Binance Facing Regulatory Scrutiny

Regulatory scrutiny of the world's biggest crypto exchange signals that governments and financial watchdogs are increasingly concerned about the risks posed by decentralized marketplaces. But it's not clear whether Binance will be able to fend off multiple enforcement actions against it.

Binance is the world's largest cryptocurrency exchange, with daily trading volumes of more than $25 billion. Its volume is more than double that of its closest competitor, Coinbase. It leads in both spot and derivatives trading, where users can trade cryptocurrencies using leverage or borrowed money.

But as the popularity of cryptocurrency trading increases, so too do concerns about its use for illicit activities like money laundering and terrorism financing. As a result, many countries have launched probes of Binance and its products.

In the United States, regulators at the Commodity Futures Trading Commission are investigating whether the company engaged in insider trading or market manipulation by "trading on customer orders before executing them," according to a source familiar with the matter. The company has denied any wrongdoing. In Japan, the financial authority has warned Binance to stop operating there without permission. And in Europe, the U.K.'s Financial Conduct Authority has told it to stop offering certain regulated services, including derivative trading.

Regulators are also concerned about Binance's risky offerings to retail investors, such as stock tokens that give commission-free exposure to traditional stocks like Apple and Tesla. The firm is offering the stock tokens via a subsidiary that will hold the underlying shares, but Germany's securities authority has said this would violate European Union securities laws.

Finally, authorities are concerned about Binance's failure to prevent money laundering and terrorism financing on its platform. They have urged it to better vet its customers and to improve its security measures.

The company has started taking steps to become a more compliant exchange. It is strengthening its compliance and legal teams, banning or scaling back products, demanding stricter background checks and changing the way it manages risks. It is attempting to transform itself from a tech start-up into a fully licensed institution, which will be necessary if it is to survive the intensifying pressure from regulators around the world.

Tom covers crypto companies, regulation and markets from London. He has been at Reuters since 2014, with previous postings in Tokyo and Seoul. He won a joint Overseas Press Club award for reporting on abuses in Japan's immigration system and has also worked at the BBC and the New York Times.

This article was updated to correct the name of the founder and CEO of Binance. It was previously incorrectly reported as Changpeng Zhao. This article has also been updated to remove a reference to a former employee who has been fired over allegations of misconduct. Please see our corrections policy for more information.