Over the weekend, the United Kingdom financial regulator Financial Conduct Authority (FCA) put out a Consumer Warning about the cryptocurrency exchange Binance (the largest global crypto exchange). It comes on the heels of a series of global financial regulators cracking down on many unregistered cryptocurrency exchanges – with Binance at the center of many of them. The FCA stated that Binance lacked the registration necessary to sell crypto derivatives in the United Kingdom, and that the firm would need to warn consumers of this on its website, Binance.com, beginning June 30th.

The FCA stated that no Binance Group entity "holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK" and thus isn't allowed to operate in the U.K. The notice clarified that while they "don't regulate cryptoassets like Bitcoin or Ether" they do regulate derivatives based on crypto – specifically naming futures contracts, contracts for difference, options, and any "cryptoassets we would consider ‘securities’". In order to offer these products, a firm must register with the FCA.

In response, Binance put out a Tweet thread, claiming that the FCA notice would have no "direct impact" on the services it provides from its website Binance.com:

The BBC added some additional details:

"Binance's existing crypto exchange is not UK-based so despite the FCA ruling, there will be no impact on UK residents who use the website to purchase and sell cryptocurrencies."

However, the FCA is requiring Binance, as of June 30, to place a very clear warning on Binance.com with the following text (as noted in Binance's FCA page under "Restrictions on Activities"):

“BINANCE MARKETS LIMITED IS NOT PERMITTED TO UNDERTAKE ANY REGULATED ACTIVITY IN THE UK. Due to the imposition of requirements by the FCA, Binance Markets Limited is not currently permitted to undertake any regulated activities without the prior written consent of the FCA. (No other entity in the Binance Group holds any form of UK authorisation, registration or license to conduct regulated activity in the UK).”

The FCA has previously warned earlier in June that “a significantly high number of businesses are not meeting the required standards under the Money Laundering Regulations resulting in an unprecedented number of businesses withdrawing their applications.”

Canada warns crypto exchanges and Binance leaves Ontario

It wasn't just the United Kingdom issuing warnings about unregistered cryptocurrency exchanges. The Ontario Securities Commission (OSC) in Canada has begun taking a series of legal actions against unregistered crypto exchanges in late May and early June, noting that the exchanges were offering securities and derivatives without registering with the OSC.

  • On May 25, the OSC alleged that the crypto exchange Poloniex  (incorporated in the Republic of Seychelles) had "failed to comply with the registration and prospectus requirements under Ontario securities law" despite offering both "securities and derivatives" on its platform. From the complaint:
While Poloniex purports to facilitate trading of the crypto assets in its investors’ accounts, in practice, Poloniex only provides its investors with instruments or contracts involving crypto assets. These instruments or contracts constitute securities and derivatives.
Investors may also trade crypto asset futures contracts on the Poloniex Platform that constitute securities and derivatives. The Poloniex Platform allows investors to engage in leveraged trading of up to 100:1 on various futures contracts.
  • On June 7, the OSC alleged that the firms that make up the cryptocurrency exchange KuCoin has failed its registration requirements (emphasis mine):
"KuCoin  is subject to Ontario securities law because crypto asset products offered on the KuCoin Platform are securities and derivatives. KuCoin has nonetheless failed to comply with the registration and prospectus requirements under Ontario securities law."

The complaint also notes the leverage KuCoin gives to its users:

15. Investors may also trade crypto asset futures contracts on the KuCoin Platform that constitute securities and derivatives. The KuCoin Platform allows investors to engage in leveraged trading of up to 100:1 on various futures contracts.

Indeed, KuCoin's website notes its maximum leverage for crypto futures is 100, and even sets the default leverage to 25 (emphasis added):

"The maximum leverage available on KuCoin Futures is 100x, while the default leverage is 20x. Users can enter the leverage they want or drag the slider to set the leverage. Users need to pass KYC [Know Your Customer] first."
A screenshot of KuCoin's futures trading screen. On the right hand side (emphasis added) you can see that you can trade crupto futurs with a maximum of 100:1 leverage. Accessed June 28, 2021.
  • One June 12, the OSC made similar allegations against Bybit Fintech Limited (incorporated in the British Virgin Islands). The complaint noted the exchange is "disregarding Ontario securities law" because "crypto asset products offered on the Bybit Platform are securities and derivatives" and highlighted the 100:1 leverage it offers its users "on various futures contracts"

In response, Binance announced on June 25th that it would stop serving users based in Ontario, would begin listing Ontario as a restricted jurisdiction, and require Ontario-based users "to close out all active positions by December 31, 2021."

Japan warns Binance

Japan's Financial Services Agency (FSA) also issued a warning against Binance on June 25 that it was operating its cryptocurrency exchange without registering with the FSA. The agency gave the same warning to Bybit back in May.

According to The Block, the FSA had first warned Binance about its lack of registration in 2018:

The FSA's new warning comes over three years after it issued a similar notice against Binance in March 2018. At the time, the regulator said Binance would face criminal charges if it continued to do business without a license. This forced the exchange to move its headquarters out of the country, officially moving to Malta (before eventually adopting a "decentralized" structure).
Last year, Binance said that it would implement a "gradual restriction of trading functions" for Japanese residents "at a later date." But the exchange's Japanese website is still accessible at the time of writing, even for new account creations. And when accessing the site via a VPN, Binance does not appear to block Japanese IP addresses.
A Binance spokesperson told The Block that the exchange "does not currently hold exchange operations in Japan, nor do we actively solicit Japanese users."

Huobi bans users in China from derivatives

On June 28th, the Crypto exchange Huobi updated its user agreement to prohibit any users in mainland China from trading derivatives on Huobi. As The Block reported, this comes shortly after Huobi rolled back some of the leverage it extended to users in China, from 125 times to 1 to 5:1, reportedly due to regulatory concerns. This comes after a series of reports crackdowns in China on Bitcoin mining, social media mentions of cryptocurrency broadly, and access to certain crypto exchanges.

Germany warns Binance on tokenized stocks

Binance has also been previously warned by other financial regulators on its tokenized stock offerings. In April, the German Federal Financial Supervisory Authority (BaFin) warned that Binance could be fined for offering so-called "tokenized stocks" – which are crypto assets that track the performace of a given stock -- without publishing an investor prospectus.

A sample of some of the tokenized stocks available for trade on Binance.com (accessed June 28, 2021)

Retuers reported on April 29:

On Monday, Binance said it would offer "stock tokens" denominated in the exchange's own cryptocurrency giving investors exposure to MicroStrategy Inc (MSTR.O), Microsoft Corp (MSFT.O) and Apple Inc (AAPL.O). These joined tokens representing Tesla Inc (TSLA.O) and Coinbase Global Inc (COIN.O) that are already trading.
But the regulator said on Wednesday there seemed to be no prospectus on the exchange's website for the MicroStrategy, Tesla and Coinbase issues, a violation of European Union securities law that could result in Binance, as issuer, being fined 5 million euros ($6 million) or 3% of last year's turnover.
"BaFin has grounds to suspect that Binance Germany is selling shares in Germany in the form of 'share tokens' without offering the necessary prospectuses," it said. "Please bear in mind that securities investments should only ever be carried out on the basis of the necessary information".

On its website, Binance describes its stock tokens this way:

Binance Stock Tokens are tokens of stocks (i.e., shares of public companies) that trade on traditional stock exchanges. Each Stock Token represents one ordinary share of the relevant stock. These Stock Tokens are fully backed by a depository portfolio of underlying securities held by CM-Equity AG, Germany (“CM-E”). Holders of Stock Tokens will qualify for economic returns on the underlying shares, including potential dividends.

Will the FCA warn other cryptocurrency exchanges?

The FCA's Consumer Warnings that Binance is offering regulated derivatives without registration like applies to other cryptocurrency exchanges that offer similar products. To take a single example, FTX offers similar products to Binance, including futures and tokenized stocks.

A sample of some of the tokenized stocks available for trade on FTX.com (accessed June 28, 2021)

Tokenized stocks are not offered to U.S. users on either Binance.us or FTX.us, but can be traded on certain "decentralized finance" of "DeFi" platforms.

Did the FCA decide to issue a Consumer Warning against Binance first, given its size in the industry overall – but will issue other warnings about other exchanges in the future?

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