When Canadian cryptocurrency trader Fawaz Ahmed saw the price of Ethereum plummet, he knew it was time to get out. Unfortunately for him, he couldn’t.
Ahmed was trading on Binance, the world’s largest digital currency exchange by trading volume. And on May 19, Binance experienced a major outage that prevented it, for about an hour, from exiting its position.
On the day, Bitcoin and Ethereum recorded their biggest single-day declines since March 2020, with the entire crypto market losing around $1 trillion in value. When prices fell below a certain point, Ahmed’s position was wiped out. His personal losses amounted to approximately $6 million.
“This loss was not fair,” Ahmed, a 33-year-old full-time trader, told CNBC. “It was something that was out of my control.”
Binance’s customer service team made Ahmed an “absurdly” low compensation offer, he said.
Ahmed is one of hundreds of investors set to participate in arbitration proceedings against Binance, seeking damages for money they lost when the cryptocurrency exchange was taken offline.
Binance said it was unable to comment on “outstanding legal issues”.
“Our policy is fair in that we compensate users who have suffered actual business losses due to problems with our system,” a company spokesperson told CNBC. “We don’t cover hypothetical situations of ‘what might have been’ like unrealized profits.”
Binance has experienced several outages over the years during times of heightened virtual currency volatility. This can be costly for traders, especially when prices fall.
And those losses can run into millions of dollars when investors make risky bets by using leverage or borrowing money to increase trades – something users often do on Binance.
Binance recently reduced the maximum leverage customers can take on futures contracts — financial derivatives that force investors to buy an asset at an agreed price at a later date — to 20x from a previous limit. of 125 times.
Binance was not the only crypto exchange to face a service disruption on May 19. Coinbase users were also temporarily unable to access its site. Bitcoin plunged as much as 30% to nearly $30,000 that day. It has since recovered to $45,790.
Changpeng “CZ” Zhao, the boss of Binance, previously said that the exchange has no official headquarters. This makes it extremely difficult for investors to determine how and where to sue the company.
A group of crypto traders hopes to change that. With the help of Liti Capital, a little-known Swiss private equity firm that funds litigation, nearly 1,000 people are expected to join arbitration proceedings in Hong Kong seeking damages from Binance.
“This is a historic case for the industry,” David Kay, chief investment officer of Liti Capital, told CNBC.
Binance is “the first company to reach any size in any industry – let alone the financial industry – where there is no regulation,” he said. “They don’t have a home, they don’t have a headquarters, they don’t have an office.”
“The only place where Binance has claimed jurisdiction is in a Hong Kong international arbitration court,” Kay added. “This will be the largest international consumer arbitration in history.”
Kay said Liti Capital began working on the Binance case after receiving a call from Aija Lejniece, an independent lawyer working with a group of crypto traders in France. Lejniece specializes in international arbitration cases.
The format makes it harder for the average consumer to make a claim, Kay said, because claimants must pay arbitration fees and additional costs — for example, traveling to Hong Kong. Individually, this could cost each claimant around $65,000. To cover these costs, Liti Capital has pledged to provide minimum funding of $5 million.
White & Case, a New York-based law firm, was retained to represent the plaintiffs. Washington, DC-based White & Case partners Abby Cohen Smutny and Darryl Lew and Hong Kong-based partner Melody Chan will serve as their attorneys.
Crypto, a nascent industry, is still largely unregulated. While some companies in the space, like Coinbase, have sought to establish relationships with regulators, Binance and many others mostly operate outside the framework of established rules.
This has not gone unnoticed by regulators, who are racing to catch up with new innovations in financial services. Two main concerns with crypto are the lack of consumer protections and the risk of money laundering and other illicit activities.
Binance, in particular, has caught the attention of authorities in several countries. The UK Financial Conduct Authority recently banned the company’s UK subsidiary after finding it did not comply with anti-money laundering requirements. Meanwhile, financial watchdogs in Japan, Canada, and Italy have issued warnings that Binance has no authority to operate in the countries.
To add to Binance’s woes, the company lost its US chief Brian Brooks, who previously served as acting head of the Office of the Comptroller of the Currency, a US banking regulator.
The company, which was founded by Zhao in China four years ago, recently said it was pivoting to become a regulated institution, with plans to obtain licenses in multiple jurisdictions and establish regional headquarters. Zhao said he was ready to retire from the exchange to hand over to someone with more regulatory experience.