The Binance cryptocurrency exchange logo is displayed on a phone screen.
Jakub Porzycki | NurPhoto via Getty Images
When Canadian cryptocurrency trader Fawaz Ahmed saw the price of Ethereum drop, he knew it was time to get out. Unfortunately he couldn’t.
Ahmed traded on Binance, the largest digital currency exchange in the world by trading volume. And on May 19, Binance experienced a major outage that resulted in its being unable to leave its position for about an hour.
On that day, Bitcoin and Ethereum saw their largest one-day declines since March 2020, with the entire crypto market shedding around $ 1 trillion in value. When prices fell below a certain point, Ahmed’s position was destroyed. His personal loss was about $ 6 million.
“That loss wasn’t fair,” Ahmed, a 33-year-old full-time trader, told CNBC. “That was something that was out of my control.”
Binance’s customer service team made Ahmed an “absurdly” low compensation offer, he said.
Ahmed is one of hundreds of investors expected to participate in arbitration against Binance seeking compensation for the money they lost when the cryptocurrency exchange went offline.
Binance said it was unable to comment on “pending legal matters”.
“Our policy is fair in that we compensate users who have suffered actual trading losses due to problems with our system,” a company spokesman told CNBC. “We don’t cover hypothetical ‘what could have been’ situations like unrealized gains.”
Binance has seen multiple outages over the years in times of increased volatility for virtual currencies. This can be expensive for traders, especially when prices collapse.
And those losses can skyrocket to millions of dollars if investors place risky leverage bets or borrowed money to boost trading – which Binance users often do.
Binance recently lowered the maximum leverage customers can take on futures – financial derivatives that require investors to buy an asset at an agreed time at a later date – from an earlier limit of 125 to 20 times.
Binance wasn’t the only crypto exchange to face a disruption to its service on May 19. Coinbase users were also temporarily unable to access their website. Bitcoin plunged as much as 30% to nearly $ 30,000 that day. It has since rebounded to $ 45,790.
No head office
Changpeng “CZ” Zhao, the head of Binance, previously said the exchange has no official headquarters. This makes it extremely difficult for investors to figure out how and where to take the company to court.
A group of crypto traders are hoping to change that. With the help of Liti Capital, a little-known private equity firm that provides litigation funding, nearly 1,000 people are expected to take part in an arbitration in Hong Kong to seek damages from Binance.
“This is a landmark case for the industry,” David Kay, Liti Capital’s chief investment officer, told CNBC.
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Binance is “the first company to ever grow to any size in an industry – let alone financial – where there is no regulation,” he said. “They don’t have a home, they don’t have a headquarters, they don’t have an office.”
“The only place Binance has declared it has jurisdiction is an international arbitration tribunal in Hong Kong,” added Kay. “This will be the largest international consumer arbitration in history.”
Kay said Liti Capital started working on the Binance case after receiving a call from Aija Lejniece, an independent lawyer who works with a group of crypto traders in France. Lejniece specializes in international arbitration.
The format makes it difficult for the average consumer to file a claim, Kay said, as plaintiffs have to pay arbitration fees and additional costs – for travel to Hong Kong, for example. Specifically, this could net each applicant an estimated $ 65,000. To cover these costs, Liti Capital has committed a minimum of $ 5 million in funding.
White & Case, a New York-based law firm, was appointed to represent the plaintiffs. Abby Cohen Smutny and Darryl Lew, two Washington, DC based partners of White & Case, will serve as their attorneys.
Crypto, an emerging industry, is still largely unregulated. While some firms in this area, like Coinbase, have tried to forge a relationship with regulators, Binance and many others operate mostly outside the scope of established rules.
This has not gone unnoticed by the supervisory authorities who are struggling to find new innovations in the financial services sector. Two major concerns with crypto are the lack of protection for consumers and the risk of money laundering and other illegal activities.
Binance in particular has drawn the attention of authorities in several countries. The UK’s Financial Conduct Authority recently banned the company’s UK subsidiary after discovering that it failed to meet anti-money laundering requirements. Meanwhile, financial regulators in Japan, Canada and Italy have issued warnings that Binance is not authorized to operate in the countries.
To add to the suffering of Binance, the company lost its US boss Brian Brooks, who was formerly acting head of the Office of the Comptroller of the Currency, a US banking regulator.
The company, which was founded by Zhao in China four years ago, recently announced it would become a regulated institution, with plans to obtain licenses in multiple jurisdictions and establish regional headquarters. Zhao said he was ready to step down from the stock market to hand over the baton to someone with more regulatory experience.