What is CeFi? Understanding Centralized Finance

Centralized Finance, or CeFi, sits between the world of dollars and the world of digital assets. It covers financial services that work with crypto but are run by companies, not decentralized protocols.

If you have bought Bitcoin on a major exchange, opened a crypto interest account, or swiped a crypto debit card, you have already used CeFi. These platforms combine blockchain-based assets with a familiar banking-style experience.

How CeFi works

The core idea in CeFi is custody. In crypto, custody means who holds the private keys that control the funds.

In Decentralized Finance (DeFi), you hold your own keys and interact directly with smart contracts on the blockchain. In CeFi, the company holds the keys. When you deposit money or crypto into a CeFi exchange, you hand over control of those assets. The platform records your balance in its internal system and promises to let you withdraw when you ask.

This is very similar to a traditional bank. When you deposit cash, you do not control the vault. The bank does.

Because a central company is in charge, CeFi platforms can offer features that are hard for pure DeFi to match. That includes things like resetting a forgotten password or stopping a mistaken transfer before it is completed.

Key components of the CeFi ecosystem

CeFi platforms mirror many services you see in traditional finance, but apply them to digital assets.

Order book exchanges

Most large crypto exchanges use a Central Limit Order Book model. This is a digital marketplace where the platform matches buyers and sellers.

• Speed: Orders are matched on the company’s own servers, not directly on a blockchain. This lets trades clear very quickly and at low cost.
• Liquidity: These exchanges usually have deep order books. That makes it easier to trade larger amounts without moving the price too much.

Crypto lending and borrowing

CeFi lending platforms work in a bank-like way. They take deposits from users who want to earn interest and lend these funds to borrowers.

• Rates: In DeFi, smart contracts set rates according to supply and demand. In CeFi, the company sets the rates. It looks at factors such as credit risk, demand from institutional clients, and its own profit targets.
• Collateral: Borrowers usually post crypto as collateral to secure a loan. If the value of this collateral drops too far, the platform may liquidate it, which means selling it to pay down the loan.

Fiat on-ramps

One of the most important roles of CeFi is acting as a fiat on-ramp. This is the setup that lets you link a bank account, debit card, or other payment method so you can convert government money like USD into cryptocurrency.

Without these on-ramps, most people in the United States would struggle to get started with crypto at all.

CeFi vs. DeFi: The core differences

CeFi and DeFi both let you trade, lend, and borrow crypto. The difference is how they are built and who you have to trust.

Trust

In CeFi, you trust people and organizations. You rely on the company to handle user funds honestly, stay solvent, and protect against hacks.

In DeFi, you trust code. You rely on open smart contracts that execute based on written rules, not on a company’s promises.

Regulation and access

CeFi platforms almost always require Know Your Customer (KYC) checks. You must provide personal information and a government ID to use them. This helps them comply with U.S. regulations but can block users who cannot or do not want to provide these details.

DeFi platforms tend to be permissionless. Anyone with a compatible wallet and an internet connection can interact with them, no ID required.

Censorship resistance

Since CeFi platforms are run by companies, they must follow court orders and local laws. They can freeze accounts or block transfers if regulators or law enforcement require it.

DeFi protocols are usually designed so no single party can unilaterally block a valid transaction. In practice, that can make DeFi more resistant to censorship, although front-end websites and infrastructure can still be pressured.

Real-life examples

There are many types of CeFi businesses in crypto, each serving a different role.

• Exchanges: Platforms like Coinjar are the main starting points for most users. They let you buy and sell crypto using an order book model and usually hold assets on your behalf.
• Lenders: These companies focus on lending and borrowing. They may let you deposit Bitcoin or stablecoins like USDC to earn yield or borrow dollars against your crypto.
• Brokerages: Traditional trading apps that add crypto, such as some stock broker apps, are also CeFi. They typically hold the crypto for you and sometimes do not let you withdraw it to a personal wallet at all.

Risks and how to stay safe

CeFi is convenient, but it introduces risks that are different from holding your own keys.

Counterparty risk and insolvency

The biggest risk in CeFi is counterparty risk. That is the risk that the company holding your funds fails.

If a platform misuses customer assets, takes excessive trading risk, or faces a liquidity crunch, it can become insolvent. In U.S. banking, FDIC insurance can cover deposits at insured banks up to a set limit. Crypto platforms usually do not offer that kind of protection.

If a CeFi platform goes bankrupt, there is a real chance customers will not get all of their funds back, or may have to wait through a long legal process.

Regulatory freezes

Because CeFi platforms are controlled by businesses, they can restrict or freeze accounts. They may do this if they detect suspected fraud, receive a legal order, or change their compliance rules.

This means you do not have full control over assets held on a CeFi service. Your ability to move funds depends on the platform’s policies and legal obligations.

Security breaches

CeFi platforms collectively hold large amounts of digital assets, which makes them a major target for cyberattacks.

Leading providers use security measures such as cold storage, multi-signature wallets, and third-party security audits. Even so, history has shown that hacks, insider threats, and operational errors can still cause losses.

How to stay safe

• Diversify: Avoid storing all of your crypto in a single place. Spread your risk across different types of custody.
• Self-custody: For long-term holdings, consider using a hardware wallet or another self-custody solution so you control the private keys.
• Research: Use platforms with a strong, public track record. Look for clear disclosures, robust security practices, transparency about reserves, and compliance with U.S. regulations where applicable.

Why CeFi matters

CeFi plays an important role in the crypto ecosystem. For most people, especially in the United States, it is the first and most familiar point of contact with digital assets.

By offering bank-like features such as customer support, password recovery, and simple links to bank accounts, CeFi lowers the barrier to entry. It helps people who may not be ready to manage private keys or handle complex DeFi interfaces.

DeFi is growing quickly and offers new ways to interact with money. Even so, CeFi remains the main infrastructure that connects traditional finance to blockchain networks and makes crypto usable in everyday life.