LittleLaw Looks At…Binance and the FCA

December 2, 2021

Category:

4 min read

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What’s going on here?

Binance is the world’s largest cryptocurrency exchange by daily trading volume. It offers customers the opportunity to buy a variety of cryptocurrencies and cryptocurrency derivatives, all on its online platform1. Only a few years old, it has been caught in the crypto-mania of the past year, which has seen its number of users and its revenue increase rapidly. Traders on its platform bought and sold an estimated $38bn a day and made derivative bets worth up to $129bn2.

However, the Financial Conduct Authority (FCA), the UK’s financial regulator, has expressed concerns, saying that it is “not capable” of supervising Binance, despite the “significant risk posed to consumers” by the company’s “complex and high-risk financial products”3.

The FCA is one of the largest and most powerful institutions of its type in the world. Therefore, its inability to constrain Binance can be seen as a sign of the immensity of the challenge posed by sprawling, global cryptocurrency companies, which often do not have traditional corporate structures.

Binance and the FCA: The bout so far

Binance has failed to respond to basic questions posed by the FCA about the company’s parent company, corporate structure and the legal body behind the Binance website. But without a fixed headquarters and with services used around the world, the FCA’s prohibition on Binance’s operating in the UK, issued two months previously, has had little effect4.

A London-based affiliate of the Cayman Islands-incorporated company did not supply the required information to the regulator regarding products offered by the wider group. This makes supervision of the company impossible in practice. Binance claimed it was engaging with the FCA “to resolve any outstanding issues that may exist”5.

Why does it matter?

Exchanges like Binance pose a danger to consumers due to the highly technical and risky products which they offer. These products are often extremely high-risk derivatives, which are then compounded by companies allowing consumers to leverage their capital many times over.

This means that a consumer, who is essentially making a bet on the market moving in a certain direction, can borrow more money than they put in up front to increase the size of the bet and the potential returns. If the bet comes off, the punter makes a fortune, if it does not, they can be left destitute.

Derivatives are a risky bet when they are based on (or derived from) stocks and shares. But investors have had hundreds of years to come to terms with the way in which the stock market behaves under many different circumstances and stimuli. Cryptocurrencies are so new that there is no knowing how they will react to various circumstances. For example, the way in which “memecoin” Dogecoin reacted to Elon Musk’s endorsement earlier this year; its value increased by almost 10,000% compared to last year, partly due to Musk’s infamous “to the moon” tweet6. Cryptocurrencies are also incredibly volatile compared to stocks, with estimates for the true value of Bitcoin varying wildly from nothing all the way up to seven figure sums.

There are further concerns when considering the anonymity provided to customers by crypto exchanges. This allows criminals and terrorists to use them to move money around the world, with minimal oversight.

With this fear in mind, the FCA earlier in the year banned the retail trading of cryptocurrencies in the UK (as we reported here), essentially restricting the practice to professionals alone. Despite this ban, Binance, through its website based overseas, has continued to allow every punter with an email address and a bit of cash to make dangerous bets on the intangible tokens.

Littlelaw verdict: Stalemate

So, what comes next for the crypto exchange? The FCA is insisting that it provide basic information on all entities within the global group, which Binance is refusing to do, claiming that the UK business is separate.

What about the FCA? The FCA’s traditional tactics may be out of date for the new-age crypto markets, but it still wields plenty of power over companies operating in the UK and it would be wrong to count it out just yet.

For now, the two find themselves locked in a stalemate, which neither appears willing to back down from. So, who will blink first?

Report written by Joshua White

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