A centralized exchange functions much like a traditional stock brokerage: it runs its own matching engine, maintains an internal order book of buy and sell orders, and settles trades on its private ledger rather than directly on a blockchain. Users typically create an account, complete Know Your Customer (KYC) identity verification, and deposit funds into wallets controlled by the company. Because the exchange itself holds the private keys, trading is fast and fees are usually low, but users take on counterparty risk: if the platform is hacked, mismanages funds, or becomes insolvent, deposits can be lost.

Binance, Coinbase, and Kraken remain among the largest CEXs by trading volume and reserves in 2026, listing thousands of markets, including major pairs like Bitcoin, alongside derivatives, fiat on-ramps, and staking or lending products layered on top of the core exchange. To rebuild trust after high-profile failures such as FTX's 2022 collapse, many exchanges now publish periodic proof-of-reserves attestations, cryptographic snapshots showing customer assets are backed one-to-one, though these snapshots capture only a single point in time and do not reveal hidden liabilities.

Regulators have increasingly targeted this custodial model directly: the EU's MiCA framework, fully enforced from mid-2026, and licensing regimes elsewhere require CEXs operating locally to meet capital, custody, and reporting standards. This oversight, combined with mandatory KYC and Travel Rule reporting, is the main trade-off against a Decentralized Exchange (DEX), where trading happens directly from self-custodied wallets without ever handing control of funds to a third party.