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Is Binance in Trouble? Or Are Regulators Just Picking On It?
Binance has been attracting plenty of headlines recently, but for all the wrong reasons. The cryptocurrency exchange — the biggest in the world in terms of volume — has been shut down in Ontario (and likely the rest of Canada), barred from “regulated activity” in the UK, and warned by the Japanese Financial Services Agency that it’s operating in Japan illegally.
This isn’t the only trouble Binance has gotten itself into in recent weeks, with the exchange also facing a legal action in Thailand and an investigation in the United States, related to alleged money laundering and tax evasion. With examples of regulator and governmental scrutiny increasing almost by the week, it raises the suspicion that things aren’t entirely legitimate at Binance, and that the exchange could possibly encounter serious difficulties somewhere down the line.
Is this accurate an assessment? Should users be wary of Binance? Well, there has been online speculation that the exchange has facilitated illegal or even fraudulent practices, as well as recent research suggesting that tether-denominated perpetual contracts for BTC on Binance are the biggest source of volatility in the cryptocurrency market. However, much of the speculation lacks convincing evidence, while it’s likely that regulators and banks are targeting Binance mostly because it’s the biggest (and therefore most visible) exchange.
A List of Binance’s Recent Troubles
Few exchanges are strangers to controversy and regulator scrutiny, but Binance seems to be attracting more than most. Here’s a brief rundown of everything it’s currently grappling with:
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On July 2, Thailand’s SEC filed a criminal complaint against Binance, alleging that the exchange was providing trading services in the country when it had no authorization to do so.
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UK’s Financial Conduct Authority ‘bans’ Binance from regulated activities: on June 26, the FCA prohibited Binance Markets Limited from facilitating trading activities under its regulatory purview, such as derivatives trading (e.g. futures contracts). Despite Binance responding that this applies only to Binance Markets Limited, and not Binance.com, a number of UK banks responded by ending fiat payments to and/or from the exchange. Deposits via the UK’s Faster Payments system were also suspended.
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On June 26, the Ontario Securities Commission (OSC) notified Binance that it has until December to shut its operations in the province. It’s possible that other Canadian provinces may follow Ontario’s lead.
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On June 25, the Japanese Financial Services Agency issued a warning to Binance — its second in three years — that it was operating in Japan illegally. The exchange responded by stating it doesn’t currently hold exchange operations in Japan or solicit Japanese users.
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In early May, the US Department of Justice and Internal Revenue Service opened an investigation into Binance, with officials reportedly seeking information regarding potential money laundering and tax offences.
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At the end of April, German regulator BaFin warned Binance that it had violated securities law in the country by offering tokenized stocks without displaying prospectuses for the corresponding companies. Binance petitioned BaFin to remove the warning from its website in May, but the regulator refused.
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On March 12, the CFTC opened an investigation into Binance, based on the suspicion that the exchange permitted US residents to trade derivatives.
Speculation and Research
Aside from these recent — and recorded — episodes, there’s currently speculation that banks in the Netherlands are no longer offering payment channels to and from Binance.
Source: Twitter
There’s also the recent news that Binance has suspended (temporarily at least) deposits using the EU-wide Sepa network, citing “events beyond our control.” This makes it harder to deposit fiat currency into a Binance account if you reside in the EU, adding to the sense that things aren’t exactly running 100% smoothly at the exchange.
For a number of highly vocal cryptocurrency critics, such developments also add to the sense that there’s something wrong with Binance itself, that the exchange is somehow illegitimate or fraudulent.
Source: Twitter
Other prominent critics note that Binance’s current issues revolve largely around know-your customer and anti-money laundering requirements. Some suggest that Binance couldn’t possibly satisfy such requirements in its current state, due to their “primary customers [being] trading bots owned by money laundering operations.”
Source: Twitter
While such tweets amount to largely evidence-free claims, recent research indicates that Binance may be the site of some less-than wholesome trading. Namely, a paper published on July 2 from researchers at the University of Sussex concluded that Binance facilitates large-scale derivative trading in tether (and bitcoin), and that such trading is the “main emitter of volatility” in the bitcoin market (i.e. the main cause of price swings).
As the paper’s authors wrote, “we find that the tether-margined perpetual contract on Binance is clearly the main emitter of volatility [in the bitcoin market]. Throughout the day, it continuously transmits strong flows to all other instruments, including both USD and USDT spot pairs as well as USD-margined perpetual contracts.”
The paper also goes on to suggest that its results are “rather concerning,” especially when considered “in light of the recurring suspicions of misconduct against tether and more recently also Binance.”
The Binance Side of the Argument
All of this reflects pretty badly on Binance, and we’d be unsurprised if more negative regulatory attention doesn’t follow in the weeks and months to come. However, Binance has consistently described any suggestion of its impropriety and of operating difficulties as FUD (fear, uncertainty and doubt).
Source: Twitter
There’s an argument to be had that regulators are attempting to make an example of Binance, and that they’re focusing on it because it’s the biggest exchange in the world (by volume). In other words, the real problem for regulators is cryptocurrency trading as a whole, and as the biggest facilitator of such trading, Binance inevitably attracts the most attention.
It’s also worth noting that the regulatory retaliation against Binance follows a spate of increasingly high-profile ransomware attacks, in which criminals have asked for payment in bitcoin. Numerous officials have responded to this wave by calling for harsh regulations, with some even calling for outright cryptocurrency bans. The US-based Ransomware Task Force, for instance, published a report at the end of April calling for cryptocurrency exchanges and various other transmitters of crypto to be subjected to tighter anti-money laundering controls.
This highlights why Binance has suddenly faced a surge in scrutiny over the past few months. And in the exchange’s favor, it appears to be making good-faith attempts to satisfy and cooperate with regulators.
In June, it participated in an international operation to track down criminals involved in the Cl0p and Petya ransomware attacks, and had previously worked with Ukraine Cyber Police on similar initiatives. As recently as July 7, it announced it would be doubling its compliance staff in a bid to meet requirements, while it also hired Jonathan Farnell on the very same day as its Director of Compliance.
Such announcements show that Binance is serious about compliance. So while question marks will continue to hang over the exchange (particularly with regards to the trading of tether on its platform), there’s little evidence that it’s in serious trouble, and that it won’t continue being the biggest trading portal for some time to come.
