Binance: Working Off The Books​

By Alison Catchpole​


The Story

The Financial Conduct Authority (FCA) has reiterated its position on Binance Markets Limited (BML), the UK division of the Binance Group, for which it had issued a warning earlier in the summer.

On 25 June, the FCA had published a statement noting that BML (previously known as EddieUK) “must not, without the prior written consent of the FCA, carry out any regulated activities … with immediate effect” (FCA.org).

Binance, the world’s largest global cryptocurrency exchange by volume, is not registered in the UK and therefore is not allowed to operate an exchange there. The more recent warning, after a failure to provide key information, suggested that BML is “not capable” of being properly supervised by the FCA, and poses “significant risk” (Financial Times). The FCA’s actions mirror those of financial regulators around the globe, who are beginning to clamp down on the re-evaluated risks posed by cryptocurrency, and finding their mettle tested.

The Background

Cryptocurrency trading is not directly regulated in Britain, but the FCA does regulate certain cryptocurrency asset derivatives, and 2021 saw the City watchdog taking a more interventionist approach.

From January 2021, when a post-consultation policy came into force (Giambrone Law), the FCA has required that all companies offering cryptocurrency-related services be registered and comply with anti-money laundering rules. However, by June, the FCA admitted that only five firms had registered and they were not compliant (Reuters).

With a decentralised base that is attached neither to a national currency nor to the conventional financial system, cryptocurrencies are “notoriously volatile” (Fortune). Binance operates out of the Cayman Islands, and has an office in Singapore – although in July, the Cayman Islands announced that Binance was not authorised to operate within the country (Coindesk).

Other regulators imposed similar measures: On 6 July, Binance said it would suspend euro bank deposits from one of Europe’s key payments networks, the Single Euro Payments Area (Sepa) schemes, after restrictions forced their hand (Financial Times). Binance also pulled out of Ontario, Canada, after falling regulatory scrutiny, and Thailand has launched a criminal investigation into the company. Japan’s regulator too has issued Binance with two warnings in three years, and Malaysia, Malta and the Netherlands have also taken action against Binance for illicitly operating without the required permissions (K2 Integrity).

What It Means For Businesses And Law Firms

US officials have raised concerns about links between cryptocurrencies and illegal transactions - such as drugs, theft and tax evasion. Blockchain forensics firm Chainalysis Inc, whose clients include US federal agencies, found that in 2019, of the $2.8 billion in Bitcoin they traced from criminal entities to exchanges, over 50% went to Binance and Huobi combined (Chainalysis). It concluded that “more funds tied to criminal activity flowed through Binance than any other crypto exchange” (Bloomberg).

Worries that illegal activity may be more easily concealed by the use of cryptocurrency, and the concurrent concerns raised by government, have been a hindrance to full mainstream acceptance. Hedge funds specialising in cryptocurrency, such as Tyr Capital and ARK36, backed away from trading after the regulatory clampdown, as reported in late July (Financial Times). The FCA’s initial warning also prompted a number of UK banks, including Barclays, Nationwide, Monzo, Starling, Santander and Clear Junction, to review their approach to cryptocurrency (Coindesk; The Guardian).

The overriding issue seems to be the FCA ensuring that new forms of digital money are safe (Dechert). Bitcoin and other cryptocurrencies were recently reconfirmed as property by the English Commercial Court, confirming the decision in AA v Persons Unknown, Re Bitcoin [2019] (RPC). Binance, whose CEO Changpeng Zhao seems keen to ramp up compliance, has reacted by some proactive restructuring.

With close to 300 million people in the cryptocurrency markets (Reuters), the FCA must find a careful balance. As BBC Technology Correspondent Rory Cellan-Jones pointed out in late June, “The FCA cannot stop people from trading in cryptocurrencies - but it has got out its biggest red flag and is waving it vigorously.”