Running into Binance problems – The recent crackdown on cryptocurrency exchanges

By Thaw Thaw Htin Thomas Coltrona

17 August 2023

Despite waning media interest, and unstable market values, cryptocurrency remains a fascinating concept for some and a diehard obsession for others. Major financial institutions in the United States continue to plan new products in the digital asset space¹, while the next generation of investors see it as their chance to seize the moment and create wealth for themselves.

Crypto-Assets in Focus for Regulators

In November 2022, we wrote about the current state of cryptocurrency regulation in Australia, which you can read here. Since then, the Australian Securities & Investments Commission (ASIC) has made it an enforcement focus for 2023 and confirmed that it will take regulatory action to address misconduct, market integrity threats and consumer harm in the crypto assets sector². Australia is not the only country making crypto assets a regulatory focus. The US Securities and Exchange Commission (SEC) has begun to file lawsuits against cryptocurrency exchanges for selling unregistered ‘crypto asset securities’³. In discussing the current state of the industry, SEC Chair Gary Gensler said “I’ve never seen so much just noncompliance and hype masquerading as reality as I’ve seen in this field⁴.”

As much as cryptocurrency by nature has an international flavour and element to it, so do the efforts to combat misconduct within its markets. On 31 March 2023, the International Organization of Securities Commissions (IOSCO) published a report calling for greater international collaboration and cooperation to combat cross-border scams, greenwashing, misconduct, and fraud⁵. ASIC co-chaired IOSCO’s Retail Market Conduct Task Force that wrote the report and supported the key findings of the report, which included a suite of measures to address conduct and fraud implications emerging from recent crypto asset trading trends⁶. Many of these measures are driven by gaining access to and obtaining up to date data on exchanges of crypto-assets and trends in related markets⁷.

Binance Australia

On 6 April 2023, ASIC announced that it had cancelled the Australian Financial Services Licence (AFSL) of Oztures Trading Pty Ltd trading as Binance Australia Derivatives (Binance)⁸. Binance held an AFSL to⁹:

issue and make a market in derivatives and foreign exchange contracts;
deal in specified financial products on behalf of another person; and
provide financial product advice in specified financial products.

Binance provided services to both retail and wholesale clients.

Notably, wholesale clients are generally wealthier and more sophisticated investors, whereas retail clients are generally less so¹⁰. Accordingly, retail clients are afforded important rights and protections pursuant to the Corporations Act 2001 (Cth), including:

access to a licensee’s internal dispute resolution system;
access to external dispute resolution through the Australian Financial Complaints Authority;
arrangements to receive compensation for loss or damage suffered because of breaches of a licensee’s obligations;
general advice warnings and statements of advice where personal advice is given; and
product disclosure statements and financial services guides.

ASIC had been conducting a targeted review of Binance’s financial services business in Australia, including how it had been classifying retail and wholesale clients¹¹. The underlying message here is that ASIC suspected that Binance may have been trying to avoid consumer protections by classifying its clients as wholesale rather than retail.

Since March 2023, Binance’s parent company, the Binance Group which is registered in the United States, has also been pursued in its home country for numerous violations of commodity exchange legislation and regulations¹². For example, in June 2023 the SEC filed a lawsuit against the Binance Group with charges including marketing unregulated securities to customers and mixing the funds of the company with those obtained from customers¹³. The SEC lawsuit also claims that the Binance Group engaged in ‘wash trading’, or selling and then rebuying the same digital assets in an attempt to drive prices higher¹⁴.

It is no surprise then that on 29 March 2023, ASIC issued a notice of hearing to consider whether it should cancel or suspend Binance’s AFSL. However, on 5 April 2023, Binance requested ASIC to cancel its AFSL¹⁵.

Notably, it seems that the cancellation of Binance’s licence has not ceased ASIC’s investigation into the company’s activities, or the activities of others occupying the same space in the market. ASIC chair Joseph Longo stated that “[o]ur targeted review of these matters is ongoing, including focus on the extent of consumer harms.¹⁶” ASIC has recently taken Court action against a number of crypto-asset exchanges and traders including:

On 15 December 2022, ASIC commenced civil penalty proceedings in the Federal Court against Finder Wallet Pty Ltd for alleged unlicenced conduct and inadequate risk disclosure in relation to the Finder Earn product;
On 23 November 2022, ASIC commenced civil penalty proceedings in the Federal Court against Block Earner for unlicensed conduct in relation to its crypto-asset based products; and
On 25 October 2022, ASIC commenced civil penalty proceedings in the Federal Court against BPS Financial for alleged misleading statements and unlicenced conduct in relation to the crypto-asset “Qoin”.

Action despite regulatory uncertainty

In our previous article, we observed that the cryptocurrency market was moving at such sheer speeds in contrast to the pace of the legislative reform required in order to regulate the crypto-asset space. However, ASIC and its equivalent overseas regulators have demonstrated on both a domestic and international level that it can achieve beneficial outcomes for consumers when focussed, motivated and well-resourced. It is therefore unsurprising to see regulators worldwide working collaboratively to address an area that truly operates without borders.

The next steps fall on governments to keep up the momentum. The IOSCO report is instructive as to the measures required to put pressure on unregulated crypto-asset trading, but also that these measures are not necessarily complex or difficult to implement. Now that the Albanese government has published its consultation paper regarding token mapping¹⁷, which sets out the Federal Treasury’s proposed crypto-asset ecosystem, it seems that there is finally movement towards having established processes in place to regulate the space.

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Thaw Thaw Htin

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Thomas Coltrona

Associate

Footnotes

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.

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