The troubles of the leading cryptocurrency exchange, Binance, are far from over. This year, the exchange has been at the center of various controversies with regulatory bodies in multiple countries. These regulatory concerns have also led to some payment providers cutting ties with the exchange. Now, Binance has another problem on its hands from Hedge Funds.
Several hedge funds are curbing their trading on Binance as they look to decrease their exposure on the platform. One of those Hedge Funds, Ark36, told Financial Times that it’s reducing its usage of the platform because of what seems like an organized regulatory attack on the exchange. Another also claimed that it had to shelve plans to trade spot and derivatives on Binance because it couldn’t withdraw pound sterling directly from the platform.
These funds cite the current tide of regulatory challenges the exchange is currently facing as to why they are making these choices.
Binance Regulatory Challenges
Regulatory concerns around Binance focus solely on the fact that the platform allows residents of countries where it’s not registered or licensed to conduct regulated activities using its services. As a result, the company is being investigated by various agencies in the US and other countries.
While Binance has grown to become one of the biggest crypto exchanges globally, some things about it remain shady. For example, the company doesn’t have a physical headquarters, which means it’s not domiciled in any jurisdiction. In addition, although it started in China, the Chinese ban on crypto in 2017 led it to move out of the country and incorporate it into the Cayman Islands.
Recently, countries like the UK, South Africa, Singapore, Italy, Malta, etc., have banned the platform from offering regulated services to their citizens. Some of these countries go as far as warning their citizens against the use of the exchange because it is not registered or licensed for such operations in their jurisdiction.
Beyond that, British banks, including Santander, NatWest, and Barclays, have all banned retail clients from sending money to Binance through their accounts. Also, about two major payment partners have had to cut ties with the CZ-led exchange.
Another challenge for Binance is the US Internal Revenue Service (IRS) and the Department of Justice (DOJ) investigation. While the details of the investigations aren’t clear, Bloomberg reports that it’s tied to how crypto is used for money laundering. Given that the exchange is already banned from operating in the US, this investigation raises some alarms. This isn’t the first time Binance has been accused of being used for money laundering. A Chainanalysis report claims the crypto exchange is the number one platform for illegal crypto activities in 2019.
Apart from the earlier mentioned investigation, US authorities are also investigating whether Binance allowed US-based residents to use its platform for illegal trades. However, Binance denies these allegations saying it has placed restrictions on Americans using the platform whereas there are claims that this restriction could be easily bypassed.
Hedge Funds Can’t Take the Risk
The regulatory onslaught on Binance from various angles is definitely something that many hedge funds can’t handle. For example, one of the hedge funds that decreased its exposure, Tyr Capital, claimed the decision was based on the need to protect its investors from the consequences of the multi-jurisdictional crackdown on the platform.
Binance market position and offerings mean many hedge funds trade and participate in one financial activity or the other on it, but that’s slowly changing as some payment companies, and banks distance themselves from the crypto exchange.
Due to the regulatory controversies, some of these hedge funds are now moving away from Binance. This shows that regulators’ attempt to stop crypto exchanges from regulated business in their jurisdictions without the right license can affect exchanges significantly, especially when it comes from multiple jurisdictions simultaneously. For investors, it’s all about protecting their investment, and presently, Binance doesn’t appear really safe.
No one sums up the hedge funds point of view better than crypto and blockchain expert Gil Solomon. According to him, “as the cryptocurrency and blockchain industry continue to evolve and increase in its exposure to the public and mainstream use, we’ll notice higher degree of regulatory involvement which means exchanges such as Binance will be reviewed and scrutinized more often and more closely.”
Going further, he pointed out that
“Binance’s practice much like many other smaller exchanges not to collect relevant ‘know your customer and anti-money laundering related documentation for its ‘smaller users’ and instead of limiting their daily withdrawals while also not limiting the involvement of users based on jurisdiction and residency – may contradict anti-money laundering and securities legislation in some jurisdictions.”
Solomon concluded that
“this poses a problem to hedge funds and financial institutions due to, among other reasons, their regulatory oversight and their duties of care and fiduciary duty to their investors.”
On its part, the crypto exchange declared it has not noticed any decrease in the institutional activities on its platform. It said that it has instead witnessed continuous interest in its institutional offerings from both crypto native firms and other traditional financial institutions getting into the crypto space. It also revealed that it has upped the ante in trying to be compliant with local laws.
Binance has been the largest crypto exchange by trading volume in recent times. With a large number of retail customers, it also has special offerings and benefits for financial companies. However, with the regulatory crackdowns and their consequences, the company will need to comply with regulatory measures before things get out of hand.