States vs Binance: what’s going on?

    04 Jul 2021

    A wave of attacks by financial regulators from different countries on the largest crypto exchange, Binance, has swept the world. Although they began in early spring, the most serious incidents occurred over the last few days and weeks. From the outside, it looks as if the actions are coordinated, although that is yet impossible to confirm.

    In March 2021, Binance was targeted in an investigation by the Commodity Futures Trading Commission (CFTC) – it tried to find out if the platform allowed US residents to buy and sell cryptocurrency derivatives. If this ended up being the case, then the trading platform activities would be violating US laws, since Binance is not registered with the CFTC.

    In his response, Binance founder and CEO Changpeng Zhao claimed that the exchange did not take any actions that would violate US law. According to him, this investigation does not mean that the agency is trying to bring charges against the exchange.

    In April of this year, the German Federal Financial Supervisory Authority, BaFin, warned national investors that Binance could violate the securities law by launching tokenized stock trading.

    On May 13, the Department of Justice and the IRS initiated their own joint investigation into Binance. Yet, the government agencies have not brought any charges against the trading platform (though such investigations can drag on for years). Binance is being audited by government agencies for money laundering and tax violations.

    On June 26, the Japanese Financial Services Agency (FSA) warned investors and traders that the Binance cryptocurrency exchange in Japan operates unlicensed and without the regulatory approval. In response, the regional Binance representative said that the exchange does not conduct cryptocurrency transactions in Japan and does not serve local users. Besides, due to political considerations, the exchange does not comment on issues related to interaction with regulatory authorities. The representative added that the exchange takes regulatory compliance across jurisdictions seriously and is doing extensive work to eliminate any potential risks in this area.

    So far it is completely unclear how the FSA’s statement will affect Binance’s operation, and whether the department is going to go after the exchange any further. After, it does not even have an official branch with the right to trade in Japan.

    On the same day, Binance decided to stop serving users in the Canadian province of Ontario. The company listed the region as a restricted jurisdiction, citing stringent local regulations. The exchange recommended that users from Ontario close all active positions by December 31, 2021.

    The story dates back to March, when the Ontario Securities Commission (OSC) announced that all digital asset trading companies are required to register as investment dealers. Following that, the OSC accused Binance of non-compliance with local laws. In response, the platform refused to register and announced its withdrawal from the local market.

    On June 27, the Financial Conduct Authority (FCA) of the United Kingdom prohibited Binance from engaging in any activity in the British Isles. “Binance Markets Limited does not have the right to engage in any regulated activity in the UK. This company is part of an extended group (Binance Group), – says the statement on the FCA website. – None of the Binance Group companies are authorized, registered or licensed to conduct regulated business in the UK.”

    In addition, the British regulator warned citizens about the risks of investing in cryptocurrencies: “Beware of online advertisements that promise you high returns on cryptocurrency investments or cryptocurrency products.” As they say, “What are you getting at?”

    In response, the crypto exchange spokespeople officially stated that the FCA warning will not affect the services provided by the website. The site representatives noted that Binance Markets Limited is a separate legal entity and does not offer services through the website.

    However, according to the FCA, no organization related to the Binance Group has permits, registrations or licenses in the UK to engage in regulated activities. Nevertheless, the cryptocurrency exchange offers residents of the country a number of products and services through the website Obviously, in this case, the laws of the country are in conflict with the cross-border nature of the Internet. Regardless, it’s hard to defy the government policy, so it seems that in the next few weeks Binance may inform its UK users that their accounts will be closed.

    One option Binance has is to try and re-establish its operations in the UK through opening its own licensed subdivision in the country. But this is a rather long and difficult process: financial legislation in the UK is quite strict, and the EU regulations no longer apply there.

    Binance’s daily trading volume is $ 18.9 billion. Its closest competitor, Huobi Global, has only $ 4.9 billion, and the next one, Coinbase, has $ 2.5 billion. It is clear that if for some reason Binance is forced to stop trading or completely close, it will probably cause the largest redistribution of the crypto exchange market since the collapse of Mt. Gox.

    It seems that Western countries are concerned about the Chinese authorities trying to destabilize the financial systems of the “First World” leaders using cryptocurrencies. And Binance, which just happens to have Chinese roots, could serve as an excellent tool for that

    And even though, in March 2018, due to the requirements of the Hong Kong authorities and the increasing regulation of the cryptocurrency market, the Binance management decided to change its jurisdiction to Malta, this obviously does cannot save them from the intelligence agencies’ “games”.

    This is not to say that Binance is not responding. For example, in April, the exchange hired the former head of the American Office of the Comptroller of the Currency (OCC) Brian Brooks – he became the CEO of the American Binance division. This is a person who knows exactly how to talk to the United States authorities, as the country is one of the largest markets for crypto exchanges.

    But I am reminded of one more remark by Changpeng Zhao. In one of his interviews this spring he said that Binance does not have an official headquarters at all, and therefore, supposedly, any investigation in any country will not lead to coercive measures by the authorities.

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