What is the future of the besieged OKX DEX?

Author: shushu, BlockBeats

On March 17, OKX officially announced that it has proactively decided to temporarily suspend its DEX aggregator service after consultations with regulatory authorities. As a result, related limit orders and cross-chain orders will be automatically canceled. OKX stated that the specific recovery time will depend on the upgrade progress, and during this period, users can still trade by switching to third-party protocols, while other services of the OKX Web3 wallet will not be affected.

According to community feedback, some trading bots that access the OKX DEX API have experienced sporadic failures in EVM series (BSC, ETH) trading.

Meanwhile, Binance Wallet announced that all transactions in the Binance Web3 wallet will enjoy zero transaction fees for the next six months. Clearly, a silent war over on-chain products of trading platforms has begun.

Tightening of European Crypto Regulation

The suspension of OKX DEX services coincides with its Web3 services being scrutinized by EU regulatory authorities.

On March 11, Bloomberg reported that informed sources said European cryptocurrency regulators are reviewing the usage of a service provided by the cryptocurrency exchange OKX, which was exploited by hackers to launder $1.5 billion stolen from the trading platform Bybit. These individuals requested anonymity because the review process is confidential. They stated that national regulators from the 27 EU member states discussed this issue at a meeting hosted by the European Securities and Markets Authority's Digital Finance Standing Committee on March 6.

Subsequently, OKX responded to Bloomberg, stating that the report is misleading, as it provides self-custody wallet services/exchange functions as an aggregator aimed at creating efficiency for users, and emphasized that its Web3 wallet services are no different from those offered by other industry participants. OKX also revealed that after Bybit was hacked, it took measures to freeze related funds entering CEX and developed new features to prevent hacker addresses from using its DEX or wallet services.

OKX insists that it is not under investigation, claiming that the incident is merely a case of Bybit's lack of security awareness, and in today's announcement regarding the suspension of DEX services, this possibility was stated as "due to service upgrades."

The regulatory pressure faced by OKX is not unfounded; globally, the cryptocurrency industry is facing an increasingly stringent regulatory environment. On March 17, François Villeroy, the governor of the French central bank, publicly stated that the U.S. embrace of cryptocurrencies could trigger another financial crisis, noting that "financial crises often start in the U.S. and then spread to the rest of the world. By encouraging cryptocurrencies and non-bank finance, the U.S. government is laying the groundwork for future turmoil."

On the same day, European Central Bank board member Villeroy stated in an interview with the French newspaper Le Journal du Dimanche that "by encouraging the development of crypto assets and non-bank finance, the U.S. government is sowing the seeds of future turmoil."

It can be said that the atmosphere of crypto regulation in Europe has always been under high pressure. Currently, only OKX and Crypto.com have obtained EU licenses under the Markets in Crypto-Assets Regulation (MiCA), both in Malta, while many exchanges, including Binance, Bybit, and Kraken, are still in the application process.

Arrest of Tornado Cash Founder, Dismissal of Thorchain Head, the Struggle Between DeFi and Regulation Never Stops

The investigation of OKX due to the fund transfer by the Bybit hacker is reminiscent of the previous situations involving Tornado Cash and Thorchain facing regulatory pressure related to hackers transferring funds and money laundering.

In April 2023, the U.S. Treasury Department released an assessment report on illegal financial activities in DeFi, revealing potential risks in DeFi services and analyzing how illegal actors exploit these services for criminal activities. Three months later, four U.S. senators proposed the "Crypto Asset National Security Enhancement and Enforcement Act," aimed at strengthening regulation in KYC, AML, and the DeFi sector.

The "Crypto Asset National Security Enhancement and Enforcement Act" provides a new framework for regulating DeFi, requiring that DeFi be regulated similarly to other cryptocurrency entities, mandating that any "person" who can control the project must be held accountable for it. The bill may state that if no specific person can control the DeFi service, then any investor who invests more than $250,000 in the project should be held accountable.

In August 2023, the U.S. Treasury's Office of Foreign Assets Control sanctioned Roman Semenov, one of the founders of the Tornado Cash cryptocurrency mixer, for providing substantial support to the state-sponsored hacking group Lazarus Group, which concealed hundreds of millions of dollars in cryptocurrency theft. In May 2024, a Dutch judge ruled that Alexey Pertsev was guilty of money laundering and sentenced him to 64 months in prison.

The Bybit hack not only affected OKX DEX but also another DeFi protocol, THORChain. The primary money laundering method used by the Bybit hacker was to exchange ETH for BTC through THORChain, which brought massive trading volume and fees to THORChain. On February 27, according to monitoring by Yu Jin, the Bybit hacker's money laundering activities brought THORChain $2.91 billion in trading volume and $3 million in fee revenue in a short period.

On February 28, THORChain's chief developer Pluto announced his resignation, which is difficult to separate from the hacker's use of THORChain to transfer funds. This also aligns with the requirements of the "Crypto Asset National Security Enhancement and Enforcement Act," which states that any "person" who can control the project must be held accountable.

These cases regarding protocols and regulation bring us back to the classic question—if a person uses a kitchen knife to harm someone, is the seller of the knife guilty?

Previously, Wang Xin, the founder of Qvod, who was arrested for becoming a platform for disseminating obscene content, appeared on BlockBeats Space, stating that as a product receives more attention, the social responsibility of developers increases. He believes that developers should proactively embrace regulation and establish preventive mechanisms in advance. The "kitchen knife theory" and "match theory" seem to defend developers, while he proposes a relatively more neutral "automobile theory."

The automobile industry has developed for many years, with the earliest users limited to race car drivers and enthusiasts, where speed was the primary competition. However, today, cars have entered every household, and car manufacturers have done much more than just improve speed. For example, safety—cars cannot go too fast. From the perspective of engine performance, cars can exceed speeds of 300 km/h, but in reality, many cars cannot achieve this. Manufacturers impose these limitations to prevent dangerous speeding incidents. The "automobile theory" is more aligned with reality; developers need to design in advance and embrace regulation to solve more real-world problems.

Perhaps from this perspective, we can understand OKX's choice to suspend DEX operations and upgrade services.

What Does the Community Think?

As the largest and most important wallet entry for active users on-chain, the suspension of OKX DEX services has sparked widespread discussion in the community.

Some believe that licenses are not a one-time solution and that there is still significant compliance pressure to continue adhering to licensed regulations, with the possibility of separating Web3 business under the MiCA license in the future. Meanwhile, some crypto enthusiasts pointed out that obtaining a license only confirms two certainties: 1. You are willing to accept regulation; 2. Your compliance costs have significantly increased.

According to insiders, major trading platforms are currently rectifying regulatory issues, primarily including splitting trading platform wallets into independent apps; wallet apps no longer come with DEX and cross-chain functions, and no longer provide CeDeFi or other official financial products; the issuing and operating entities are completely isolated from the trading platform.

After Trump took office, his pro-crypto government successively withdrew previous SEC accusations against crypto companies like Coinbase, Uniswap, and Ripple, and the U.S. regulatory environment for cryptocurrencies once became a stimulant for market sentiment. Therefore, the community optimistically believes that the EU's regulatory actions against OKX will also ease.

Additionally, the community speculates that the most likely scenario is the separation of OKX DEX and CEX operations, and that it will follow the Binance Web3 wallet model for user KYC, which would be a strategy under the overarching goal of compliance.