Binance in the spotlight: Are crypto regulators paying attention?

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Binance has become a target for regulatory action throughout the world, but is it the exchange or the crypto ecosystem in general that is being targeted?

Is Binance the crypto industry’s next whipping boy? Regulators in the United States, the United Kingdom, Canada, Japan, Thailand, and the Cayman Islands have all issued warnings, and in some cases criminal charges, against the cryptocurrency exchange. Poland has joined the battle, with its financial authority advising people to exercise “special caution” while utilising Binance’s trading services.

Some believe the exchange is solely to responsible for the recent wave of regulatory scrutiny, while others believe the exchange is being used as a scapegoat for the whole crypto sector, which has grown too large too quickly in the eyes of some authorities. In a separate letter, Binance CEO Changpeng Zhao, often known as CZ, felt obligated to address the “recent hyper-focus on regulation when it comes to Binance.”

Binance — founded in Shanghai in 2017 but with no publicly acknowledged headquarters at present — has never been a poster child for compliance. “Binance has a history of attempting to avoid regulation while also making false statements about being regulated in some of these jurisdictions,” Dan Awrey, professor of law at Cornell Law School, told Cointelegraph, adding, “Binance has, therefore, placed the target firmly on its own back.”

According to Markus Hammer, an attorney and principal of Hammer Execution consulting business, authorities are just rehashing earlier warnings, but they are now being recognised more broadly.

“Warnings are usually a prelude to taking real actions,” such as prohibiting clients from utilising a specific platform, according to Hammer. “Another reason could be that they are now attempting to distance themselves as investors prepare to file legal action against Binance Leveraged Tokens (BLVTs),” which he described as a “defective” financial instrument. He went on to say, “A repeated warning that Binance is not regulated would absolve them of charges for previously being blind or inactive.”

However, warnings alone might have repercussions. When UK regulators issued a warning in late June that Binance was operating without a business licence, bank behemoth Barclays stated it would stop facilitating client payments to the exchange, with Santander following suit a few days later.

No widespread withdrawals

But maybe there is no need to overreact? “In spite of regulatory actions across jurisdictions, there is no mass exodus of tokens from Binance as happened in 2017 in connection with China’s previous onshore exchange crackdown,” Winston Ma, adjunct professor at New York University School of Law and author of The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace, told Cointelegraph, adding:

“This shows that Binance has a global business and decentralized operation, and the market wasn’t too worried about the recent actions from those countries.”

Unregulated cryptocurrency exchanges like Binance have long been seen as off-ramps for money laundering and other criminal activities. Over the course of 2019, Chainalysis traced $2.8 billion in Bitcoin (BTC) that moved from criminal entities to exchanges, outlining that “just over 50% went to the top two: Binance and Huobi,” said the firm, with Binance alone accounting for 27.5%, the most.

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Zhao suggested in his July 6 letter that regulation often trails innovation, particularly with revolutionary technologies like crypto: “The adoption and development of crypto has many parallels with that of the car. When the car was first invented, there weren’t any traffic laws, traffic lights or even safety belts.” Those came later. “Crypto is similar in the sense that it can be accessible for everyone, but frameworks are required to prevent misuse and bad actors. […] Binance wants to be a positive contributor.”

Financial regulators are not necessarily looking to go after all crypto enterprises, said Awrey, “The real problem is that many crypto exchanges are not taking customer protection or legal compliance very seriously.” Most exchanges don’t offer even basic private law protections, as he documents in an upcoming book: “Against that backdrop, it’s not realistic to think that regulators would sit back and do nothing.”

This isn’t always a bad thing for the crypto industry. “Quite the opposite,” Carol Alexander, professor of finance at the University of Sussex Business School, said, adding, “We are all waiting for the space to clean up from fraud and manipulation so that we can realise the true value of coins that are needed as gas for smart contracts — for example, Ether, DOT, Cardano.” She went on to say:

“The real problem with crypto is not the fundamental worthlessness of Bitcoin — but Binance and Tether [USDT]. These two companies are intrinsically linked because most inflows to Binance are USDT. Without Binance, the market cap of Tether would be much less than $62.5 billion.”

The more immediate reason for the clampdown on Binance, in Alexander’s view, is the spate of class-action lawsuits on behalf of users “who lost everything on May 19 through auto-liquidations during the futures platform outage,” as well as the “long maintenance mode on BLVTs following wild price swings, after which tokens opened vastly lower instead of up in price.”

Growing protectionist sentiment?

In a recent LinkedIn post, Hammer noted that many crypto exchanges operate around the world without licenses — but are not facing the sorts of regulatory measures as Binance has. “One could therefore argue that unspecified measures against Binance are born from plain protectionist anti-crypto reasons” — rather than “legitimate causes” like the BLVTs, for instance.

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Drawing attention to Binance could thus “be perceived as a bit arbitrary” where the regulators are arguably picking out “the biggest of the black sheeps,” he told Cointelegraph. Two countries Hammer cited as possibly embodying this protectionist sentiment were Japan and the United Kingdom.

Regulatory pressure from Thailand and the Cayman Islands is unlikely to upset Binance, but what happens in China and the United States might be a different story. “What will be most important to Binance in terms of regulation will be China and the United States, the two largest crypto markets and the two most powerful regulatory enforcers,” Ma told Cointelegraph.

What if the United States took real legal action against Binance, or if China completely broke off the link between its online crypto dealers and offshore exchanges like Binance? “These are the focal points of the global Binance crackdown,” Ma continued.

Elsewhere, “I think Singapore will be illuminating because the MAS has been signalling that it wants to become a crypto hub,” Awrey told Cointelegraph, referring to Singapore’s central bank, the Monetary Authority of Singapore. As a result, if MAS rejects Binance’s latest application to operate in Singapore, “this can arguably be interpreted as revealing private information about the firm’s risk profile.”

Binance seems to be mindful of the stakes involved. In CZ’s letter, he further noted that “we have grown our international compliance team and advisory board by 500% since last year,” including the addition of former Financial Action Task Force Executive Secretary Rick McDonell as a compliance and regulatory advisor, as well as former U.S. Senator and Ambassador to China Max Baucus.

Should we interpret this as a sign of good intentions? “Yes, it should,” Hammer said. “They’re taking it seriously because the stakes are too high. The issue appears to be a lack of a regulatory framework, though I would be cautious about the numbers.” That example, although Binance claims a 500 percent increase in compliance since last year, what is its starting base — a single compliance advisor? This is not stated.

Are new regulatory approaches needed?

Others have argued that nation-states are incapable of monitoring borderless, decentralised companies – however most regard Binance to be a centralised exchange, even if its headquarters are difficult to locate. Awrey had this to say about it:

“While many of the enterprises may be borderless and decentralized, most of their customers are not. This theoretically opens the door to forms of regulation and enforcement that many in the crypto community seem to be discounting.”

“The problem is not that there is too little regulation out there but rather — particularly in the U.S. — there is a missing taxonomy with regard to crypto and tokens, about which regulatory authority and regulation should be applied for which case and situation,” said Hammer.

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Europe, by comparison, is “quite advanced with codifying blockchain, DLT and tokens, particularly Switzerland and Liechtenstein,” which have excellent legal and regulatory frameworks, Hammer said, while according to Alexander:

“We need to establish an international crypto markets committee that meets each month and makes recommendations for enforcement into local rules and regulations — like the Basel Committee does for Banking Supervision with the Basel Accords.”

This will take time, she admits, and “there is nothing to force countries that are prospering economically from crypto asset and derivatives trading — for example, Malta — to adopt these recommendations.” To summarise, the path is apparent, but as Alexander mentioned, getting to the destination may still be difficult.

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