My suggestions for building a safer centralized exchange.

So unless you have been living under a rock, you are very aware of all the money that investors have lost on centralized exchanges this year.
As a concerned citizen of the cryptocurrency nation I would like to propose six ways that centralized exchanges could be better.
I know that cryptocurrency is hard, and self custody is hard and scary.
Creating and maintaining your own wallet for your cryptocurrency is a non-trivial task, and many Bitcoin have been lost forever due to the intrinsic difficulties and multiple ways to lose your money.
So with no further delay, here are six things I suggest based on my research into centralized exchanges:

Six key elements of the my ideal centralized cryptocurrency exchange.

segregate or hold in separate wallets customer cryptocurrency assets and fiat from the exchange's cryptocurrency assets and fiat.

the exchange must outsource the actual custody of all customers'cryptocurrency assets and fiat balances to a third-party trusted and bonded company.

the exchange must keep 95% of each customers cryptocurrency assets and fiat in cold wallets of this trusted third party.

the exchange must keep an equivalent amount of the 5% of customers assets held in the exchange hot wallet for trading, in an cold wallet controlled by the same trusted third party as in number Two above.
In this way 100% of customer funds are protected, and the exchange takes all the risk of website hacks, not the customers.
This incentivizes them to protect their site against hacks.

the terms of service must specifiy that exchange customers are entitled to receive payment in priority to general creditors in the case of bankruptcy.
And all general creditors must sign a memorandum acknowledging this and agreeing not to seek customers assets in the event of bankruptcy.

the exchange must pay for a quarterly audit, by a third party accounting firm, to insure that each of the above five requirements are being followed.

Cryptocurrency and the blockchain are complex
Self custody is hard
Mass adoption depends on making cryptocurrency familiar and easy.
The familiar part comes from making it similar to banks or investment companies.
Centralized exchanges are fulfill the role of banks to a certain degree, so they should just as safe in regard to investors deposited funds.

That is Six Ways Centralized Exchanges can be safer for customers.
As you can see my priority is the absolute protection of customer funds from theft or misuse by the exchange.
The exchange should make all their profits from fees generated by investors buying and selling cryptocurrency assets.
I feel strongly that exchanges should not to be involved in investing customers funds, or loaning out customers funds.
There is no government insurance to protect customers of cryptocurrency exchanges against insolvency, and there is no central cryptocurrency bank to provide unlimted assets to an exchange in the event of all customers wanting to withdrawal their funds.
I think that if these rules are followed, customers funds would have very high levels of protection, and crypto investors could start to trust centralized exchanges again.