Nearly USD 1 trillion in crypto market cap was wiped out in mid-May. A cascade of negative news—like Elon Musk saying that Tesla will suspend its acceptance of bitcoin as payment, China’s crackdown on crypto mining, and its ban on the provision of crypto-related services by financial and payment institutions—dialed up volatility for two key digital assets, bitcoin and ether. Trading activity was in such a frenzy that the world’s largest crypto trading platform, Binance, experienced a service outage for more than one hour on May 19. In the crypto space, that may well have been a lifetime.
Fawaz Ahmed, a Canadian investor, was among one of the traders who ended up mired in steep losses. He tried to close his position at noon that day, but was locked out of the system. “I tried to click that ‘Close Position’ button more than 70 times,” Ahmed told The Verge in a statement. He estimated that he racked up USD 6 million in losses because of Binance’s blip.
Ahmed’s case during the May 19 interruption typifies the fragility of crypto exchanges during intense market volatility. Although no platform is foolproof, Binance’s blackout—and the ensuing vitriol from its users—raises questions about the legal ramifications when major systems go down.
On July 6, a group of Italian and international investors launched a class action lawsuit against Binance over the damages suffered by investors on its Futures platform, which allows users to trade futures contracts without holding any crypto. On behalf of the investors, Italy-based law firm Lexia Avvocati and the Swiss Blockchain Consortium alleged that Binance did not receive regulatory approval to offer derivative financial instruments and did not function properly during peak trading hours.
Lexia Avvocati and the Swiss Blockchain Consortium continues to urge more victims to join their legal action. Liti Capital, a Swiss private equity firm that offers litigation financing, committed USD 5 million to support the class action’s some 700 traders who have suffered “more than USD 100 million of damages” in an international arbitration case against Binance.
For many, a day in court is the only path forward. “A number of traders have tried to resolve matters with Binance short of pursuing legal claims, but so far have been unsuccessful,” Liti Capital said.
Under Binance’s terms and conditions, traders can escalate their disputes for international arbitration to resolve their compensation claims, but Liti Capital pointed out in a press release that the process is “a costly step for an individual.”
Even in the brewing class action lawsuit against Binance, the group of investors found it difficult to determine where they should send their court papers, as Binance has no headquarters, according to Airell Ang, a legal associate at Singapore-based Magna Law Corporation. “This is a red flag and perhaps explains why many regulators are picking on Binance right now. It leads to many questions about who should take responsibility,” Ang told KrASIA.
At the moment, financial regulators around the world are engaging in uncoordinated crackdowns on Binance. This includes moves in Southeast Asia. In July, Thailand’s Securities and Exchange Commission filed a criminal complaint against the platform for operating a digital asset exchange without a license. Then, in early August, Malaysia’s Securities Commission reprimanded the exchange for operating illegally in the country.
Beyond the region. the platform was barred from undertaking regulated business in the United Kingdom in late June. Japan’s Financial Services Agency warned that Binance was operating in the country without a license, while the United States Department of Justice was reportedly investigating the exchange as it allows users to trade cryptocurrency derivatives, according to multiple media reports.
There is one case that offers a look at what Binance might face if authorities pursue an investigation into its May outage. In the US, the Financial Industry Regulatory Authority (FINRA) ordered Robinhood, a stock and crypto trading app, to pay USD 70 million in fines for systemwide outages and misleading information that was offered to consumers, according to a press release issued by FINRA on June 30.
Crypto regulation is still in its nascent stage in Southeast Asia, but regulators are formulating ways to oversee the industry. Singapore has one of the most progressive sets of crypto regulations in the region. So far, it has granted two instances of in-principle approval for crypto trading, according to Ang. On September 1, Singapore-based fintech firm Fomo Pay became the first to receive a crypto trading license from the city-state.
As Singapore continues to explore ways to protect investors, Ang suggests that regulators could reference some of the rules that govern the stock exchange. “There is no legal ramification when a crypto exchange outage happens in Singapore. However, I do not believe that this will be the case in the long run. In the case of the Singapore stock exchange, the maximum allowable unscheduled downtime for financial institutions is up to four hours in any 12-month period,” Ang said.
“The crypto exchanges might also follow the same direction. But this legal ramification only applies to stock exchange outages for now, as the crypto industry is still in its infancy. The regulators are still trying to keep up with the concept of digital assets,” he explained.