Centralized Finance (CeFi)

What Is Centralized Finance?

Centralized finance (CeFi) encompasses cryptocurrency financial services such as trading, lending, borrowing, and yield-earning opportunities that operate through centralized institutions rather than decentralized protocols. It represents an intermediate approach between traditional finance (TradFi) and decentralized finance (DeFi), combining elements of both worlds.

CeFi platforms primarily facilitate the purchase, sale, and trading of digital assets through centralized exchanges (CEXs). One potential advantage of these platforms is their ability to provide seamless fiat-to-crypto onramps and offramps, which may be more convenient for newcomers.

While CeFi shares some similarities with traditional finance, important distinctions exist. Traditional finance deals with conventional assets like fiat currencies, stocks, and bonds, whereas CeFi focuses specifically on cryptocurrency-based services. What defines CeFi as “centralized” is the presence of governing authorities—typically companies—that control user accounts, execute transactions, maintain custody of user assets, and make operational decisions.

Through CeFi platforms, users can create accounts to send and receive cryptocurrencies, access lending and borrowing services, trade with leverage, and earn interest on their digital assets. These platforms typically implement know-your-customer (KYC) and anti-money laundering (AML) procedures to comply with regulatory requirements, and their activities are increasingly subject to government oversight.

Popular examples of CeFi companies include Binance, Coinbase, and Gemini.

Key Components of CeFi

Most CeFi platforms or services constitute:

• User Registration and Identity Verification – Before accessing services, users must create accounts and complete verification processes. This typically involves providing personal information, completing KYC procedures, identity verification through documentation, and accepting the platform’s terms of service.
• Custodial Asset Management – When users deposit funds on CeFi platforms, they surrender direct control of their assets to the platform, which takes responsibility for securely storing and managing these digital assets. This contrasts with DeFi, where users typically maintain control of their private keys.
• Centralized Transaction Processing – Unlike DeFi protocols that use smart contracts on public blockchains, CeFi platforms process transactions through their own internal systems. This often allows for faster execution but introduces counterparty risk.
• Regulatory Compliance and Security – CeFi platforms must implement comprehensive risk management frameworks, compliance protocols, and security measures that align with financial regulatory requirements in their operating jurisdictions.
• Fee-Based Revenue Model – These platforms generate revenue through various fee structures, including trading fees (typically ranging from 0.1% to 1.5% per transaction), withdrawal fees, interest spreads on lending/borrowing services, and premium feature subscriptions.

The centralized nature of CeFi sacrifices the principle of self-custody—where individuals maintain complete control over their private keys and digital assets—in exchange for convenience. It’s important to note here that the only way to maintain true ownership of your crypto is to hold it in self-custody.

To learn more about self-custody, read our full article on Ledger Academy.