Cryptocurrency traders seek damages from Binance after a major outage

Canadian crypto trader Fawaz Ahmed knew it was time to escape when he saw Ethereum prices declining. Unfortunately for him, he couldn’t.

Ahmed traded on Binance, the world’s largest cryptocurrency exchange in terms of trading volume. And on May 19, Binance experienced a major outage. This means he couldn’t leave his position for about an hour.

That day, Bitcoin and Ethereum recorded the largest daily decline since March 2020, reducing the value of the crypto market as a whole by about $ 1 trillion. Ahmed’s position was wiped out when prices fell below a certain point. His personal loss amounted to about $ 6 million.

“This loss wasn’t fair,” Ahmed, 33, who trades full-time, told CNBC. “This is beyond my control.”

Ahmed is one of the hundreds of investors expected to participate in arbitration proceedings against Binance seeking damages for money lost when crypto exchanges went offline.

Binance wasn’t ready to comment at the time of publication.

Binance has experienced several outages over the years during periods of high cryptocurrency volatility. This can be costly for traders, especially if prices are plummeting.

And as investors use leverage and debt to make risky bets and increase transactions, these losses can grow to millions of dollars. This is something users often do in Binance.

Binance recently reduced the maximum leverage available to clients in futures (financial derivatives that require investors to buy assets at a later agreed time) from 125x to 20x the previous limit.

Binance wasn’t the only crypto exchange that faced a service outage on May 19. Coinbase users were also temporarily unable to access the site. That day, Bitcoin plunged 30% to nearly $ 30,000. After that, it recovered to $ 45,790.

Binance boss Changpeng “CZ” Zhao previously stated that the exchange has no official headquarters. As a result, it is very difficult for investors to understand how and where to bring a company to court.

A group of crypto traders want to change that. With the help of Liti Capital, a lesser-known private equity firm that funds the proceedings, nearly 1,000 people are expected to participate in arbitration proceedings in Hong Kong to seek damages from Binance. increase.

“This is a milestone for the industry,” Liti Capital Chief Investment Officer David Kay told CNBC.

Binance is “the first company to grow to any scale in any unregulated industry, let alone the financial industry,” he said. “They have no homes, no headquarters, no offices.”

“The only place Binance has said it has jurisdiction is the International Arbitration Court in Hong Kong,” Kay added. “This will be the largest international consumer arbitration in history.”

Kay said Liti Capital began working on the Binance proceedings after receiving a call from Aija Lejniece, an independent lawyer working with a group of French crypto traders. Lejniece specializes in international arbitration cases.

Binance’s Terms of Service state that legal disputes must be resolved through arbitration at the Hong Kong International Arbitration Center. Arbitration proceedings, unlike class action proceedings, are aimed at resolving disputes outside the courtroom.

According to Kay, this format makes it difficult for the average consumer to make a claim. This is because the claimant has to pay arbitration and additional costs, for example a trip to Hong Kong. Individually, it could return each claimant an estimated $ 65,000. To cover these costs, Liti Capital has promised to provide at least $ 5 million in funding.

White & Case, a New York-based law firm, was hired to represent the plaintiffs. Two Washington, DC-based White & Case partners, Abby Cohen Smutny and Darryl Lew, will be lawyers.

Cryptography, an early industry, is still largely unregulated. While some companies in this area, like Coinbase, have sought to build trust with regulators, Binance and many others operate primarily outside the scope of established rules. going.

It has not been overlooked by regulators competing to keep up with new innovations in financial services. The two main concerns about cryptography are the lack of protection for consumers and the risk of money laundering and other illegal activities.

Binance in particular is drawing attention from authorities in multiple countries. The UK’s Financial Conduct Authority recently banned its UK subsidiary after discovering that it did not meet the requirements to prevent money laundering. Meanwhile, financial watchdogs in Japan, Canada and Italy have warned that Binance is not authorized to operate in these countries.

In addition to Binance’s worries, the company has lost US chief Brian Brooks, who was formerly the director of the Office of the Comptroller of the Banking, a US banking regulator.

Founded by Zhao in China four years ago, the company recently said it plans to license in multiple jurisdictions and set up regional headquarters, pivoting to become a regulator. Zhao said he was ready to resign from the exchange to give the baton to someone with a wealth of regulatory experience.