Centralized Finance (CeFi)
I. What is CeFi?
Centralized finance (CeFi) refers to cryptocurrency and digital asset services provided by companies with traditional corporate structures, central control, and identifiable counterparties. Unlike DeFi protocols where smart contracts execute automatically, CeFi platforms operate more like conventional financial institutions. They custody your assets, execute trades on your behalf, and maintain internal ledgers of account balances.
Think Coinbase, Kraken, BlockFi, or Celsius (before its collapse). Customers deposit cryptocurrency, and the platform handles everything: storing private keys, processing transactions, calculating interest, managing liquidity. You get customer support, password resets, and FDIC insurance on USD balances. In exchange, you're trusting the platform exactly like you trust a bank.
II. CeFi vs DeFi: why the distinction matters for lenders
The difference comes down to custody and trust. CeFi platforms control your assets and operate behind the scenes. You don't see the transactions, know where funds are deployed, or control the private keys. DeFi protocols let you maintain custody while interacting with transparent smart contracts you can audit.
For traditional lenders exploring crypto products, CeFi platforms offer the more familiar operational model. You're dealing with incorporated entities that have compliance officers, auditable financials, and established banking relationships. Integration looks like normal vendor partnerships with service level agreements and legal contracts. CeFi providers handle the blockchain complexity while exposing standard APIs and reporting.
The risk profile also feels more familiar. With CeFi, you're facing counterparty risk (will the platform stay solvent?), operational risk (will they manage keys securely?), and regulatory risk (will they maintain licenses?). These are known problems with established mitigation strategies. DeFi introduces smart contract risk, oracle manipulation, and governance attacks that most traditional risk teams lack frameworks to evaluate.
III. Why CeFi platforms keep failing
CeFi failures follow a pattern traditional lenders recognize: leverage, opacity, and misaligned incentives. Platforms accept customer deposits, promise yields, then deploy those assets into higher-risk strategies to generate returns. When markets turn, liquidity gaps emerge. Celsius, Voyager, BlockFi, and FTX all collapsed following variations of this script.
The challenge for lenders considering CeFi partnerships is that regulatory oversight remains inconsistent. Some platforms operate under money transmitter licenses or trust charters. Others function in jurisdictions with minimal supervision. Unlike traditional banks with capital requirements, stress testing, and examiner oversight, many CeFi platforms operated with minimal reserves and concentrated risk exposures.
This matters less if you're building your own infrastructure versus relying on third-party CeFi platforms. Lenders using crypto as collateral need custody solutions, price feeds, and liquidation mechanisms, but don't necessarily need to outsource those functions to CeFi intermediaries. Modern lending platforms can integrate directly with institutional custody providers and exchange APIs, maintaining control over credit risk assessment and collateral management while leveraging crypto rails for settlement speed.