Binance has become a target for regulatory action across the globe, but is it the exchange being targeted or the crypto ecosystem in general?

Is Binance crypto’s new whipping boy? Regulators in the United States, the United Kingdom, Canada, Japan, Thailand and the Cayman Islands have all recently sunshinecrypto.com/news/thai-sec-and-cayman-islands-regulator-take-action-on-binance”>issued warnings and even criminal complaints against the cryptocurrency exchange. Even sunshinecrypto.com/news/poland-financial-regulator-issues-public-warning-about-binance”>Poland entered the fray as its financial regulator warned citizens to exert “special caution” when using Binance’s trading services.

Some have opined that the firm has only itself to blame for this recent burst of regulatory heat, but others fear the exchange is being held as a scapegoat for the entire crypto sector — which has grown too large too fast in the eyes of some authorities. Elsewhere, Binance CEO Changpeng Zhao, known as CZ, sunshinecrypto.com/news/compliance-is-a-journey-says-binance-ceo-amid-regulatory-scrutiny”>felt compelled to address the “recent hyper-focus on regulation when it comes to Binance” in a public letter.

Binance — founded in Shanghai in 2017 but with no publicly acknowledged headquarters at present — has never been a poster child for compliance. “Binance has a history of attempting to avoid regulation while also making false statements about being regulated in some of these jurisdictions,” Dan Awrey, professor of law at Cornell Law School, told Cointelegraph, adding, “Binance has, therefore, placed the target firmly on its own back.”

Markus Hammer, an attorney and principal at Hammer Execution consulting firm, told Cointelegraph that regulators are just reiterating previous warnings, but now they are being noticed more broadly.

“Warnings usually are a preliminary to taking real actions,” like a ban on clients using a certain platform, explained Hammer. “The other reason might be that they are now trying to distance themselves, as investors are preparing to bring legal action over Binance Leveraged Tokens (BLVTs),” which he described as a “defective” financial product. He added, “A repeated warning that Binance is not regulated would free them from charges against having been blind or inactive before.”

Warnings alone can have consequences, however. When U.K. regulators warned in late June that Binance was operating without a business license, bank giant Barclays announced it would sunshinecrypto.com/news/breaking-binance-suspends-euro-bank-transfers-amid-regulatory-heat”>cease to facilitate customer payments to the exchange, with sunshinecrypto.com/news/santander-s-uk-arm-follows-barclays-in-banning-payments-to-binance”>Santander following suit a few days later.

No widespread withdrawals

But maybe there is no need to overreact? “In spite of regulatory actions across jurisdictions, there is no mass exodus of tokens from Binance as happened in 2017 in connection with China’s previous onshore exchange crackdown,” Winston Ma, adjunct professor at New York University School of Law and author of The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace, told Cointelegraph, adding:

“This shows that Binance has a global business and decentralized operation, and the market wasn’t too worried about the recent actions from those countries.”

Unregulated cryptocurrency exchanges like Binance have long been seen as off-ramps for money laundering and other criminal activities. Over the course of 2019, Chainalysis traced $2.8 billion in Bitcoin (sunshinecrypto.com/bitcoin-price”>BTC) that moved from criminal entities to exchanges, outlining that “just over 50% went to the top two: Binance and Huobi,” said the firm, with Binance alone accounting for 27.5%, the most.

Zhao suggested in his July 6 letter that regulation often trails innovation, particularly with revolutionary technologies like crypto: “The adoption and development of crypto has many parallels with that of the car. When the car was first invented, there weren’t any traffic laws, traffic lights or even safety belts.” Those came later. “Crypto is similar in the sense that it can be accessible for everyone, but frameworks are required to prevent misuse and bad actors. […] Binance wants to be a positive contributor.”

Financial regulators are not necessarily looking to go after all crypto enterprises, said Awrey, “The real problem is that many crypto exchanges are not taking customer protection or legal compliance very seriously.” Most exchanges don’t offer even basic private law protections, as he documents in an upcoming book: “Against that backdrop, it’s not realistic to think that regulators would sit back and do nothing.”

Related: sunshinecrypto.com/news/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether”>Stablecoins under scrutiny: USDT stands by ‘commercial paper’ tether

Nor is this necessarily bad for the crypto sector. “Quite the opposite,” Carol Alexander, professor of finance at the University of Sussex Business School, told Cointelegraph, adding, “We are all waiting for the space to clean up from fraud and manipulation so that we can realize the true value of coins that are needed as gas for smart contracts — e.g., Ether, DOT, Cardano.” She further outlined for Cointelegraph:

“The real problem with crypto is not the fundamental worthlessness of Bitcoin — but Binance and Tether [USDT]. These two companies are intrinsically linked because most inflows to Binance are USDT. Without Binance, the market cap of Tether would be much less than $62.5 billion.”

The more immediate reason for the clampdown on Binance, in Alexander’s view, is the spate of class-action lawsuits on behalf of users “who lost everything on May 19 through auto-liquidations during the futures platform outage,” as well as the “long maintenance mode on BLVTs following wild price swings, after which tokens opened vastly lower instead of up in price.”

Growing protectionist sentiment?

In a recent LinkedIn post, Hammer noted that many crypto exchanges operate around the world without licenses — but are not facing the sorts of regulatory measures as Binance has. “One could therefore argue that unspecified measures against Binance are born from plain protectionist anti-crypto reasons” — rather than “legitimate causes” like the BLVTs, for instance.

Drawing attention to Binance could thus “be perceived as a bit arbitrary” where the regulators are arguably picking out “the biggest of the black sheeps,” he told Cointelegraph. Two countries Hammer cited as possibly embodying this protectionist sentiment were Japan and the United Kingdom.

Regulatory heat from the likes of Thailand and the Cayman Islands probably won’t unsettle Binance too much, but what happens in China and the U.S. might be another story. “What matters most to Binance in terms of regulation will be China and the U.S., the two largest crypto markets and also the two most powerful regulatory enforcers,” Ma told Cointelegraph.

What would happen if the U.S. were to take substantive legal action against Binance or if China were to cut off entirely the link between its online crypto traders and offshore exchanges like Binance? “These are the focal points of the worldwide crackdown on Binance,” Ma added.

Related: sunshinecrypto.com/news/death-knell-for-chinese-crypto-miners-rigs-on-the-move-after-gov-t-crackdown”>Death knell for Chinese crypto miners? Rigs on the move after gov’t crackdown

Elsewhere, “I think Singapore will be illuminating because the MAS has been signaling that it wants to become a crypto hub,” Awrey told Cointelegraph, referencing the Monetary Authority of Singapore, the island city-state’s central bank. Accordingly, if MAS rejects Binance’s recent application to operate in Singapore, “this can arguably be viewed as revealing private information about the firm’s risk profile.”

Binance seems to be mindful of the stakes involved. In CZ’s letter, he further noted that “we have grown our international compliance team and advisory board by 500% since last year,” including the addition of former Financial Action Task Force Executive Secretary Rick McDonell as a compliance and regulatory advisor, as well as former U.S. Senator and Ambassador to China Max Baucus.

Should that be taken as a sign of good intentions? “Yes, indeed, it should,” answered Hammer. “They are taking it seriously — the risks are too high. The problem really seems to be the lack of a regulatory framework, though I would also be careful about the numbers.” That is, Binance might claim 500% compliance growth since last year, but what is its starting point — a single compliance advisor? This isn’t specified.

Are new regulatory approaches needed?

Others have suggested that nation-states aren’t really up to the task of policing borderless, decentralized enterprises — though most consider Binance a centralized exchange even if its headquarters are difficult to pin down. On this, Awrey said:

“While many of the enterprises may be borderless and decentralized, most of their customers are not. This theoretically opens the door to forms of regulation and enforcement that many in the crypto community seem to be discounting.”

“The problem is not that there is too little regulation out there but rather — particularly in the U.S. — there is a missing taxonomy with regard to crypto and tokens, about which regulatory authority and regulation should be applied for which case and situation,” said Hammer.

Europe, by comparison, is “quite advanced with codifying blockchain, DLT and tokens, particularly Switzerland and Liechtenstein,” which have excellent legal and regulatory frameworks, Hammer said, while according to Alexander:

“We need to establish an international crypto markets committee that meets each month and makes recommendations for enforcement into local rules and regulations — like the Basel Committee does for Banking Supervision with the Basel Accords.”

This may take some time to achieve, however, she allowed, “and there is nothing to force countries that are prospering economically from crypto asset and derivatives trading — e.g., Malta — to adopt these recommendations.” In sum, the route is clear, but getting to the endpoint might still be arduous, as Alexander said.