3 months ago

    Why is your crypto exchange unregulated, and should you be worried?

    Table of contents

      Last year, Binance agreed to pay $4.3 billion to settle with the Department of Justice and Commodity Futures Trading Commission (CFTC) over breaches of illicit finance regulations. Binance’s then-CEO Changpeng Zhao pleaded guilty to breaking U.S. anti-money-laundering laws and agreed to step down as CEO​​​​. The CFTC now has access to all of Binance’s records, which could lead to the uncovering of additional instances of mishandled funds or suspected fraudulent activities. The CFTC has expressed its commitment to ensuring that non-U.S. entities comply with the U.S. regulatory framework, indicating that the legal issues for Binance may intensify​​. 

      The U.S. Securities and Exchange Commission (SEC) has accused Binance and CZ of 13 charges related to buying, selling, and trading unregistered securities and commingling customers’ funds. Furthermore, they are accused of operating an unauthorized stock exchange under the banners of both Binance.com and Binance.US. The SEC alleges that despite public statements to the contrary, Binance secretly allowed high-value U.S. customers to continue trading on the Binance.com platform.

      Is Binance’s U.S. operation compliant?

      According to a new report, Binance.com and Binance.US continue to receive substantial traffic from the United States. Despite the ban, Binance.com was the second-largest recipient of visitors in the U.S. after Coinbase, attracting about 34.5 million visitors. Binance.US is the 7th on the list, with 17.8 million visits. 

      As of January 2024, Binance displays a warning banner for U.S. users. Still, it seems more like a formality than an effective compliance measure at first sight, as you can close the pop-up and continue to the site. They do, though, block access to new users from the U.S. who try to log in or register their accounts and advise users to use Binance.US. The text on the popup says: “Binance.com is read-only in your country or region. Visit Binance.US, our U.S. regulated partner”. So then, is Binance.US regulated?

      Not really. Last year, Binance.US was registered with FinCEN with an MSB license under BAM Trading Services from Palo Alto, California. The registration allowed it to do Money Transmitter activities in most states except Delaware, Hawaii, Mississippi, New Hampshire, and Rhode Island. But as of January 2024, BAM Trading, Binance.US or Binance are no longer listed on the FinCEN website. This raises questions about their compliance status in the U.S. and the “Regulated” status they are claiming for Binance.US. 

      Drawing traffic in restricted countries, an industry dilemma

      While Binance.US’s regulatory status in the U.S. appears murky, a parallel situation unfolds globally. Despite regulatory challenges in various countries, Binance continues to see high traffic from these regions, indicating a disconnect between regulatory actions and user behavior.

      Here’s a brief overview of the situation in each country:

      • The Philippines: The Philippines’ Securities and Exchange Commission (SEC) initiated the process of blocking access to Binance in November 2023. The SEC’s decision was based on Binance operating without the necessary license and authority to sell or offer any form of securities in the country. Despite this, Binance recorded 2.5 million visits from the Philippines in December 2023.
      • The Netherlands: Binance faced a setback when it was denied a license in the Netherlands. Nevertheless, the platform continued to attract significant traffic, with 11.2 million visits from the Netherlands in 2023.
      • Canada: Binance announced its exit from Canada, but this didn’t seem to hinder its popularity, as evidenced by 14 million visits from the country last year.
      • Malaysia: In 2021, Malaysia took enforcement actions against Binance. Despite these measures, Binance managed to draw 9.5 million visitors from Malaysia in 2023.
      • India: India blocked 9 crypto exchanges in the past year. However, India remains Binance’s biggest market, with the platform receiving 75 million visits from the country.

      The pattern of continued usage despite regulatory hurdles isn’t unique to Binance. Other exchanges like KuCoin and Poloniex also saw significant traffic from countries with restrictions. Despite bans, KuCoin had about 2.9 million visits, and Poloniex saw 363,000 visits from Canada. In countries like China and Egypt, where cryptocurrencies face legal restrictions, exchanges still receive considerable traffic. Binance got 10 million out of Egypt’s 30 million visits to crypto exchanges.

      These instances highlight crypto exchanges’ continued traction in countries facing regulatory challenges, raising questions about their compliance and the effectiveness of regulatory actions against them. 

      Crypto regulation is still seeking global consistency and clarity

      Exchanges like Binance often find themselves in a precarious position with regulators. While it’s easy to point fingers at these exchanges for non-compliance, the reality is that the cryptocurrency industry is still nascent, and governments worldwide are taking their time to develop clear regulatory frameworks. This lack of standardization in regulations contributes significantly to the challenges exchanges face.

      As of last year, only 39 countries had specific regulatory paths for crypto exchanges to register as Virtual Asset Service Providers (VASP). This statistic highlights the global inconsistency in cryptocurrency regulation, where each government adopts different standards and approaches. For example, in the U.S., most states, barring New York with its BitLicense, utilize the Money Service Business (MSB) license for crypto exchanges instead of adopting a VASP framework. 

      Binance’s journey illustrates a broader industry conundrum: striving for compliance in a space where regulatory clarity is still a work in progress and government approaches vary widely.

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