Can FCA’s Binance ban be the beginning of a clampdown on crypto exchanges?

Binance, one of the world’s leading cryptocurrency exchanges, has been banned from operating in the UK. This might be a sign that regulatory bodies will now put cryptocurrency exchanges under their microscope, experts said.

The UK’s finance watchdog has banned major cryptocurrency exchange Binance from regulated trading in Britain, as the industry faces greater global scrutiny.

Binance Markets Limited, part of Binance Group, is “not permitted to undertake any regulated activity in the UK”, the Financial Conduct Authority (FCA) said in a statement published over the weekend. The ban affects options and futures contracts related to bets on price movements of cryptocurrencies.

However, purchases of cryptocurrency units, such as bitcoin and dogecoin, can continue since they are not regarded as financial products and are therefore not regulated.

The Financial Conduct Authority followed its prohibitions on Binance with a warning to consumers: Be wary of advertisements “promising high returns on investments in crypto asset or crypto asset-related products.” The UK’s move mirrors that of Japan, where finance regulators Financial Services Agency (FSA) notified Binance that it is not authorized to do business in the country.

This is not the first time that Binance has come under scrutiny by regulators over its global operations. In the US, one of the firm’s entities – Binance Holdings – has been the subject of a probe by the US Securities and Exchange Commission (SEC), specifically by its officials dealing with money laundering and tax offences, according to Bloomberg.

The SEC issued a similar warning to US consumers in April about the platform. Recently, Binance pulled out of Ontario, Canada, after the Ontario Securities Commission (OSC) accused it and several other crypto trading platforms of failing to comply with province regulations.

The crackdown is the latest in an ongoing series of setbacks for the broader crypto universe that has wiped billions off the market value of listed US rival Coinbase and prompted marketplace Kraken to consider postponing its own plans to go public.

It’s therefore easy to see why the FCA is taking a harder line on digital assets as more and more consumer money flows into it. An FCA report, which found that 2.3 million adults in the UK now hold cryptocurrency – up from 1.9 million last year, suggested that some individuals who have heard of crypto may not fully understand the risks that come with it.

Clearly, while blockchain may be decentralized and borderless, the technologies built to support open and public blockchains are not. As a result, cryptocurrencies have long sparked concern among central banks and regulators alike, because of their lack of oversight. And companies need to do more to beef up their security.

BrandShield CEO Yoav Keren told FinTech Global, “The FCA’s move to halt Binance’s UK operations poses a significant challenge to crypto’s leading exchanges to step up, raise their standards and take significant action against the persistently illegal and fraudulent activity this space has seen.” According to him, the time is overripe for industry players to ramp up efforts to protect investors’ trust. “Should they fail to act, we could see another crypto collapse akin to 2018. Simply put, crypto investors shouldn’t have to tolerate the amount of risk that is currently present in the space and it’s time for leading figures to show greater responsibility,” he added.

This is especially pertinent as cryptocurrency is now receiving an increasing amount of mainstream coverage and investors of all experience levels are flocking to the alternative capital markets, whether to trade assets for the first time or diversify their investments. Keren continued, “It shouldn’t surprise anyone that cybercriminals are following the money and targeting retail investors with both increasing frequency and sophistication through a wide array of fraud schemes. To continue capturing the interest of investors, the crypto industry needs to firmly rid itself of concerns about money laundering and fraud.”

Furthermore, while Binance may be the first to fall foul of the Financial Conduct Authority, it is unlikely to be the last, analysts said. ComplyAdvantage CEO Charles Delingpole believes that as crypto becomes more common, exchanges and traders will face fire from regulators around the world and they must ensure complete regulatory compliance to avoid drowning in legal hot water. He said, “The FCA may be the first regulator to act, but they are unlikely to be the last. As different regulators demand that global crypto companies are authorised in each jurisdiction, we can expect each crypto operator to double down on their investment in meeting and surpassing local regulatory requirements. 2021 may become the year that the regulation of crypto truly begins at a global scale.”

Delingpole added that whilst crypto is borderless and global, regulators act vociferously to enforce their local regulation and companies need to be fully compliant with each jurisdiction.

Echoing a similar sentiment as Delingpole, Divi co-founder Nick Saponaro said that it was hardly surprising for the FCA to scrutinise crypto exchanges further. He said, “The area that some crypto companies operate in is grey at best.” He believes better regulation demonstrates that a relatively new sector is maturing quickly thanks to the scale at which it is garnering interest from investors. And a greater focus on compliance and best practice will ensure high operational standards and strengthen our industry’s reputation. “Regulation was a given, which may come as a disappointment to crypto die-hards but the writing has been on the wall for years,” he said. “Those that work within these boundaries will become the Amazons, Googles, and Facebooks of tomorrow, while the edgier projects may find it increasingly difficult to operate.”

It’s indeed clear that the FCA is sending a strong signal that it is worried about the dangers of investing in cyptocurrencies in general. The reason it wants them all to register is because it’s concerned about their potential use as a cover for illicit activity – and it wants consumers to be very careful indeed. Change Invest CEO Kristjan Kangro opined that FCA’s move should not be taken in a negative light as the UK is simply applying its existing financial regulations that are in part designed to protect consumers. He said, “It is easy to panic and look at this as an attack on cryptocurrencies in general. However, We know from experience that cryptocurrency investing platforms can operate in every country within the EEA providing they do the hard work of complying with the legislation.”

However, some believe that for crypto traders and investors, nothing has changed despite the ban. This is because per the FCA website regulated tokens consists of Security Tokens and E-money tokens and cryptocurrency assets such as futures, options or leveraged trading. Crypto assets such as Bitcoin, Ether, Litecoin and the equivalent do not come under the ban. People in the UK are still free to buy, sell, and hodl crypto on the platform. According to Quantum Economics founder Mati Greenspan, “To the uneducated, [FCA’s] opening sentence may seem ominous.” However, he added that the ban in no way indicates a policy shift from the UK regulators regarding crypto assets.

Greenspan continued, “For what it’s worth, Binance was ostensibly trying to achieve compliance in this area, but did not do it to the FCA’s standards in the time frame provided to them, hence the clarification. We should applaud the FCA’s efforts to protect inexperienced traders and their consumers.”

The FinTech industry as a whole ought to take away from this that cutting corners, especially those of legal persuasion, equates to long-run folly. According to FinTech investor Viktor Prokopenya, “The underlying parable behind the FCA’s move against Binance is that corporate compliance is a necessity for any business looking to scale: there is a fundamental reliance on fiat currencies which unquestionably comes with regulation, if not immediately then eventually.”

The FCA’s blunt decision regarding Binance also highlights that crypto exchanges having what is effectively a centralised entity, acting as a make-shift custodian of consumer finances, goes against the very notion underpinning cryptocurrencies which is that of decentralisation. Prokopenya concluded, “Perhaps, this wake-up call will serve to realign FinTech businesses in the space and act as a catalyst for innovative solutions to meet consumer demand for decentralisation.”

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