themselves is striking the balance—a model that benefits innovation while safeguarding users. This involves not merely regulation but collaboration between governments, technology developers, and financial experts.
Hybrid Reality: More Than Labels
Attempting to force exchanges into one quadrant does them a disservice. In reality, crypto exchanges are hybrid institutions, possessing characteristics of both banks and technology companies.
They are like banks in that they possess and shift value.
They are like technology companies in that they construct software ecosystems.
They are also like marketplaces, matching buyers with sellers.
This hybridity necessitates a new category of regulation, one that accepts their special risks and duties. It also underscores the fact that exchanges will not all shift in the same manner. Some will tend toward bank-like models, and others will remain unapologetically decentralized tech.
Trust, Transparency, and User Protection
Trust cannot be compromised in both banking and technology. Trust is even more tenuous for crypto exchanges. The anonymity of the crypto world makes scams and rug pulls routine. Without adequate transparency, exchanges can lose credibility.
Practices such as proof-of-reserves audits are becoming industry norms, in which exchanges cryptographically attest to holding assets they say they have. Being clear about how funds are being segregated, how wallets are being handled, and how risks are being hedged is becoming an essential expectation.
Here, exchanges need to marry the accountability of banks with the transparency of open-source software communities.
Global Regulatory Contrasts
The question of classification also plays out differently by jurisdiction:
United States: Regulatory bodies are divided—some consider crypto to be securities yet others commodities. This piecemeal strategy leaves exchanges uncertain.
European Union: The Markets in Crypto-Assets (MiCA) regulation gives a systematic framework, treating exchanges as partially financial service providers without ignoring their tech function.
Asia (Singapore, Japan, South Korea): These nations have a better-balanced strategy, enforcing licensing and conformity while promoting innovation.
This patchwork of international rules is a sign of the unresolved debate. Exchanges that wish to serve globally have to thread their way through conflicting frameworks, driving up costs and legal exposure.
The Technology Risks No One Can Ignore
Exchanges are similar to banks, but they have risks specific to online platforms. Hacking is the number one risk, with billions stolen by cyberattacks in the last decade.
Another distinct challenge is smart contract risk. A bug in a decentralized exchange's code can create exploits whereby attackers drain millions within minutes. Banks are not subject to such risks.
Additionally, the crypto markets' 24/7 nature requires exchanges to have uptime and security 24/7, not like banks that can "close" on the weekend. This renders operational resilience a technological imperative, not merely a regulatory box to be checked.
The Innovation-Regulation Tug-of-War
The crypto industry represents the time-honored conflict: innovation and regulation.
Excessive regulation threatens to make exchanges bureaucratic organizations indistinguishable from traditional banks. Insufficient oversight threatens another Mt. Gox or FTX catastrophe.
Finding the balance point demands regulators fluent in both finance and technology. It demands exchanges accepting a self-regulatory culture, establishing standards before governments step in.
Looking Ahead: What the Future May Hold
The future of crypto exchanges won't be a straight line. Rather, two general trends could occur:
Bank-like exchanges: Well-regulated, custodial sites providing finance products such as lending, insurance, and savings accounts. These could attract institutional investors and risk-averse users.
Tech-driven exchanges: Decentralized sites that focus on independence, privacy, and innovation. These will appeal to users who desire control and are willing to handle greater risk.
Both models can coexist, and there can be a layered ecosystem. With time, users might even switch between them based on requirements.
The Future of Crypto Exchanges
As crypto matures, exchanges will develop in two ways. Some will act more like banks, with custodial services, lending, and bundled financial products under rigorous regulation. Others will follow the decentralized philosophy, being purely software protocols with users holding custody of their assets.
Both types of models can exist side by side, serving various users. Users who think first of safety and trust might opt for bank-like exchanges with robust protections. Users who care about decentralization and autonomy might prefer technology-based platforms where control stays in their own hands.
In the end, the variety of models might make the ecosystem stronger, providing choice for users and promoting innovation while assuring stability.
Conclusion: A New Category of Its Own
So should crypto exchanges be viewed as banks or tech firms? The answer is both—and neither. They are a new type of institution, one that combines financial custodianship and technological innovation.
Instead of trying to fit them into old-fashioned paradigms, the world needs to understand their hybrid nature and create bespoke regulations that balance trust, transparency, and innovation.
In some respects, the debate itself puts the revolutionary character of crypto on display. It forces us to re-examine our traditional categories and to reconsider money, technology, and trust in the age of the internet. Crypto exchanges are not merely marketplaces—they are architects of a new financial frontier.
