The UK's Binance ban shows ‘how little control’ regulators have over sprawling crypto giants

Quick Take

The U.K.’s Financial Conduct Authority issued a notice on June 26 barring Binance from engaging in “regulated” activities in the U.K.
Crypto industry sources say the action is likely to have little or no consequence for the business that Binance does in the U.K.

Typically, when a regulator bans a subsidiary, it’s bad news for the group that owns that subsidiary.

But in the case of Binance, industry experts are convinced that the recent actions of the Financial Conduct Authority (FCA) — the regulator issued a notice on June 26 barring Binance Markets Limited (BML) from engaging in “regulated” activities in the U.K. — will have little to no impact on the sprawling cryptocurrency exchange operator.

“This seems like an attempt by the FCA to control Binance but, in reality, it’s shown how little control they actually have over the activities of their offshore entities,” said one lawyer who works in the crypto sector. “Unless they can block the website in the United Kingdom, which you can’t really do, then they’re out of real practical options.”

In a statement to The Block on June 27, a Binance spokesperson said that the FCA’s notice “has no direct impact on the services provided on Binance.com.”

The spokesperson stressed that BML is a separate legal entity that does not offer products through 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,” they added.

The Binance.UK website isn't live yet. A Binance spokesperson declined to comment on whether the website would be launched in the future.

The episode is indicative of the challenges of regulating groups whose activities transcend national boundaries and that deal in assets that, for the most part, exist beyond the regulatory perimeter.

Structural concerns

In its warning on BML on June 26, the FCA specified that no other entity within the Binance Group has permission to carry out regulated activities in the U.K. market.

The term "regulated activities" refers specifically to derivative products such as futures and options trading. The FCA banned the sale of crypto derivative products and exchange-traded notes linked to crypto in January this year.

Binance’s spot trading products — which are, at present, unregulated — appear unaffected by the FCA's notice.

“In the U.K. exchanging money or cryptoassets for other cryptoassets [spot trading] or arranging for another person to perform that service is not a regulated activity. These are registrable activities under the UK's anti-money laundering regime,” said Diego Ballon Ossio, a senior associate at London-based law firm Clifford Chance, which advises crypto and blockchain firms, in a message to The Block.

“So really the restriction applies in respect of trading of tokenized securities such as shares or bonds. I note that Binance Markets Limited’s register entry does not include activities in respect of forwards, options or contracts for differences (so-called contractually based investments),” Ballon Ossio added.

A person close to the FCA said that spot trading “is unlikely to be a regulated activity and is unlikely to be included under the crypto derivatives ban for retail consumers,” meaning such activities are not impacted by the Binance notice.

The FCA has given Binance until June 30 to cease regulated activities within the U.K. and to display a notice on its website and social media reflecting the fact that it is not allowed to carry out such activities in the country. Yet in its statement issued June 27, the Binance spokesperson asserted, “our relationship with our users has not changed.”

A source close to the FCA agreed with Binance’s interpretation, telling The Block that the ban “has no impact on anything” because Binance’s U.K. users face Binance.com — not BML.

At the heart of the issue is the relationship between BML and the Binance Group.

“The restriction on the FCA register for BML requires that entity to put notices on Binance.com, but BML doesn’t control or operate the website, so it can’t do that,” said the lawyer who works in the crypto sector. “The FCA knows this, but they only have jurisdiction over BML and not any of the other Binance entities, so it’s all they can do.”

The notion that BML has no influence over Binance.com has raised eyebrows.

Companies House records list Changpeng Zhao as the sole person with significant control over BML. On the other hand, it is a separate legal entity.

“Binance Markets Limited is essentially a shell company, and it would be surprising if Binance took a proactive response with regards to actively banning U.K. clients,” said Joseph Edwards, head of research at Enigma Securities, a crypto market maker. “It’s always possible that they do so, but in general, offshore exchanges don’t really worry about these things unless U.S. or Chinese authorities specifically get involved.”

A person close to the situation admitted there are complications relating to the territorial scope of U.K. regulation. That person added, however, that they didn’t agree that the FCA notice should be dismissed out of hand by Binance.

Saber-rattling?

What, then, is the point of the FCA’s ban? Is it a genuine attempt to curb U.K. consumer access to Binance products or is it merely saber-rattling from a regulator short on options?

The timing of the move is noteworthy. Similar warnings about Binance’s regulatory status have been issued by watchdogs in Japan and in Ontario over the past few days — signs of what may be a coordinated strike.

For Enigma’s Edwards, the actions are intended to send a message to crypto firms.

What the U.K. regulator cares most about, according to Edwards, is barring consumers from investing in crypto derivatives. “They see them, in practical terms, as a gambling product,” he said.

“With BitMEX very much in decline, Binance is the biggest retail derivatives venue by far, and they have leaned into the casino angle, from their 125x leverage offering to their entire promotions system to the user interface of the platform itself,” Edwards said.

But although derivatives are regulated in the UK, “offshore crypto exchanges have been providing a lot of regulated services in the U.K. with no regulation for a very long time,” Sergey Zhdanov, COO of the crypto exchange EXMO, points out.

“I think that regulators should react much faster,” said Zhdanov. “I think the reaction should be faster and the punishment should be harder.”

But determining who to punish — and if punishing them is possible — is complicated in the context of an offshore crypto exchange like Binance.

According to those well-versed in the arcane language of crypto regulation, the distinction between regulated activities (derivatives) and unregulated activities is somewhat irrelevant. What matters most is the group structure.

FCA guidance published in early 2020 specifies that crypto firms with “no office or other activity in the U.K., beyond simply having a client in the U.K,” are unlikely to be considered as carrying on U.K. business.

What this seems to suggest is that the FCA will not act against crypto firms serving British customers from an offshore base. As a result, the crypto lawyer said he “doesn't think they’ll stop derivatives.” The source close to the regulator agreed that the FCA has not, therefore, instructed Binance that it cannot sell to U.K. customers.

The same source labeled the FCA notice as little more than propaganda.

“I am sure CZ [Changpeng Zhao] is not losing any sleep over this one – not his first dust up with regulators. It’s their MO to push the envelope,” they added.

That is not to say, however, that the FCA notice will have no impact at all on Binance's derivative products. A person close to the FCA told The Block that, under the regulator's derivatives ban, “firms that are located outside of the U.K. cannot advertise crypto derivatives to UK retail consumers.”

Even here, though, there is a loophole.

“A retail consumer could buy a crypto derivative on Binance.com. Indeed, unauthorised third country entities, like Binance.com, are able to take advantage of the 'overseas person’s exclusion' and may sell crypto-derivatives to retail clients in the UK (from overseas) without being subject to our rules where there is a legitimate sale by 'reverse solicitation',” they added.