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.
- Regulators in several jurisdictions, including the Cayman Islands,1 Japan,2 Malaysia,3 Malta,4 the Netherlands,5 Thailand,6 and the United Kingdom (UK),7 have taken action to combat Binance's practice of allowing trading by residents in jurisdictions where it is not licensed to operate. For example, in June 2021, the UK Financial Conduct Authority ordered Binance to stop all regulated activity in the UK because it does not hold any relevant authorization, registration, or license.8 The following month, Malaysian authorities took similar action and filed a criminal complaint against Binance for operating as an unlicensed virtual asset service provider (VASP).9
- Other actions against Binance, including by U.S.,10 Indian,11 and UK12 authorities, target potential illicit activity on the platform. Globally, regulators have increasingly expressed concerns that cryptocurrencies are being used for illicit activity, including money laundering and tax evasion.13 In 2019, Chainalysis Inc., a blockchain forensics firm, traced $2.8 billion in Bitcoin that moved from criminal entities to cryptocurrency exchanges, and concluded that during that year, more than 50 percent of all funds tied to criminal activity flowed through Binance and Huobi, more than any other cryptocurrency exchange.14
- Regulators worldwide have also issued warnings around high-risk products and services that Binance offers to retail investors-in some cases allegedly without appropriate licensing-including stock tokens, derivatives, and highly leveraged positions. Regulators in several jurisdictions, including Brazil,15 Germany,16 Hong Kong,17 Lithuania,18 Italy,19 and the United States20 have issued statements or launched investigations into whether certain offerings qualify as securities or derivatives and should fall under the associated licensing and regulatory regimes. Other jurisdictions, like Poland21 and the UK,22 have issued consumer-protection-oriented statements that warn about trading with Binance and alert investors of the elevated risk of its offerings.
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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,25 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.
- Founded in July 2017 in China, Binance later moved its operations into Japan, ahead of the Chinese government's ban on cryptocurrency trading in September 2017. After receiving a warning for operating in the country, Binance phased out its service to Japanese residents, and allegedly moved to Malta, and then to the Cayman Islands. Authorities in Japan,32 Malta,33 and the Cayman Islands34 have all stated that Binance is not licensed, registered, or authorized to operate a cryptocurrency exchange in their jurisdiction.
- Amid persistent concerns about transparency and potential illicit activity in the cryptocurrency sector, global standards setters such as the Financial Action Task Force (FATF) and leading national authorities are pushing to strengthen and standardize regulation and supervision and reduce opportunities for jurisdictional arbitrage. In 2019, the FATF updated its Recommendations to include VASPs and subject them to the "Travel Rule" requirement. The FATF and EU and U.S. authorities are also focused on ensuring transparency with regard to the identities of underlying parties involved in cryptocurrency transactions, including for unhosted wallets. Some jurisdictions continue to lag in implementing and enforcing AML/CFT supervision of VASPs, however, judging from FATF's latest 12-month review,35 and regulators use registration and licensing requirements to combat risks from VASPs located in jurisdictions with weaker AML/CFT oversight.
- Recent U.S. enforcement actions against cryptocurrency businesses are also on the rise, including against entities registered or headquartered outside the United States. In late 2020 and August 2021, U.S. authorities in a series of actions levied more than $100 million in penalties against Seychelles-registered BitMEX for anti-money laundering failings.36,37 U.S. sanctions enforcement activity has also increased in the space,38,39 and multiple U.S. agencies have publicly indicated that the cryptocurrency sector is a top priority.40,41
- Traditional financial institutions have withdrawn services to or limited or severed connections with Binance following the recent regulatory actions. Several banks, including HSBC, Barclays, and Banco Santander, and payment companies such as Clear Junction, all recently announced that they will block United Kingdom customers from making payments to the exchange. Several hedge funds have also limited their trading and other activities on Binance.42
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.
- In particular, recent actions signal that regulators expect VASPs, including cryptocurrency exchange companies, to register, obtain licenses in, and be subject to supervision in all jurisdictions in which they have substantial operations or customers. VASPs should evaluate their legal and regulatory risk in this light and should also consider the risks-including reputational risks-of registering or establishing their headquarters in a jurisdiction known to have weak supervision.
- VASPs and the financial institutions that bank them should all ensure that VASPs are licensed in all jurisdictions in which they operate and that they have appropriate controls in place to ensure that they are not onboarding or facilitating the activity of clients from jurisdictions where they are not licensed. VASPs' compliance policies, procedures, systems, and controls at the group level should address the requirements and expectations of the most stringent jurisdiction in which they operate or have customers, and financial institutions conducting due diligence should verify that this is the case.
- Additionally, when conducting due diligence on prospective VASP
partners or clients, financial institutions should evaluate the
extent to which the VASP is based in a jurisdiction with strong
VASP supervision. The strength of regulation and supervision in the
jurisdiction where the VASP's headquarters is located sends a
signal about the VASP's compliance posture and, alongside other
geographic indicators such as the VASP's global footprint and
customer base, should be an important part of the customer or
counterparty risk rating.
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.
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