Earlier today, the UK Financial Conduct Authority posted the “First Supervisory Notice” related to a statement by the FCA in June that Binance Markets Limited is not permitted to undertake any regulated activity in the UK. Binance Markets is part of the Binance Group. Binance is, of course, the largest crypto exchange in the world serving international markets.
At the time of the announcement, the FCA cautioned individuals to be wary of promotions that promise high returns on investments in cryptoasset or cryptoasset-related products. The regulator added that most firms promoting crypto are not authorized by the FCA.
In the notice posted today that included more information, the FCA admitted that Binance was ill-equipped to be regulated stating the “FCA considers that the Firm is not capable of being effectively supervised. This is of particular concern in the context of the Firm’s membership of a global Group which offers complex and high-risk financial products, which pose a significant risk to consumers.”
As well, the FCA said it “considers that the Firm is failing to satisfy the effective supervision Threshold Condition” as Binance sought to offer its services in the UK.
Chris Chapman, Partner at Mayer Brown, pointed to the balancing act of encouraging Fintech innovation while ensuring investor protection mandates:
“UK regulators, like other regulators, are keen to facilitate innovation and attract Fintech business to their jurisdiction. They need to balance this with protecting consumers and the market and policing financial crime. Some activities involving crypto-assets are already regulated in the UK. Some crypto-asset firms may need to be registered with the UK authorities and follow anti money laundering rules. Other firms may need to be more fully authorised and follow more detailed rules. It is also true that some crypto asset activities are not regulated in the UK, and it is not always easy to police offshore firms. However, that does not mean UK regulators are powerless. For example, they may take action in relation to misleading marketing and they may recommend to other UK regulated firms, such as payment services providers, that they should not do business with certain crypto asset businesses. The scope of crypto-asset regulation is also increasing. The current pace of change is relatively slow, but it may speed up as the importance of crypto assets continues to increase.”
Sam Roberts, Partner at Cooke, Young & Keidan, noted that Binance was not forthcoming when the FCA asked its questions:
“The FCA’s conclusion that it cannot supervise Binance shows how it will be necessary for crypto businesses operating globally to take a “cards on the table” approach if they want to undertake regulated activities in the UK. Although the words that have been widely cited – that the FCA is “not capable” of supervising Binance – appear to place the emphasis on the FCA’s abilities or resources, Binance’s woes in fact stem from failing to respond frankly and fully to the FCA’s requests for information about its global business. For example, Binance refused when asked to name the full set of companies in and trading names used by its wider group, and did not identify the owner of the domain www.binance.com. Nor did Binance state which legal entities within the group took the other side of a trade executed on its platform – crucial information for its customers. Binance is certainly not alone in organising itself both globally as a group of related companies, and without full transparency. The FCA’s decision here may well be a bellwether of its approach to other crypto platforms, who should take heed.”
While Binance remains the top global crypto trading by far (~$30 billion in daily trading volume), more recently the crypto exchange has been retrenching from services provided like the removal of digital assets that reference securities. Or the Thai Securities and Exchange Commission filing criminal charges against Binance and Binance’s decision to cease offering services in Ontario.
There are other jurisdictions where Binance has garnered additional scrutiny while it scrambles to incorporate greater compliance processes in an effort to mitigate this scrutiny.
Perhaps the bigger question is where the US Securities and Exchange Commission sits in all of this? The current leadership has strongly messaged its intent to hold crypto exchanges to a higher degree of disclosure – regardless of geographic location – if it deals with US investors. Binance’s failure to disclose the legal entity behind the Binance website did not hold water with the UK regulator. The same may be true for the US SEC.