Author: Luoluo; Source: Beehive Tec
On March 17, the cryptocurrency trading platform OKX announced the reason for suspending its Web3 DEX aggregator service - it discovered that the North Korean Lazarus hacker group was abusing its DeFi service, and after consulting with regulators, it proactively suspended the service.
The next day, another top platform Binance upgraded its early project "Discoverer" Alpha in the Web3 wallet product to version 2.0, directly integrating it into the CEX main site, allowing users to purchase cryptocurrencies directly using crypto assets.
"Up and down", the two major giants in the cryptocurrency industry have once again opened up the discussion on whether Web3 products should introduce KYC, and how DEX and DeFi should deal with the mainstream country's regulation.
In the battlefield of on-chain asset infrastructure, the strategies of the two giants not only reflect their grasp of market trends, but also reveal the deep game between regulation and technology in the cryptocurrency industry.
OKX proactively suspended DEX service "after consulting with regulators"
On March 11, Bloomberg reported that European cryptocurrency regulators were reviewing whether OKX was used by hackers to launder some of the funds stolen from Bybit. Although OKX quickly responded that it was not under investigation and emphasized the technological neutrality of its DEX aggregator, the impact of the incident is still brewing.
On March 17, OKX announced that after consulting with regulatory authorities, it had proactively decided to suspend its Web3 DEX aggregator service, because it discovered that the North Korean Lazarus hacker group was abusing its DeFi service. OKX stated that this move was to implement technical upgrades and prevent further abuse, and reiterated that its Web3 services are not custodians of client assets.
When the news came out, many cryptocurrency users "cried foul" for OKX, believing that the regulators were suppressing North Korean hackers, and OKX, as a third-party technology provider, became the "scapegoat" of the hackers, like "antivirus software accidentally deleting system files".
Suspension of OKX Web3DEX aggregator service
Indeed, OKX's Web3 DEX aggregator is essentially a technical tool, not a contract or protocol, nor is it an asset custodian. As a provider of Web3 products and services, OKX may now face a dilemma between compliance and technology.
On the one hand, as the first global exchange to receive pre-authorization for the EU's MiCA (Regulation on Markets in Crypto-assets), OKX is trying to establish an industry benchmark through compliance; on the other hand, although its Web3 wallet and related functions strive to maintain the "decentralized" tradition of the industry, including non-custodial attributes and the ability for users to directly access the chain without applying for the OKX exchange, this technological neutrality positioning makes it relatively passive in dealing with hacker attacks.
However, the regulatory authorities are clearly not satisfied with this "technological neutrality" explanation.
Taking the EU's MiCA as an example, the regulatory scope of this regulation covers all "crypto assets" and related services. Although DeFi and DEX are known for their decentralized nature, MiCA has not yet clearly defined the boundary between "fully decentralized" and "partially decentralized", but the regulation seems to have no intention of turning a blind eye to them.
According to the definition of MiCA, MiCA will view any entity providing crypto asset-related services as a CASP (Crypto Asset Service Provider), including DEX and DeFi protocols. MiCA emphasizes that regardless of the technological form (centralized or decentralized), as long as it involves the issuance or trading of crypto assets, it must comply with the relevant regulations.
OKX's suspension of service also reflects the vulnerability of decentralized Web3 products under the current regulatory framework. Although OKX emphasizes that its Web3 wallet is not an asset custodian, the regulatory authorities in the mainstream countries where crypto assets circulate have been emphasizing that "any platform involved in fund flows should bear the responsibility of anti-money laundering (AML) and counter-terrorist financing (CFT)". This regulatory logic is in direct conflict with the decentralized concept of Web3.
Some commentators believe that OKX is like a "canal company without an X-ray machine", and under regulatory pressure, it has no choice but to suspend service and upgrade its products. This adjustment not only affects the user experience, but may also have an adverse impact on the market competition of its Web3 ecosystem.
Market analysts predict that under regulatory requirements, OKX may have two choices: one is to make KYC a mandatory option for product use; the other is to separate the wallet and exchange operations. The former can keep up with regulatory requirements and stabilize the situation, but the Web3 ecosystem may be restricted; the latter isolates regulatory risks and maintains decentralization, but requires re-downloading the app, which not only discounts the convenience of the experience, but also inadvertently isolates the exchange traffic and wallet, making it easy to lose users.
Regardless of which path it chooses, OKX will need to balance user experience and compliance requirements in the future.
Binance Web3 product Alpha 2.0 directly integrated into the main site
Just as OKX suspended its DEX aggregator service, another cryptocurrency giant platform Binance, which is applying for MiCA authorization, has taken the initiative to layout its Web3 products.
On March 18, Binance announced that its Alpha 2.0 version has been officially launched, and it has been directly integrated into the Binance trading platform main site, allowing users to directly purchase on-chain tokens using assets such as USDT on the Binance platform, without the need to withdraw assets to an external wallet.
Here is the English translation:Binance said that this expansion aims to bridge the experience gap between centralized exchanges (CEX) and decentralized exchanges (DEX), simplifying the trading process while improving users' capital efficiency and accessibility to decentralized trading.
Binance Alpha enters the CEX main site
Binance Alpha was originally a platform product within the Binance Web3 wallet, focusing on exploring early-stage crypto projects with growth potential. The launch of Binance Alpha 2.0 marks a strategic upgrade of Binance in the Web3 field.
In mid-2022, Binance's Web3 wallet was widely criticized as "inferior to OKX" during the Bitcoin NFT market frenzy. Later, Binance's co-founder He Yi even admitted that their Web3 wallet and its market products have not yet reached an optimal state.
Now, the approach of Binance Alpha 2.0 to connect CEX and DEX is stimulating user interest. Some users believe that by introducing low-market-cap projects (such as meme coins) to the main site, not only can it enhance the wealth effect of the Binance main site, but it can also consolidate BNBChain's leading position in the Web3 ecosystem.
More importantly, Binance's seamless integration of on-chain asset trading with CEX provides a more controllable trading environment for regulators. It's worth noting that Binance's Web3 wallet is a crypto asset custodial wallet, and users need to pass KYC (Know Your Customer) verification to use this wallet.
Binance's strategy can be seen as "trading compliance for innovation" to better meet the regulatory requirements of mainstream countries, such as KYC and AML. After the OKX incident of suspending DEX services, Binance's "centralized + decentralized" hybrid model may become the mainstream development direction for future Web3 products.
However, the direct integration of Binance Alpha 2.0 into the main site, while enhancing the appeal of its Web3 products in the short term, also faces potential regulatory risks - the volatility and compliance risks of low-market-cap projects may become a concern for its future development. In addition, as global regulators' attention to the crypto industry continues to escalate, Binance still needs to continuously adjust the balance point between innovation and compliance.
Web3 decentralized products "dance on the edge of the knife"
One provides custodial services, the other non-custodial services; one must undergo KYC, the other provides optional KYC. From the practices of Binance and OKX, for Web3 products, the essence is a game between decentralization and compliance, which needs to consider the regulatory attitudes of mainstream countries towards Web3 products.
The different product strategies of OKX and Binance have also sparked heated discussions about whether Web3 products should introduce KYC. KYC, as a core compliance requirement in the traditional financial field, is gradually penetrating into the crypto industry. However, for Web3 wallets, the introduction of KYC means a compromise of the decentralization principle.
Supporters of KYC argue that "compliance is a prerequisite for survival" because under the regulatory framework of mainstream countries, KYC is a necessary condition for Web3 wallets to gain legal status. From the perspective of "user protection", KYC can effectively prevent hacker attacks and fund abuse, protecting user asset security. Additionally, at the "market trust" level, KYC can enhance the trust of institutional investors and ordinary users in Web3 wallets, promoting industry mainstream.
Opponents argue that KYC "deviates from decentralization", meaning users need to submit personal information to centralized institutions, which is contrary to the decentralization principle of Web3. The "technical complexity" also increases the difficulty of implementing KYC in the on-chain environment, which may also affect the user experience. As for "privacy risks", KYC requires users to submit sensitive information, which may increase the risk of data leaks and privacy infringement.
However, the regulatory frameworks represented by mainstream countries are gradually bringing DEX and DeFi under regulatory scope. The core demands of major regulatory authorities include anti-money laundering (AML) and counter-terrorist financing (CFT), which require platforms to verify user identities and monitor fund flows. They also need to assume asset custody responsibilities, even non-custodial platforms may be required to assume partial asset custody responsibilities, and maintain transparency requirements, such as regularly submitting transaction data and compliance reports.
The strategic differences between the two giant platforms in their Web3 products are a microcosm of the entire crypto industry's search for a balance between compliance and innovation. In this game, the introduction of KYC or not, and the compliance path of DEX and DeFi, will become key factors determining the fate of Web3 products.
The battle line is long, and the outcome is undecided. For industry participants, how to wield the "double-edged sword" of compliance and "treat regulation as a bulletproof vest rather than shackles" is a real test of survival wisdom. Achieving technological innovation within the compliance framework will become the core competitiveness of industry builders.
