BT Explains: How Binance tests the long arm of crypto regulation

IT WAS a one-two punch over a single day. 

First came the move by the Singapore regulator to put Binance.com on its Investor Alert List. 

By that same Friday evening, the Singapore regulator explicitly said Binance can no longer offer payment services. It also had to stop soliciting business from residents here.

With the latest regulatory action, the world’s largest crypto platform is taking down its app services here from Friday, and will stop offering products in Singapore dollars.

But that doesn’t mean it’s the end of Binance as a business here. The Business Times reviews the salient issues:

Binance.sg vs Binance.com

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Since the Singapore regulator flagged Binance.com on its Investor Alert List last Friday, the regulator and both Binance’s global and Singapore units have repeatedly highlighted that Binance.sg and Binance.com are operated by different – and independent – legal entities.

Binance.sg was set up as a locally compliant platform to meet Singapore regulatory expectations, Hagen Rooke, financial regulatory and fintech counsel at Reed Smith LLP said. This set-up allows the Binance group to maintain “a local foothold in a key hub for the cryptocurrency industry”. 

By contrast, Binance.com is the offshore exchange with the broader and more established product offering which, for some time, operated under the radar of many onshore regulators, observers noted.

This week, Binance Singapore – operated by Binance Asia Services (BAS), a separate legal entity from Binance – told users they would no longer be allowed to transfer digital payment tokens from Binance.sg to Binance.com from noon on Monday, Sep 13. 

Shutting down this pipe is critical for users. Checks by BT found that customers here tend to send cryptocurrencies bought on Binance.sg to Binance.com for other trades and transactions, so as to bypass credit card and conversion fees.

That said, BT understands that other crypto entities servicing Singapore residents are still able to facilitate transfers to Binance.com.

An online notice, signed off by the Binance.sg team on Tuesday, now makes it explicit that accounts created on the Binance.sg are not transferable and are not otherwise connected in any way to accounts on Binance.com. 

Still, the fact that the two are separate legal entities may be lost on – or ignored by – crypto traders.

A quick search online finds netizens drawing distinctions in terms of functionality, cost of transactions and service offerings.

For instance, several personal investment blogs highlight that Binance.com supports a wider array of cryptocurrencies, whereas Binance.sg offers only eight major cryptocurrencies. Binance.sg users can use Singapore dollars to buy crypto, but users of Binance.com cannot directly deposit Singdollar onto the platform.

Binance.com has been available as a mobile app, which will be removed from Singapore stores from Friday,  while Binance.sg is only available via its website. 

One netizen called Binance.sg the “lite version of Binance.com”.

Other blog posts claimed that Binance Singapore was “probably spun off” to be able to comply with local regulations.

In fact, Binance Singapore, via BAS, had separately applied for a licence under the latest Payment Services Act (PSA). But Binance itself had not applied for an MAS licence.

Customer confusion

The Investor Alert List flags entities that are not regulated by the central bank but “may have been wrongly perceived as being licensed or regulated by MAS”. It currently lists 699 entities.

In its warning against Binance last Friday, the MAS mentioned that it was working with BAS to suspend transfers of digital payment token assets between BAS and Binance.com. 

Binance.com had been supporting cryptocurrency pairs and payment options denominated in Singapore dollars. Its app and Telegram channel were also accessible to Singapore residents as well – taken together, these all created the impression that Binance.com was specifically offering its services to users in Singapore, said Mr Rooke.

“The fact that Binance does have a separate, but very similarly branded, Singapore-based entity which operates the Binance.sg platform and which is in fact permitted to service users in Singapore, likely heightened the risk of customer confusion and contributed to the impression that Binance, as a group, is permitted to services users in Singapore."

Long road to licensing

While the PSA came into force in January last year, the MAS only recently approved the first application by a provider of digital payment token (DPT) services to be licensed. 

The first of these much-coveted licenses was issued to Singapore-based fintech firm FOMO Pay, the licensee announced on Sep 1.

The framework change meant that the regulator had to facilitate a transition to the PSA.

MAS allowed entities already engaged in regulated activities before the start of the Act to be exempted from holding a licence if they submitted licence applications by July 2020. 

The exemption then stays in force until the applications are approved, rejected, or withdrawn by the applicant.

As at July 26, there are about 90 DPT service providers operating under this exemption, a parliamentary reply then showed.

All in – and since the start of the PSA more than a year ago – MAS has received about 170 applicants seeking a licence to provide DPT services, it disclosed via the parliamentary reply in late July. These made up about 35 per cent of all licence applications under the Act. As at July 26, 30 DPT applications have been withdrawn, while two were rejected. 

Whether an average retail consumer would take the time to understand the legal nuances between a licensed entity, an exempted entity, and an entity that is neither licensed nor exempted but still accessible for Singapore residents – is a question mark. The case surrounding Binance.com may be a test case of this today. 

The current trading euphoria also cannot be ignored.

Cryptocurrencies have seen a surge in interest amid the pandemic, while crypto platforms have largely not been difficult to get on board.

Chris Holland, partner at Holland & Marie, said It is important for consumers to know the identity of their legal counterparty.

“We have seen several cases where foreign cryptocurrency exchanges have stolen client assets and funds. If the cryptocurrency exchange is not regulated in Singapore, consumers will not benefit from the MAS prudential supervision.”

He added that while the license application timeline may have been “longer than some people expected”, there are likely many factors which caused this. Chiefly, this includes Covid-19, which began spreading globally just about when the PSA came into effect.

Reed Smith’s Mr Rooke said to be eligible for licensing, exempted entities are expected to demonstrate a robust governance and compliance framework. They should also be staffed by individuals with suitable track records.

“To some degree, this is already helping create a compliance and user-protection mindset across the industry, even if not many crypto-licences have been granted yet."

Buyers beware

MAS’s calls for caution in using Binance comes amid intense scrutiny of the platform by authorities around the world. 

India’s anti-money laundering agency is reported to be examining if the exchange had a role to play in an ongoing investigation involving betting apps. 

Binance’s UK arm, Binance Markets, was in June banned from doing regulated business in the UK. There, there were concerns that Binance Markets was not doing enough to prevent money laundering and other financial crimes on its platform. 

In the US, the exchange is being investigated for tax fraud and money laundering. Several global banks, too, have suspended customers’ payments to Binance. 

Binance, BAS and MAS did not respond to requests for further comment for this story.

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