Binance Holdings Limited (Binance), the world’s largest cryptocurrency exchange platform by trading volume, is facing growing legal and regulatory scrutiny across many jurisdictions, signaling increasing pressure on the cryptocurrency industry in general and decentralized organizational structures in particular. Multiple regulators around the world are taking action to ensure that Binance is not providing services in jurisdictions where it is not licensed, registered, and regulated. They are also seeking to root out potential illicit activity on the platform and to address consumer protection concerns.
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Binance has responded to growing regulatory scrutiny by indicating that it plans to establish multiple headquarters around the world and apply for licenses in every jurisdiction where it operates.23 Binance is also stepping up compliance capacity and resources and has wound down or restricted some high-risk products. For example, Binance has halted cryptocurrency margin trading in some currencies,24 removed its tokenized stock trading feature,26 and limited the maximum leverage for trading cryptocurrency futures for new users.26 The company has also wound down its futures and derivatives product offerings in Germany, Italy, and the Netherlands,27 and has restricted access to new derivatives products offerings in Hong Kong and Australia.28,29 Binance has also tightened its customer verification requirements—new and existing customers now have to provide government ID and pass facial verification to meet Binance’s “Intermediate” level of verification and be able to use Binance’s products and services.30
The mounting scrutiny and global efforts to unify regulatory standards signal that jurisdictional arbitrage and decentralized business models cannot be used to escape regulation, and traditional financial institutions’ responses suggest that they interpret such tactics as important indicators of risk. Regulators’ actions also signal that they have a broad interpretation of the applicability of their authority and that they consider advertising in, having clients in, or in some cases simply making a mobile application available in a jurisdiction a trigger for licensing and regulatory obligations. Though Binance operates around the globe, it does not have any formal headquarters. Binance has always declined to comment on the location of its headquarters, arguing it was “decentralized” and that Binance “works with a number of regulated entities around the world,” potentially in a bid to avoid regulatory scrutiny.31 A number of other cryptocurrency businesses have either attempted to make similar claims of decentralization or to strategically set up bases of operations in jurisdictions with weaker or less stringent licensing and regulatory regimes.
VASPs and the financial institutions that conduct business with them must be cognizant of the risks of decentralization and should closely track evolving global standards and regulations and monitor enforcement cases. Regulatory bodies sometimes use enforcement cases to signal their position in rapidly developing areas, and it is increasingly clear that VASPs cannot assume that regulators’ silence on certain activities means such activities are permissible.
1 The Cayman Islands Monetary Authority, “Binance Not Authorised by CIMA to Operate Crypto-Currency Exchange,” July 1, 2021, at https://www.cima.ky/binance-not-regulated-by-cima.
2 Japan Financial Services Agency, Warning against Binance, June 25, 2021, at https://www.fsa.go.jp/policy/virtual_currency02/Binance2_keikokushilyo.pdf.
3 Securities Commission Malaysia (SC), “SC Takes Enforcement Actions on Binance for Illegally Operating in Malaysia,” July 30, 2021, at https://www.sc.com.my/resources/media/media-release/sc-takes-enforcement-actions-on-binance-for-illegally-operating-in-malaysia.
4 Malta Financial Services Authority, “MFSA Warning to the Public Regarding Binance and Other Unlicensed VFA Service Providers,” July 14, 2021, at https://www.mfsa.mt/news-item/mfsa-warning-to-the-public-regarding-binance-and-other-unlicensed-vfa-service-providers/.
5 DeNederlandscheBank, “DNB Warns against Binance,” August 18, 2021, at https://www.dnb.nl/en/actueel/dnb/news-2021/dnb-warns-against-binance/.
6 Reuters, “Crypto Exchange Binance Hit by Criminal Complaint from Thai Regulators,” July 2, 2021, at https://www.reuters.com/technology/thailand-sec-files-criminal-complaint-against-crypto-exchange-binance-2021-07-02/.
7 UK Financial Conduct Authority, “Consumer Warning on Binance Markets Limited and the Binance Group,” June 26, 2021, at https://www.fca.org.uk/news/news-stories/consumer-warning-binance-markets-limited-and-binance-group.
8 UK Financial Conduct Authority, “Consumer Warning on Binance Markets Limited and the Binance Group.
9 “SEC Files a Criminal Complaint Against Binance for Operating Digital Asset Business Without License,” July 2, 2021, at https://www.sec.or.th/EN/Pages/News_Detail.aspx?SECID=9017.
10 Tom Schoenberg, “Binance Faces Probe by U.S. Money-Laundering and Tax Sleuths,” Bloomberg, May 13, 2021, at https://www.bloomberg.com/news/articles/2021-05-13/binance-probed-by-u-s-as-money-laundering-tax-sleuths-bore-in?sref=Pw1Mp35R.
11 Shruti Srivastava, “India Said to Probe Binance in Betting App Laundering Probe,” Bloomberg, August 2, 2021, at https://www.bloombergquint.com/business/india-said-to-examine-binance-in-betting-app-laundering-probe.
12 Reuters, “London Court Orders Binance to Trace Cryptocurrency Hackers,” August 13, 2021, at https://www.reuters.com/technology/london-court-orders-binance-trace-cryptocurrency-hackers-2021-08-13/.
13 See for example in the United States: U.S. Department of the Treasury, The American Families Plan Tax Compliance Agenda, May 2021, at https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf.
14 Chainanalysis, “Money Laundering in Cryptocurrency: How Criminals Moved Billions in 2019,” January 15, 2020, at https://blog.chainalysis.com/reports/money-laundering-cryptocurrency-2019.
15 Brazilian Securities and Exchange Commission, Notice to Binance, July 2, 2020, at https://www.in.gov.br/en/web/dou/-/ato-declaratorio-n-17.961-de-2-de-julho-de-2020-265060074.
16 BaFin Federal Financial Supervisory Authority, “Binance Deutschland GmbH & Co. KG: Sufficiently Substantiated Suspicion of Missing Prospectuses,” April 28, 2021, at https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/weitere/2021/meldung_210428_binance_deutschland.html.
17 Hong Kong Securities and Futures Commission, “Warning Statement on Unregulated Virtual Asset Platforms,” July 16, 2021, at https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=21PR76.
18 Central Bank of Lithuania, “Bank of Lithuania Issued Warning Regarding Binance, UAB and Other Crypto-Asset Service Providers,” July 16, 2021, at https://www.lb.lt/lt/naujienos/perspejimas-vartotojams-del-binance-uab-ir-kitu-su-kripto-turtu-susijusiu-paslaugu-teikeju.
19 Commissione Nazionale per le Società e la Borsa (CONSOB), “Consob Publishes a Warning on Binance,” July 15, 2021, at https://www.consob.it/documents/46180/46181/pr_20210715.pdf/7f78ad2d-a146-4b17-abe8-92efac07f49e.
20 Benjamin Bain, Tom Schoenberg, and Matt Robinson, “Binance Probed by CFTC Over Whether U.S. Residents Traded,” Bloomberg, March 12, 2021, at https://www.bloomberg.com/news/articles/2021-03-12/crypto-exchange-binance-investigated-by-u-s-over-who-s-trading?sref=Pw1Mp35R.
21 Polish Financial Supervision Authority, “UKNF Draws Attention to Warnings Regarding Binance Markets Limited and Binance Group,” July 7, 2021, at https://www.knf.gov.pl/komunikacja/komunikaty?articleId=74107&p_id=18.
22 UK Financial Conduct Authority, “Consumer Warning on Binance Markets Limited and the Binance Group,” June 26, 2021, at https://www.fca.org.uk/news/news-stories/consumer-warning-binance-markets-limited-and-binance-group.
23 Olga Kharif and Joanna Ossinger, “Binance Seeks New CEO, Headquarters Amidst Regulatory Probes,” Bloomberg, July 27, 2021, at https://www.bloomberg.com/news/articles/2021-07-27/binance-seeks-new-ceo-headquarters-amidst-regulatory-probes?sref=Pw1Mp35R.
24 Reuters, “Binance Stops Crypto Margin Trading Against Pound, Aussie Dollar, Euro,” July 26, 2021, at https://www.reuters.com/world/china/binance-stops-crypto-margin-trading-against-pound-aussie-dollar-euro-2021-07-26/.
25 Tom Wilson, “Binance Ditches ‘Stock Tokens’ as Global Crackdown Widens,” Reuters, July 16, 2021, at https://www.reuters.com/world/china/binance-stops-selling-stock-tokens-after-regulatory-scrutiny-2021-07-16/.
26 Binance, “Updates on Rules of Binance Futures Leverage for New Accounts,” July 27, 2021, at https://www.binance.com/en/support/announcement/d6457e23eb2e42f2b9c3ce44f46f9a6d.
27 Binance, “Unavailability of Futures and Derivatives Products in Germany, Italy, and the Netherlands,” July 30, 2021, at https://www.binance.com/en/support/announcement/f72d0fff2bd24b488213fa30284dd4cd.
28 Binance, “Restricting of Derivatives Products Offerings in Hong Kong,” August 6, 2021, at https://www.binance.com/en/support/announcement/25a2571392a24367a7d927bd37ab2b86.
29 Binance, “Restricting of Derivatives Products Offerings in Australia,” August 19, 2021, at https://www.binance.com/en/support/announcement/a671a8fcc5e04eabab485f82566a0db5.
30 Binance, “Updates to Binance Services,” August 20, 2021, at https://www.binance.com/en/support/announcement/51bf294e26324211a4731ca998e110ca.
31 Tom Wilson and Huw Jones, Reuters, “Explainer: Binance, the Giant Crypto Exchange Under Regulatory Scrutiny,” July 1, 2021, at https://www.reuters.com/world/china/binance-giant-crypto-exchange-under-regulatory-scrutiny-2021-07-01/.
32 Japan Financial Services Agency, Warning against Binance, June 25, 2021, at https://www.fsa.go.jp/policy/virtual_currency02/Binance2_keikokushilyo.pdf.
33 Malta Financial Services Authority, “MFSA Warning to the Public Regarding Binance and Other Unlicensed VFA Service Providers,” July 14, 2021, at https://www.mfsa.mt/news-item/mfsa-warning-to-the-public-regarding-binance-and-other-unlicensed-vfa-service-providers/.
34 Cayman Islands Monetary Authority, “Binance Not Authorised by CIMA to Operate Crypto-Currency Exchange,” July 1, 2021, at https://www.cima.ky/binance-not-regulated-by-cima.
35 Financial Action Task Force, “Second 12-Month Review of the Revised FATF Standards on Virtual Assets and Virtual Asset Service Providers,” July 2021, at: https://www.fatf-gafi.org/media/fatf/documents/recommendations/Second-12-Month-Review-Revised-FATF-Standards-Virtual-Assets-VASPS.pdf.
36 U.S. Department of the Treasury, “FinCEN Announces $100 Million Enforcement Action Against Unregistered Futures Commission Merchant BitMEX for Willful Violations of the Bank Secrecy Act,” August 10, 2021, at https://www.fincen.gov/news/news-releases/fincen-announces-100-million-enforcement-action-against-unregistered-futures.
37 Commodity Futures Trading Commission, “Federal Court Orders BitMEX to Pay $100 Million for Illegally Operating a Cryptocurrency Trading Platform and Anti-Money Laundering Violations,” August 10, 2021, at https://www.cftc.gov/PressRoom/PressReleases/8412-21.
38 U.S. Department of the Treasury, “OFAC Enters Into $507,375 Settlement with BitPay, Inc. for Apparent Violations of Multiple Sanctions Programs Related to Digital Currency Transactions,” February 18, 2021, at https://home.treasury.gov/system/files/126/20210218_bp.pdf.
39 U.S. Department of the Treasury, “OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent Violations of Multiple Sanctions Programs Related to Digital Currency Transactions”, December 30, 2020, at https://home.treasury.gov/system/files/126/20201230_bitgo.pdf.
40 U.S. Securities and Exchange Commission, “SEC Division of Examinations Announces 2021 Examination Priorities,” 2021 at https://www.sec.gov/news/press-release/2021-39.
41 U.S. Department of the Treasury, Financial Crimes Enforcement Network, “Anti-Money Laundering and Countering the Financing of Terrorism National Priorities,” June 30, 2021 at https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20(June%2030%2C%202021).pdf.
42 Financial Times, “Hedge Funds Back Away from Binance After Regulatory Assault,” July 23, 2021, at https://www.ft.com/content/0cbd5704-42fd-4c9c-b0ab-8bca212b64b8.