Cryptocurrency exchange Binance and its founder Changpeng Zhao are facing a lawsuit worth approximately £150 million (about $190 million) in the United Kingdom. The case alleges that the company offered complex and high-risk financial products, such as leveraged trades, to UK users without obtaining the required regulatory approvals.
Scope and Allegations of the Lawsuit
The lawsuit includes around 1,700 UK-based investors as plaintiffs. A portion of these investors claim they suffered losses in the tens of thousands of dollars due to these financial products, which became accessible towards the end of 2019.
The focus of the allegations is primarily on derivatives and leveraged trading instruments. These products expose investors to amplified risks since they are sensitive to the price movements of underlying assets, making them significantly riskier for retail participants.
Glossary: Derivatives are financial instruments whose value depends on an underlying asset. Leveraged trading allows investors to open larger positions with a smaller collateral, which can amplify both potential profits and potential losses.
A Binance spokesperson stated that the company has honored its obligations to users, conducts business in compliance with current laws, and will mount a defense against the lawsuit.
The FCA’s Position
The UK’s Financial Conduct Authority (FCA) announced in October 2020 that it was banning the sale of crypto derivative products to retail customers. The regulator concluded that these advanced instruments were not appropriate for retail investors.
This ban came into effect in January 2021. In a policy update published on Tuesday, the FCA noted that it had lifted restrictions on certain exchange notes for individual access, but that its review of access to derivative products was ongoing.
The FCA reiterated that crypto assets are high-risk investments and stated that this risk designation would not change under the current regulatory framework.
Regulatory Process in Europe
Binance, one of the world’s largest crypto exchanges by trading volume, is facing regulatory headwinds not only in the UK but also across Europe. The company recently withdrew its MiCA license application in Greece.
MiCA represents the European Union’s unified regulatory framework for crypto-asset markets. This license gives companies the legal basis to offer crypto services in EU countries starting from July 1st.
Following the withdrawal of its application in Greece, Binance announced plans to resubmit its MiCA application through another EU member state, but so far has not disclosed which country it will choose for its new application.
