Being the leading cryptocurrency exchange, Binance is always in the crosshairs of litigious people and parties. Whether it is regulators looking to bing the exchange down or customers who have had a problem or two in the past, Binance is always in the news.
Recently, a group of crypto investors has gained steam for a legal battle against the exchange as they look to make it answer for a service outage.
Going Dark at the Worst Possible Time
According to a report from The Financial Times, the investors in question have come together to demand answers following an outage that happened earlier this year. The case, which has now been filed with an international business arbitration court, represents the largest investor action ever brought against a cryptocurrency platform. It could be a watershed case as well, marking what could come for many exchanges.
On May 19, several cryptocurrency exchanges experienced severe outages as their operations went down due to technical difficulties. This isn’t a surprise - cryptocurrency exchanges can witness unusually large amounts of trading volume and eventually go down. But, it was especially disappointing to see names like Binance and Coinbase go down that day.
The date itself was also unfortunate as it coincided with the drop in the crypto market. Cryptocurrency prices dropped significantly on the day in what proved to be the beginning of a lengthy bear market. Coin prices have since gone up, but they’ve never gained the heights that they did before May came along.
One of the characteristics of a bear market is significant panic. Investors will look to cap their losses, so they will hedge the bets they can and close some of their positions. This influx of activity overwhelmed even Binance, and the exchange was eventually out for hours. In a Bloomberg TV interview following the outage, Brain Brooks, the chief executive of Binance US, confirmed the outage and committed to fixing the issues. But, the damage had been done.
By the time Binance’s services had been restored, investors were shocked to see the impacts of the outage. Many who had funds had seen their accounts drained because their portfolios had taken hits, and many futures traders who were unable to close their positions saw their accounts emptied to cover up their losses.
The Dust Clears Up
As The Financial Times reported, the Binance outage affected over 700 people. Some of the early participants in the investor action reported losing up to $12 million as a result of the outage, and they blamed the exchange for their misfortunes.
One of the participants in the suit - a Canadian named Fawaz - said that he tried to close his position around noon on the day. But, Binance restricted him from doing so. Despite hitting the ‘Close Position’ button multiple times, Binance never responded. Eventually, his position was fully liquidated, and he lost about $6 million.
So far, Binance has maintained its stance that it wasn’t at fault. The company claimed that May 19’s outage was an industry-wide one, with several of its competitors also experiencing issues.
The suit is now geared to move forward, even though the investors have found it difficult to make legal proceedings. They’ve been unable to file a traditional lawsuit because Binance doesn’t have an official jurisdiction. The company has been based in China, Hong Kong, and Malta at different instances over the past few years. After the Maltese government disavowed it, Binance essentially became a floating entity.
With no authority to place the case with, the investors are now suing with the Hong Kong International Arbitration Centre - a quasi-judicial body that tends to get called in when international business disputes are being handled. The hope is that they will be able to get everyone who was affected by the Binance outage into a single lawsuit, thus reducing litigation costs and allowing each investor to regain some of the funds they lost.
If successful, the traders will be able to force Binance to repay the losses they suffered. The company will also most likely have to submit itself to better technical oversight regulations.
The upcoming suit is just the latest in Binance's many legal troubles. While it remains the largest exchange, the company has faced scrutiny from several regulators over the years, evidenced by its inability to even find a jurisdiction to settle. 2021 has seen Binance get dragged into more spats with regulators, and a legal dispute with investors will only set the company back even further.