On May 19, 2021, Francis Kim thought he had hit it big. The Australia-based entrepreneur had been dabbling in derivatives trading in regulated markets, and he was used to their relative volatility. Now, however, he was trying his hand in the Wild West of finance: cryptocurrency futures. He had begun trading on a crypto exchange called Binance only a month prior with less than $20,000, when bitcoin and Ethereum (the two most popular cryptocurrencies) were at then-all-time highs. Kim thought their prices would fall, and using leverage — essentially borrowing from the exchange to risk more on a trade — he put his money on the line. What he would soon find out is how, in the topsy-turvy world of crypto trading, a person can be right about the market and still lose it all.
Perhaps the most remarkable characteristic of Binance, the exchange Kim was using to place his bets, is its size: In terms of volume, Binance is the largest crypto exchange in the world by a wide margin, regularly processing tens of billions of dollars in transactions per day. (There is a Binance U.S. exchange, but in terms of activity, it’s dwarfed by what’s sometimes referred to as “Binance global.”) Binance has four times the spot trading volume of its nearest competitor on a typical day, and its activities potentially have wide influence across this globally interconnected industry.
Binance allows its customers to employ enormous leverage — at one point up to 125 to 1 (now down to 20 to 1 for most customers, comparable to other exchanges). That means everyday people, or “retail traders,” can gamble with far more chips than they actually bought. The upside is large, but so is the downside: At 125 to 1, for every 1 percent move, your $100 bet could more than double, or you could get wiped out instantaneously. Kim was trading with 30 to 1 leverage.
In mainstream financial markets, offering extreme amounts of leverage to retail traders — not accredited investors who must prove they have the funds to withstand a margin call — is not allowed, a rule meant primarily to protect inexperienced traders from themselves. (The popular online brokerage Robinhood, for instance, offers loans to customers to buy stock, but nowhere near the amount that Binance once offered.) So why would Binance, along with some competing exchanges, allow such sky-high leverage? According to experts such as Carol Alexander, a professor of finance at Sussex University Business School, it may be because, like some of its competitors, Binance plays a number of roles that may pose conflicts of interest.
As Alexander points out, Binance is not just an exchange where people can buy and sell crypto. The company, whose valuation some employees claim may be as high as $300 billion, is practically its own vertically integrated crypto economy, offering crypto loans and the widest selection of tokens. If that weren’t enough, Binance itself trades on its own exchange. In traditional markets, this kind of arrangement would never be allowed, as the conflicts of interest — and potential for market manipulation — are glaring. Imagine the New York Stock Exchange or Nasdaq taking positions on different sides of trades it facilitates. No financial regulator would allow it, for obvious reasons. (“Market making activities are standard in both traditional finance and crypto,” a Binance representative said in response to a question about whether the company trades on its own platform. “They ensure liquidity and directly support a healthy, vibrant, and efficient marketplace to the benefit of end users.”)
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But for cryptocurrencies, this is how the whole market works, especially since much of it is based in offshore jurisdictions and operates in legal and regulatory gray areas. “It’s not just Binance,” said Alexander. Practically all crypto exchanges occupy these varied, potentially conflicting roles, which in conventional markets are divided up between different entities. “And they’re completely unregulated,” she said. The lack of government oversight, combined with the conflicts, will become more of an issue as cryptocurrencies grow increasingly mainstream, advertised on every possible medium and traded in retirement portfolios. Even relatively savvy investors stand to lose everything on risks they could never take in another circumstance.
This was the situation Francis Kim had put himself into when he took out a bitcoin short position on Binance. Whether by luck or skill, his bet soon proved right — or seemed to. In the first few weeks of May, the price of bitcoin fell from $58,000 per coin to $40,000. On May 19, it collapsed, with the slide even steeper on Binance’s trading platform (crypto prices can vary slightly among platforms, offering arbitrage opportunities for sophisticated traders). As Kim watched on his phone screen, the price per bitcoin fell in minutes from $38,000 to $30,000. And as the market tanked, his short position exploded, its value growing from $30,000 to $171,000. Time to cash out: All he had to do was click a button on the Binance app to lock in his gains.
But the app wouldn’t respond. Experienced in online trading, Kim switched to the two other Internet connections he had installed as backups in his house. None of them got the app to work. “So I’m just going there, going crazy, going click click click, you know, trying to close out of that position, to lock in the profits,” he told us. “And you know, I jump on Twitter. Other people are having similar issues.”
Flash crashes in crypto markets tend to be accompanied by technical snafus or unexplained outages, including an inability to withdraw funds. On Sept. 7, 2021, for example, when El Salvador introduced bitcoin as a form of legal tender — despite social protests and technical issues with the Chivo app designed for Salvadoran citizens to access their coins — a marketwide slide led to a number of exchanges reporting transaction delays and other problems. Similarly, Binance users report regular technical issues, with Tesla chief executive Elon Musk publicly criticizing the exchange recently for an issue that prevented traders from withdrawing Dogecoin for at least two weeks. (A Binance representative said that “the Dogecoin withdrawal issue was an unlikely and unfortunate coincidence for Binance and the DOGE network” and pointed out that “the technical issue was resolved.”)
On the other side of the world last May, in Toronto, Fawaz Ahmed, a 33-year-old trader, was having the same experience as Kim, but from the opposite end of the gamble. Over the past year, also using leverage, Ahmed had ridden the crypto wave up, turning an initial stake of 1,250 Ethereum tokens into 3,300 that were eventually worth more than $13 million. (He said he started trading in 2017 with about $25,000.) Ahmed was betting that the crypto market would continue its overall rise, though he said he planned to cash out if the price of Ethereum reached $4,100. Like Kim, Ahmed expected some volatility along the way, but it was only on May 19, when Ethereum plunged dramatically alongside bitcoin and other currencies, that Ahmed realized the gravity of his situation. He needed to close his position, and fast.
For an hour he frantically tried to get out, but just as for Kim, the app wouldn’t work. “I saw my position get liquidated,” said Ahmed, referring to a margin call that happened while the app was unresponsive. “It was right in front of my eyes.” Just like that, Ahmed’s eight-figure crypto fortune was gone. He described it as “one of the worst days of my life.”
By the time the Binance app was back up and running some hours later, it was too late for both Kim and Ahmed. While Ahmed’s position had been liquidated because the app wasn’t working and the price was plunging, destroying the value of his holdings, for Kim, something even stranger happened. Although he was correct in his bet, and his short position was worth $171,000 when bitcoin hit its lowest price that day, by the time the Binance app was usable again, the price had bounced back to near its original level. Rather than being up nearly $150,000, all his profits had evaporated. Hoping for the market to turn in his favor again, Kim held onto his original position, only to see his short position liquidated when the price continued to rise.
The response from Binance was of little help to users. It nevertheless revealed something fundamental about how cryptocurrency exchanges exist as murkily operated casinos that are essentially unaccountable to their customers. Instead of acknowledging the full scale of the problem, the official Binance Twitter account simply said that Ethereum withdrawals were “temporarily disabled due to network congestion,” before announcing them “resumed” less than 90 minutes later. Aaron Gong, a company executive, tweeted a vague apology, urging “affected users” to fill out a “derivatives compensation claim form,” which has since been taken offline. Then Gong deleted the tweet. No announcement appeared on the official Binance blog. Two months later, Binance announced that it had “recently learnt of a few users who publicly claimed to have been impacted during a market-wide outage on May 19,” but that it had investigated and “could not identify any relevant technical or system issues that impacted their trading.”
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But thanks to social media, Kim and Ahmed soon learned that they weren’t alone — and that strange outages like this one weren’t atypical for Binance. On Twitter and Reddit, horror stories abounded, with at least one individual claiming a loss of $30 million. On Discord, an ad hoc support group swelled to more than 700 people. Some of the traders, including Kim, had dealt fruitlessly with Binance’s customer service, which offered them a small percentage of their losses. At one point, according to a screenshot of a chat with a Binance customer service representative that Kim shared, he was offered a voucher for $60,000 in Tether — a commonly used, if controversial, stablecoin — and another $60,000 in trading credits as an inducement to keep him on the very platform that he felt had robbed him. (Binance said that it does not discuss individual cases, but is “always happy to assist any user who has a concern.”)
With Binance refusing to make them whole, the Discord group began to plan a class-action lawsuit, which has the potential to win relief for a broad swath of aggrieved customers. Kim and Ahmed connected with Liti Capital, a Switzerland-based blockchain private-equity firm — essentially, a litigation finance firm that issues its own cryptocurrency and tries to incorporate public decision-making into which cases it takes on. Liti staked $5 million to support the suit, which is now being led by international law firm White & Case. Binance’s user agreement requires litigious customers to submit to arbitration at the Hong Kong International Arbitration Center, where a minimum cost of more than $50,000 for the services of the court and a qualified arbiter is prohibitive for traders who lost a few hundred or thousand dollars. By pooling millionaire day traders with mom-and-pop claimants, and using the backing of Liti Capital, White & Case got around that hurdle.
(Binance declined to comment on “potential legal proceedings.” A representative said, “When issues arise, we strive to take care of users to the best of our ability.”)
But first they have to win, and then they have to collect, and no one seems sure how much money Binance might have in the bank — or which bank. There’s a lot about Binance, which has no central headquarters, that seems strange, even in the freewheeling world of crypto. Just as exchanges like Binance have helped “decentralize” finance, the company has also essentially decentralized its workforce — perhaps in an unprecedented way for a company dealing with billions of dollars in daily transactions. Nominally headquartered in the Cayman Islands, Binance’s employees are scattered across the world. Binance’s crypto-nerd-celebrity chief executive, Changpeng Zhao, or CZ, serves as the company’s face via Twitter while jetting among various global tech and financial capitals. A Binance representative said of its structure that the company “is a remote-first organization, and as such does not have traditional buildings or campuses like Apple or Google.”
The company’s hazy operations and lack of regulatory oversight have spurred investigations in a number of countries, including in the United States, where the Commodities Futures Trading Commission is reportedly investigating possible market manipulation, and the Justice Department and Internal Revenue Service are examining whether Binance facilitates money laundering and tax evasion. On Feb. 15, the Wall Street Journal reported that the Securities and Exchange Commission was investigating relationships between crypto trading firms and Binance’s U.S. division.
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Binance declined to comment on these investigations but said that it aims to work “collaboratively with regulators and share information with them when requested.” A representative said that the company “has always welcomed increasing regulatory and government involvement in the crypto space. We believe regulation and compliance is necessary for the growth of the industry. We are committed to being fully licensed and regulated around the world, and we were recently awarded virtual assets service provider licenses in Bahrain and Dubai.”
Binance’s best defense may be to claim basic technical incompetence — perhaps that network congestion led to malfunctions in the company’s app. What actually happened on May 19 remains a mystery. But people like Alexander and Matt Ranger, a data scientist and former professional poker player, propose that the platform’s problems may go beyond simple technical outages. In blog posts, academic papers and conversations with journalists, they have argued that Binance has been outplayed in its own casino. According to their analysis, Binance has become the perfect playground for professional trading firms to clean up against unsophisticated retail traders. Using state-of-the-art algorithmic trading programs and access to the latest market-moving information, these firms are both faster and more powerful than the regular Joes they compete against.
Ranger compares what’s happening on crypto exchanges now to the online poker craze of the mid-2000s. Back then, you had a sense of the stakes and could see who was beating you at the virtual table. “At least poker’s kind of honest,” said Ranger. “You’re losing to this guy named, like, Penis420, and he bluffed you out of your cash, and you’re here.” But for average crypto investors/gamblers trading on Binance, there is no such clarity. Across the table could sit an advanced computer trading program. Regular traders don’t stand a chance; when the professional firms easily outmaneuver them, they can get wiped out in seconds.
Under these circumstances, potential litigants argue, it’s impossible to have anything resembling a fair market. In their view, Binance is so compromised — dependent on a constant stream of suckers coming through the door while also keeping an eye on the savvy trading firms picking novice traders’ pockets — that its problems may be existential. (Zhao himself said that Binance may eventually lose out to more nimble and harder-to-regulate DeFi, or decentralized finance, exchanges.) Now, along with its proliferating legal troubles across the United States, Europe and Asia, it has thousands of alienated customers and one of the world’s top law firms ready to use it as an example of what happens when an unregulated crypto exchange is put under the microscope.
Despite its distributed — and still mostly unaccountable — corporate structure, Binance probably faces significant legal head winds. Its decline as the world’s preeminent crypto exchange could be as steep as its rise. For many crypto traders, high risk is an accepted part of the game, and an exchange or DeFi protocol is only as good as the profit opportunities it presents. Should Binance fall, another unregulated trading platform might quickly take its place.
It’s hard to see how this “democratization of finance,” as it’s often called, leads to a fairer economy rather than a more chaotic one, with a vast gulf between winners and losers. The liberatory rhetoric and experimental economics of crypto are alluring, but they seem to amplify many of the worst qualities of our existing capitalist system while privileging a minority group of early adopters and well-connected insiders. Right now, Binance is in the vanguard of this attention-grabbing, money-churning industry, but perhaps its example should be taken as a warning.