The Real Story of the UK Binance Ban
By Nathaniel Whittemore
In our main discussion, NLW looks at recent regulatory action from the U.K., Canada and Japan. He argues that we’re entering a new phase of global regulation, where we’re likely to see a particular focus on leverage and derivatives.
What’s going on guys, it is Monday, June 29, and today, we are talking about the U.K. Binance ban. First up, however, let’s do the brief. First on the brief today, Indian investments in crypto are absolutely popping off. Chainalysis released a report saying that Indians have invested $40 billion in crypto markets this year. That’s up from $200 million last year. Daily trading values are up about 900% in the last 12 months. The headline Bloomberg went with was: “Even Gold-Obsessed Indians Are Pouring Billions Into Crypto.” One younger investor was quoted as saying: “I’d rather put my money in crypto than gold: crypto is more transparent than gold or property and returns or more in a short period of time.” In total, there are now more than 15 million Indian crypto investors. India, meanwhile, still doesn’t have legal clarity about crypto, but it does seem like the worst case scenarios of outright bans are increasingly unlikely.
Next up on the brief, the first Mexican bank to accept bitcoin. Ricardo Salinas Pliego is the 166th richest person in the world and one of the richest men in Mexico. He tweeted this weekend to Michael Saylor, saying: “Me and my bank Banco Azteca are working to be the first bank in Mexico to accept bitcoin.” Saylor had commented on a video shared by Pomp where Salinas was seen discussing how he had witnessed hyperinflation firsthand and why he thinks all fiat currencies are fraud. Grupo Salinas, his company, owns telecom, media, financial services, retail and more, so not a bad ally to have.
Third and finally on the brief today, Tether FUD from the Fed. Last week, a senior U.S. Federal Reserve official, Eric Rosengren, gave a presentation where he talked about financial stability challenges. One of them was: “Periodic Disruptions to Short Term Credit Markets.” In that, he called Tether one of the risks. He elaborated his position on Yahoo saying: “The reason I talked about Tether and stablecoins is if you look at their portfolio, it basically looks like a portfolio of a prime money market fund but maybe riskier, has a number of assets that during the pandemic, the spread got quite wide on those assets.”
I do think we need to think more broadly about what could disrupt short term credit markets over time and certainly stablecoins are one element. I do worry that the stablecoin market that is currently pretty much unregulated as it grows, and becomes a more important sector of our economy, that we need to take seriously what happens when people run from those types of investments very quickly. Caitlin Long called it an escalation of the rhetoric saying: “What’s interesting is Fed governor Lael Brainard and then Chairman Jerome Powell started talking ‘stablecoins.’ But now Rosengren talks ‘tether’ by name. That’s an escalation. The Fed is so practiced at ‘Fedspeak’ – such carefully constructed statements so that multiple sides of an issue can see their side in what the Fed said. That was basically the case with previous statements about stablecoins. But today the Fed escalated. Rarely are they so explicit like they were today.”
Tether’s Paolo Ardoino tried to add a bit of differentiation within the stablecoin space, saying: “It is remarkable that the growing market share of such new financial innovations is being recognized by the likes of the Boston Fed. However, it is also an important moment to educate consumers about the difference between stablecoins such as Tether and the various experiments that are constantly taking place in decentralized finance. It is always recommended that investors spend time researching these projects. Opportunities with outsized APYs are extremely risky. Nascent monetary experiments such as algorithmic stablecoins should not be classified in the same category as U.S.DT. Doing so only demonstrates a lack of understanding on the ground floor of the cryptocurrency financial system.”
So, this could probably be a whole episode. But, no matter what we do, we cannot shake Tether FUD. It’s like the U.S. government decided that environmental concerns were getting too far ahead as the FUD of the cycle and wanted to give Tether a little boost. All joking aside, as I’ve said before, and I’ll say again, it’s stablecoins, not Bitcoin, that are most likely to show up as a place for U.S. regulatory action.
And, speaking of regulatory action, let’s move now to our main discussion. One will be forgiven for thinking that there’s an increase in regulatory scrutiny around Binance, the world’s biggest crypto exchange. On Friday, Japan’s Financial Services Agency issued a warning about the company. The FSA said that the company is not registered to do business in Japan. Last month, the company issued a similar warning regarding Bybit. This also wasn’t the first time the FSA has that something to say about Binance. In March 2018, they issued a similar notice. At that time, rumors swirled that Binance was subject to criminal charges by the FSA, which CZ said was absolutely untrue and that they were in quote “constructive dialogues with the regulator.” Given that it’s been three years, his version of the story seems likely closer to the truth. Regarding this FSA notice, a Binance spokesperson said: “Binance does not currently hold exchange operations in Japan nor do we actively solicit Japanese users.”
That wasn’t the action that really caught people’s attention, though, that was reserved for an outright ban by the U.K., or, at least, that’s how reporting made it seem. Here’s the first line of the Fortune piece about it: “Binance Markets Limited was banned by the U.K.’s financial watchdog from doing any regulated business in the country, one of the most significant moves to date by a regulator amid a global crackdown in the crypto industry.” Now, that name here is the significant part. Here’s what Binance tweeted about it: “We are aware of recent reports from an FCA U.K. notice in relation to Binance Markets Limited, BML. BML is a separate legal entity and does not offer any products or services via the Binance.com website. The Binance Group acquired BML in May 2020 and has not yet launched its U.K. business or used its FCA regulatory permissions. The FCA U.K. notice has no direct impact on the services provided on Binance.com. Our relationship with our users has not changed. We take a collaborative approach in working with regulators and we take our compliance obligations very seriously. We’re actively keeping abreast of changing policies, rules and laws in this new space.”
Let’s actually read the FCA’s notice specifically: “Consumer warning on Binance Markets Limited and the Binance group. Binance Markets Limited is not permitted to undertake any regulated activity in the U.K.. This firm is part of a wider group, Binance Group. 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 to the FCA. No other entity in the Binance Group holds any form of U.K. authorization, registration or license to conduct regulated activity in the U.K. The Binance Group appears to be offering U.K. customers a range of products and services via a website, Binance.com.” It then goes on to warn about crypto in general. One key line from that is: “While we don’t regulate crypto assets like bitcoin and ether, we do regulate certain crypto asset derivatives, such as futures contracts, contracts for difference and options, as well as those crypto assets we would consider securities.”
So, let’s talk now about different reactions to this news. Some had some things to say about the U.K. specifically, from what I gather, people have roughly the same perception about the FCA as they do about New York State when it comes to crypto regulation. And to them, this confirms that the U.K. is going to be a comparatively hostile jurisdiction. Another dimension though, is increased regulatory scrutiny everywhere and I actually have a theory about this. I think that we’re hitting an inflection point where governments are recognizing the simple fact that crypto is here to stay. Despite all the economists and journalists who have cried “bubble” for so many years, it simply isn’t going away on its own. Because of that, governments are now drawing their lines about what they will and what they won’t tolerate. That’s going to be different in different places.
Here’s what Kirill Suslov, the CEO of the trading app TabTraders said about the U.K.: “FCA is usually after leveraged high risk trading, not crypto per se. Binance, apparently, was targeted because of its futures in margin trading. Spot trading of Binance shouldn’t be included in the ban, really.” Now, if you listen to my show last week on McAfee and the end of crypto’s Gonzo era, one of the things I mentioned is that it seems possible to me that in 10 years, there will be certain parts of today’s crypto markets that still seem extremely Gonzo based on the perspective that we’ve gained. The one that I referenced specifically was 100x leverage trading. I think there are signs that leverage trading and derivatives are going to be one of those lines that regulators start to draw.
Take the example of Canada. Last week, the Ontario Securities Commission released a statement of allegations against ByBit. Here’s the key line: “ByBit is subject to Ontario Securities Law because crypto asset products offered by the ByBit platform are securities and derivatives, ByBit has nonetheless failed to comply with the registration and prospectus requirements under Ontario Securities Law.” So, this is an escalation from a March 29 action where the Ontario Securities Commission issued notice to crypto trading platforms that were offering derivatives and securities that they had to bring their operations into compliance with Ontario Securities Law or, as they put it, face potential regulatory action. Binance, for its part, has actually made the decision to leave Ontario entirely because of this new shift.
Canada is also not the only place with a growing focus on derivatives and leverage. This morning Huobi put out a notice that it was discontinuing derivatives trading for Chinese users, it did the same for U.K. users. Now, this was somewhat expected. There’s been an argument that part of why China is cracking down on crypto are their concerns about financial and social stability. Others have rightly pointed out however, that it seems that if stability were a primary motivation, trading, particularly leveraged trading, would be more of a target than mining. For that reason, the industry has had its eyes on what moves the exchange is serving mainland Chinese users like Huobi would do, and maybe we’ve got our answer.
As an aside, the oldest and longest running bitcoin exchange in China, BTCC, has fully and finally closed its bitcoin trading business following the latest anti-crypto actions in China. Given that this exchange started all the way back in 2011, it’s clearly the end of an era. So, what do you think? Are we at the beginning of a global crackdown on leverage on crypto derivatives? It’s too early to call it but there are certainly some signs. What’s most interesting to me is what the response of the industry will be. Will we see a deeper schism between aboveboard, regulated KYC spot trading based crypto and underground, decentralized anonymous derivatives crypto? Certainly seems possible, but there’s still a lot of history left to write. For now, I appreciate you listening and until tomorrow guys, be safe and take care of each other. Peace!