Binance Faces Regulatory Issues in Lithuania for Offering Derivatives Services

2021-09-14

The Bank of Lithuania declared recently that it had issued a warning to the virtual currency exchange operator Binance UAB regarding its investment services. The issue arose due to the company providing unlicensed services that did not meet the regulations of the country and extended beyond its scope as a virtual currency exchange operator. The Bank of Lithuania addressed Binance directly, ordering the company to ensure that all of its publicly available information was not misleading and that it complied with legal requirements.

In this context, the bank explained that it had evaluated the publicly available information on Binance and found that it is acting as a virtual currency exchange operator and virtual currency wallet custodian in the country, for which it might not have the proper regulations. The problem arises from the alternative services, such as derivatives services, that they currently provide. Currently, the platform allows customers to invest in derivative financial instruments related to crypto-assets (futures and options), contracts for difference (CFD), or crypto-assets linked to securities.

According to the bank, while their services might not be offered or advertised in Lithuania directly, as an international and virtual crypto-asset exchange and trade platform Binance is still considered a financial instrument, as under the Republic of Lithuania Law on Markets in Financial Instruments. This means that they must seek proper authorization and licensing from the proper institutions in order to operate in Lithuania. Since the company is registered as a virtual currency exchange operator, they are not supervised in the role of financial service provider. As such, they have no right to provide these services, including investment services.

The Bank of Lithuania stated that they monitor and analyze the state of financial service providers and if they are found to be offering unlicensed services or performing unlicensed activities in Lithuania, they will take measures to cease the provision of such services. These measures, for example, could come in the form of blocking access to certain websites or connections upon judicial authorization.

Increased International Scrutiny in the Form of Regulatory Warnings

The warning from Lithuania’s Central Bank has not been the only issue that Binance has faced in the past months when it comes to regulatory warnings from Financial Institutions. Italy’s Consob gave a similar warning to the company just a day before the one from the Bank of Lithuania. The same happened earlier with German regulators, as well as Japan’s FSA, UK’s Financial Conduct Authority, Poland’s UKNF, and Hong Kong’s market regulators. In the case of the UK and Hong Kong, the main concern is the ability to trade stock tokens over the platform.

Financial watchdogs operating at a global level have been vocal about their concern over issues regarding securities rules, proper regulations, and consumer protections. Those familiar with Binance operations have said that they have struggled to keep its compliance function on par with its quick growth.

The Crypto Exchange Company has maintained that it takes its legal obligations very seriously. As a result of these warnings, Binance announced that it would stop selling stock tokens, only continuing to service them until October 14. Come to that date, any customer holding stock tokens will be closed out of their positions. In addition, the exchange deleted mentions of stock tokens on its website. If you try to click on a link to “Introduction to Stock Tokens” on the site, you will get a “404” error. However, you can still view the page by visiting the web archive link.

The Issue with Binance’s Derivative Services Offerings

But why is the offering of derivative services such a problem for regulators across the world? For one, the countries issuing the warnings agree that Binance is not properly licensed for the kind of services that it was looking to provide. The company markets itself as a virtual currency exchange but its offering of token stock and security trades elevates it into the realm of investment services, for which they lack the proper licenses and regulations.

Also a significant rise in trading automation products and services also use Binance as their main platform which expands even further the realm of investment services.

Another of the concerns is the seemingly wild west approach of virtual currency exchanges to regulations and protections.

Binance first released its tokenized stocks option on April 12, starting with Tesla and followed by Coinbase, MicroStrategy, Microsoft, and Apple. However, in the same month Germany’s financial regulator BaFin warned the exchange operator that they risked being fined for offering these services without publishing an investor prospectus. It was after this initial warning that other countries followed suit and the legal complications started to pile up. This has led to unexpected consequences in the form of high-profile departures from the company. Binance’s director of Brazil, Ricardo Da Ros, announced his departure from the company on LinkedIn citing a misalignment of expectations about his role.

Other departures from the company are those of Wei Zhou, the chief financial officer of Binance, who quit in June. Catherine Cooley, the Binance.US CEO, quietly stepped down in May. Her successor, Brian Brooks, quit in August after a mere 4 months in the position.