Messari describes cryptocurrency exchanges as the industry's 800-pound gorillas: entities that make all the money, interact with all the users, and have their fingers in pretty much every pie. Centralized or decentralized, these digital trading platforms represent the fulcrum of the cryptoconomy, the industry's Central Station where users alight to buy, sell, bet, swap, lend, borrow, stake and save. According to The Block, the total volume across recognized exchanges in 2020 exceeded a cool $1 trillion.

As successful as many exchanges are though, they face serious challenges in the form of regulatory hurdles, opportunistic hackers and rival platforms. There's also the question of whether to add support for a popular but dubious altcoin whose eventual implosion may result in reputational damage for the platform itself. In order for exchanges to remain viable, they must continually face down such challenges with aplomb, refining their infrastructure and security accordingly. Here are the biggest difficulties facing cryptocurrency exchanges in 2021.

Cybersecurity

The absolute number one concern for crypto-asset exchanges is, unsurprisingly, cybersecurity. Every year, exchanges fall victim to sophisticated hacks with a consequent loss of customer funds that can run into the hundreds of millions. Needless to say security processes have vastly improved over the years, with experienced cyber-intrusion analysts helping exchanges minimize breaches and protect customer data. Of course, hackers have a tendency to get smarter and more devious themselves.

Last year, hackers targeted Singapore-based exchange KuCoin and managed to make off with $280 million before laundering the proceeds via various defi protocols. Amazingly, leading crypto exchange KuCoin subsequently managed to recover all of the funds from suspicious addresses using a combination of on-chain tracking, contract upgrades and judicial recovery. It also pledged to use its insurance fund to completely cover any losses incurred by users. Miraculously, through the strength of the KuCoin team, no user sustained a single loss in this incident. The lesson? If a breach does occur, take every step to restore trust. Speaking of which...

Maintaining trust

Trustworthy. Safe. Reliable. Secure. These are adjectives crypto exchanges use to describe themselves, and for good reason: users want to feel like they're in safe hands whenever they open an account or commence trading. Like any financial institution, exchanges have to earn the trust of their customers by offering fair rates and fiat onramps, providing access to in-demand coins, avoiding outages, hacks and regulatory heat, winning at social media, and generally presenting themselves to the world in the best possible light. If crypto exchanges can maintain an unblemished reputation while offering strong UX, they'll attract dedicated traders and retail investors by the boatload.

Satisfying regulators

Regulation is often cited as being key to wider crypto adoption, and while many CEXs are doing their bit to keep regulators satisfied, others are carrying on regardless, cynically playing hide-and-seek with the Securities and Exchange Commission (SEC). That can be dangerous, as BitMEX found out last year: the Hong Kong-based exchange faces an indictment after "serving thousands of customers located in the United States, even after purportedly withdrawing from the U.S. market in or about September 2015."

While not all exchanges are likely to bend over backwards to accommodate regulators, the latter will almost certainly step up their efforts in the years to come, aided and abetted by law enforcement agencies, watchdogs and chainalysis companies.

Seeing off DEXs

Decentralized exchanges (DEXs) handled $23.3 billion worth of volume in December, a massive 36.5% increase on the previous month. Moreover, there's every chance they will more than double that number in January. All of which is to say that decentralized exchanges represent an over-growing challenge to the hegemony of their centralized counterparts.

Non-custodial DEXs like Uniswap, Curve, and SushiSwap let users skip invasive KYC processes (regulators be damned) and swap between cryptocurrencies without having to first transfer tokens to an exchange wallet. As such, they appeal most to the privacy-conscious "not your keys, not your coins" crowd. While centralized exchanges generally offer superior trading efficiency and much greater liquidity, DEXs (and defi protocols more generally) will continue chipping away at their market share.

Coping with heavy trade volume

In recent years, cryptocurrency exchanges have consistently suffered from connectivity issues due to heavy loads, generally during periods of intense volatility. These outages, which can last anywhere from ten minutes to five hours, disrupt the experience of users, some of whom have accused platforms of cynically hitting a kill-switch to manipulate the market. Whatever the case may be, maintaining stability will be a major challenge as more users flock to the cryptosphere. If you thought the market was volatile to this point, you'd better fasten your seatbelt.

Courting mobile-first millennials

In the past, centralized exchanges were pretty much the only show in town if you wanted to buy or sell crypto. Nowadays, there are endless options including banking apps (Wirex, Revolut), payment platforms (PayPal), peer-to-peer marketplaces (LocalCryptos), DEXs and mobile-first investment portals such as Robinhood and eToro, the latter of which are especially popular with millennials. To capture this young demographic, centralized exchanges must continue to innovate, making their mobile applications as slick and user-friendly as possible.

Differentiating themselves

At present, there are over 300 cryptocurrency exchanges vying for your custom. With this kind of competition, no wonder so many platforms get lost in a sea of sameness, struggling to differentiate themselves from their rivals. From the way they look to the coins they support, fees they offer and trading features they develop, exchanges must do all they can to rise above the noise and cultivate a dedicated user base. Otherwise, they risk obsolescence.

Digital asset exchanges have largely served individual investors up to now. But institutions (hedge funds, brokers, banks) are boarding the crypto bus at a rapid rate, and solutions must improve accordingly. Security, speed, liquidity, customer service, UX - these are the frontiers on which CEXs must perform if they are to build on recent successes. Providing they can overcome the myriad challenges, centralized exchanges will remain a mainstay of the expanding cryptoconomy.