What is Cefi (centralized finance)?

CeFi, or Centralized Finance, refers to the traditional financial system where financial transactions and services are managed by centralized intermediaries such as banks, brokerage firms, or other financial institutions. What is CeFi, In CeFi, these intermediaries act as trusted third parties and control the flow of funds, provide various financial services, and enforce regulations.

In CeFi, individuals and businesses rely on centralized entities to access financial products and services like banking, lending, investing, and trading. These entities maintain control over user funds, enforce regulations, and often require Know Your Customer (KYC) procedures for user verification.

Here’s a explanation of how CeFi typically works:

1. Centralized Institutions: CeFi relies on centralized institutions that act as intermediaries, such as banks or financial service providers. These institutions hold custody of customer funds and manage financial transactions on their behalf.
2. Trust and Security: CeFi operates based on trust in these institutions. Users trust that their funds will be secure, transactions will be executed reliably, and their personal information will be protected. The institutions implement security measures, regulatory compliance, and infrastructure to safeguard customer assets and data.
3. Account Creation and Verification: To access CeFi services, individuals or businesses usually need to create an account with the centralized institution. This involves providing personal information, completing identity verification (KYC), and complying with any necessary regulatory requirements.
4. Financial Services: CeFi institutions offer a wide range of financial services, including banking, lending, investing, trading, and payment processing. Users can access these services through various channels such as online banking platforms, mobile applications, or physical branches.
5. Centralized Control: In CeFi, the intermediaries have centralized control over customer funds and assets. They manage transactions, hold custody of assets, and facilitate transfers between users. This control allows them to enforce regulatory requirements, freeze accounts if necessary, and provide customer support.
6. Regulatory Compliance: CeFi institutions operate within the legal framework of the jurisdictions they operate in. They comply with financial regulations, anti-money laundering (AML) laws, and customer protection requirements. This compliance helps ensure the stability, integrity, and security of the financial system.

While CeFi has been the traditional financial system for a long time, the emergence of decentralized technologies, such as blockchain and cryptocurrencies, has led to the rise of decentralized finance (DeFi) systems that aim to provide alternative, decentralized financial services.