Binance Faces Hong Kong Showdown For May 19 Outage

This will be the first major test of Binance anchor to the Hong Kong International Arbitration Center


Blockworks exclusive art by Axel Rangel


key takeaways

  • Binance, like many other crypto exchanges, went down on May 19 as the market crashed
  • Now its facing a case in the Hong Kong Arbitration Center over this calamity, with litigants asking the exchange to pick a jurisdiction and play by their rules

If you lost $125 or $1.25 million dollars during Binance’s outage in May, Liti Capital’s David Kay wants to let you know that there’s a place for you in his firm’s arbitration against Binance. 

In May, a combination of factors put the market into freefall and when the carnage had settled nearly $8 billion in value had been destroyed. Many of the largest exchanges couldn’t keep up and crumbled under the virtual stress of people trying to login and execute trades. In a press release, Liti Capital estimates that losses might exceed $100 million.

Now Kay and Liti Capital are assembling a herd of disgruntled investors to take on Binance and seek compensation for their losses, hoping to bundle together cases and paying their fees on a contingency basis.

Taking on Binance has its own level of complexity as the exchange famously doesn’t declare a home, instead hopping around the globe from jurisdiction to jurisdiction as an act of indefinite regulatory arbitrage. However, per their website, they do require disputes to be heard via the Hong Kong International Arbitration Center — a well-established mediation and arbitration center used by firms across Asia and the world.

(This doesn’t mean Binance is “in” Hong Kong per se, only that they’ve agreed to respond to cases brought forward by the HKIAC and play by their rules)

“What they’ve agreed to is international law, via the HKIAC. And when you have a judgement under international law it’s enforced pursuant to the New York convention — which 150 countries have signed on to — which is enforced in whatever country you’re in as though it’s a final judgement of the highest court,” said Kay. “If you took the judgement to the US you could go and enforce that on an asset. If they ran to the Cayman Islands, you could go there. Wherever they want to go and transact to do business you can get them. It’s one of the best things about international arbitration.”

Kay explained that if his side wins, and they have an international arbitration judgement, banking institutions would be required to disclose for any branch around the world accounts that have a Binance entity or Changpeng Zhao name attached to them. 

“They don’t have 100% of their money in crypto, nor can they. It’s simply not possible,” Kay said. 

Part of Kay’s frustration with Binance comes down to the fact that they are of the belief that none of the world’s rules about securities apply to them.

“You and I could not turn around tomorrow and create our own securities and offer them to the public. Remember, Binance offers leveraged products and futures — these aren’t bitcoins or other crypto assets,” Kay said. “In every jurisdiction around the world there are rules to prevent this. They would have to meet certain standards before we would get a license, and there are certain steps we would need to take before acquiring customers.”

Kay also points out that in any regulated trading venue you just can’t get a margin account. There are certain rules and regulations you need to follow, but with Binance you can simply sign up. 

In any other sort of trading venue, “You have to agree to submit yourself to jurisdiction where you want to trade, so that governments know that when you are offering securities to their citizens you have the ability to pay up should something go wrong and get messed up,” Kay said. 

At the end of the day this isn’t an issue with Binance as an institution. “We love Binance. They are a part of the community. I think the community would be worse off if Binance disappeared and there were a hundred tiny exchanges that took their place.” 

“We want Binance to come, sit down, and say to us ‘lets figure this out’. We want them to take responsibility for the losses their platform caused, and we want them to set up rules for people to be able to get compensation,” Kay said. “We would also like them to plant a flag somewhere.”

For Binance’s part, while they admit that their platform — like many others — went down on May 19. But they stop short at admitting that this outage caused future losses. 

“On 19 May, nearly all cryptocurrency exchanges suffered temporary outages due to extreme market volatility,” a Binance spokesperson has been quoted as saying. 

“We are aware of a very small number of users who are attempting to extract unreasonable demands from us. Our policy is fair in that we compensate users who experienced actual trading losses due to our system’s issues. We do not cover hypothetical ‘what could have been’ situations, such as unrealized profits,” the spokesperson concluded.

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