What is CeFi? Understanding Centralised Finance

Centralised Finance, or CeFi, is the bridge between traditional money and digital assets such as Bitcoin and Ethereum. It describes financial services that operate in the crypto sector but are run by companies that control key decisions and infrastructure, instead of decentralised protocols.

If you have ever bought Bitcoin on a major exchange, deposited funds into a crypto interest account, or used a crypto card linked to your balance, you have probably used CeFi. These platforms combine blockchain-based assets with a familiar user experience, including customer support and tools that resemble online banking.

How CeFi works

The defining feature of CeFi is custody. In crypto, custody refers to who controls the private keys that give access to the funds.

In Decentralised Finance (DeFi), you hold your own keys and connect your wallet directly to smart contracts (computer programs) on the blockchain. In CeFi, the company holds the keys. When you deposit money or crypto into a CeFi platform, you give that company control over your assets, in line with their custody and safeguarding arrangements. They record your balance and commit to processing deposits and withdrawals according to their terms of service.

This is similar to a traditional bank account. When you deposit cash into a bank, the bank controls the money, then updates your balance in its system.

Because a central company operates the service, it can provide features that purely decentralised protocols often cannot, such as password resets, human customer support and, in some cases, where possible, reversing mistaken transactions before they are final.

Key components of the CeFi ecosystem

CeFi platforms mirror many services found in traditional finance, then apply them to digital assets like Bitcoin, Ether or stablecoins.

Order book exchanges

Most large centralised cryptocurrency exchanges use a Central Limit Order Book model. This is an electronic marketplace where buy and sell orders are placed and matched by the platform.

• Speed: Trades are matched on the company’s internal systems rather than directly on a blockchain, so they are usually fast and have relatively low trading fees.
• Liquidity: Major exchanges often have deep markets. This makes it easier to buy or sell larger amounts of an asset, although big trades can still move prices, especially in less popular markets.

Crypto lending and borrowing

Some CeFi platforms offer lending and borrowing services. They accept deposits from users who want to earn a return, and they lend those funds to other users or institutional clients.

• Rates: In CeFi, interest rates are set by the company. They may consider market conditions, credit risk, institutional demand, and their own costs and margins. Rates can change over time and are not guaranteed.
• Collateral: Borrowers usually provide crypto as collateral. If the value of this collateral falls below a set threshold, the platform may sell some or all of it to repay the loan. This process is called liquidation. It can happen quickly in volatile markets.

These services can be complex. Returns are not risk free, and there is a possibility of losing part or all of your funds.

Fiat on-ramps

One of the most important roles of CeFi is to act as a fiat on-ramp and off-ramp. This is the system that lets you connect a bank account or card in order to convert government-issued currency, such as euro (EUR) or United States dollar (USD), into cryptocurrency and back again.

In practice, this means you can:

• Deposit EUR from your bank account to a CeFi platform, then use it to buy crypto.
• Sell crypto for EUR, then withdraw those funds to your bank account, subject to the platform’s policies and any applicable regulations.

CeFi vs DeFi: The core differences

CeFi and DeFi both aim to let you trade, lend and borrow using crypto, but they are built on different ideas.

Trust

In CeFi, you trust people and institutions. You rely on the company to hold your funds safely, to keep accurate records and to process your transactions according to its rules.

In DeFi, you mainly trust code. You interact directly with smart contracts that run on a blockchain. These contracts follow predefined rules, although they may still contain bugs or design weaknesses.

Regulation and access

CeFi platforms usually carry out Know Your Customer (KYC) and Anti-Money Laundering (AML) checks. You are often required to provide identification documents and personal information. This can support compliance with legal and regulatory obligations in the European Union and other regions, but it may also limit access for some people.

Most DeFi protocols are permissionless. In general, anyone with a compatible wallet, an internet connection and the required crypto can interact with them. However, certain front-end websites or apps may restrict access based on jurisdiction.

Censorship and controls

CeFi platforms are operated by companies that must comply with laws and lawful orders from authorities in the countries where they operate. This means they may:

• Freeze accounts or block withdrawals in certain situations.
• Restrict access to specific assets or services for regulatory reasons.
• Report suspicious activity to regulators or law enforcement.

Many DeFi protocols are designed so that no single party can directly block a transaction on the blockchain once it is valid and broadcast. However, governments and regulators can still influence how people access these protocols, for example by supervising service providers or front-end interfaces.

Real-life examples

The crypto sector includes many CeFi providers that focus on different services. The following examples are for illustration only and are not recommendations.

• **Exchanges:**Centralised exchanges like CoinJar usually act as the first contact point for people who want to buy or sell crypto using EUR or other fiat currencies.
• Lenders: These companies offer credit products and interest-bearing accounts. Users can deposit assets like Bitcoin or certain stablecoins to earn a return, or borrow cash or stablecoins against their crypto collateral. These services involve counterparty, market and liquidity risks.
• Brokerages and trading apps: Some traditional brokerage or trading apps have added crypto exposure. In many cases, they hold the underlying asset or an equivalent product on your behalf. You may not be able to withdraw the crypto to a private wallet, and you might only gain price exposure rather than full ownership on-chain.

Always review the terms, conditions and legal structure of any service you use, including whether you own the crypto directly, indirectly, or not at all.

Risks and how to stay safe

CeFi can be convenient and familiar, but it introduces specific risks that you should understand before using these services.

Counterparty risk and insolvency

The main risk in CeFi is counterparty risk. This is the risk that the company holding your funds fails or does not meet its obligations.

If a platform mismanages user assets, suffers large trading losses or faces liquidity problems, it could become insolvent. In such cases:

• Users may not be able to withdraw funds as normal.
• You may become an unsecured creditor in a bankruptcy process.
• You might recover only part of your assets, or in some cases nothing at all.

In many jurisdictions, including parts of Europe, crypto deposits on CeFi platforms are not covered by the same deposit guarantee schemes that protect bank deposits up to a certain limit. You should not assume any protection.

Regulatory freezes and restrictions

Because CeFi platforms act as central gatekeepers, they can:

• Temporarily or permanently freeze accounts, for example during investigations into suspicious activity.
• Limit transfers to certain countries, individuals or services based on sanctions or regulatory requirements.
• Request additional information about the source of funds or purpose of transactions.

You retain a legal claim to your assets subject to the platform’s terms and applicable law, but you do not have the same direct control as you would with a self-custodied wallet.

Security breaches

CeFi platforms often store large amounts of digital assets. This makes them a target for hacking, fraud and insider abuse.

Many reputable providers use security measures such as:

• Cold storage, where most funds are kept offline.
• Multi-signature wallets and internal controls.
• Regular security audits and monitoring.

Even so, security breaches can and do occur. Losses may or may not be covered by the platform, insurance or other arrangements. It is important to check what protections, if any, apply to your account.

How to stay safe

You cannot remove all risk, but you can take steps to manage it.

• Diversify: Avoid keeping all your crypto in a single place. Spread your assets across different providers and, if appropriate, across different types of storage.
• Self-custody: For long-term holdings, consider using a hardware wallet or other self-custody option where you control the private keys. Make sure you understand how to store and back up your recovery phrases securely.
• Research: Review a platform’s history, regulation, security practices, terms of service and proof-of-reserves or similar disclosures. Be cautious of offers that promise unusually high or fixed returns, especially if the underlying risks are not explained clearly.

Why CeFi matters

CeFi plays an important role in today’s digital asset market. For many people in Europe and around the world, it is the first and most practical way to gain exposure to cryptocurrencies.

By providing features such as customer support, password recovery, familiar user interfaces and bank account connectivity in EUR and other currencies, CeFi can make crypto more accessible to people who are not comfortable managing their own wallets and private keys.

DeFi continues to grow and innovate, offering alternative models that rely more on smart contracts and less on central intermediaries. Even so, CeFi remains a key part of the infrastructure that links blockchain-based assets with existing financial systems, payment networks and everyday use.

Both CeFi and DeFi carry risks. Understanding how they work, and how they differ, can help you choose the approach that best matches your needs, experience and risk tolerance.