Binance crypto traders line up $5m for legal challenge

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Traders pursuing Binance for compensation over an outage during crypto market turmoil earlier this year have secured financial backing to wage one of the most significant legal battles to date against the exchange.

Liti Capital, a Swiss litigation finance firm, has pledged at least $5m to fund an international arbitration case against Binance in Hong Kong, and has enlisted the New York law firm White & Case to represent investors.

An initial group of six investors, from countries including Ukraine, Australia, France and the US, say their claims against the exchange together total more than $20m and they hope to sign up several hundred more traders.

The case will test whether the sprawling crypto exchange, which operates through a complex global network of legal entities and lacks a formal headquarters, can be forced to face legal complaints from its customers. 

“One way or another this case is going to end up being landmark,” said David Kay, Liti’s executive chair. “We are going to find out what limits, if any, there are on what these huge organisations can and can’t do.”

The Cayman Islands-registered company is one of the biggest players in the digital asset industry. It is facing mounting pressure after a series of regulatory censures in financial hubs including the UK, Hong Kong and Japan that have largely revolved around its anti-money laundering practices.

The customer claims come as Binance and its chief executive Changpeng Zhao have vowed to tighten the company’s compliance procedures and work more closely with financial watchdogs where it operates.

Binance declined to comment on pending legal action.

The planned legal action centres on losses that crypto derivatives traders claim they suffered on May 19, when digital asset markets crashed after Chinese regulators signalled a crackdown on the use of digital coins. As markets tumbled, Binance sustained a global outage on its futures platform, where traders are able to make supercharged bets on a variety of digital tokens using high levels of borrowing.

Binance automatically liquidates clients’ futures trades if their losses exceed a certain threshold, something that many of the company’s customers say ultimately led to losses during the May 19 outage.

Typically, traders manage their positions either by adding collateral to reduce the risk of being liquidated or closing them as markets begin to sour. However, traders say they were unable to perform these actions when Binance’s platform stuttered.

“Whatever button I pressed, I was met with glitches,” said a Japan-based trader, who asked to remain anonymous. Within a few minutes, he started to receive email alerts from Binance that his positions were being liquidated. “​​I went numb seeing myself lose $74,000,” he said. 

Traders who suffered losses have linked up on social media sites such as Reddit and Discord to strategise on how to seek compensation. Several customers claimed that Binance had offered to pay back, at most, a fraction of their losses. 

“There’s a profound sense of injustice among the group,” said Aija Lejniece, a Paris-based lawyer who has helped to organise the effort after being contacted by a friend who had lost money.

Fighting the exchange for compensation is a daunting prospect for individual traders, given the lack of clarity around which national courts or regulators have jurisdiction over the offshore exchange.

Binance said it took “immediate steps to engage with users affected by the outage” but that it accepts customers’ claims for compensation “only when users experienced actual losses due to system issues or errors but not as a result of market volatility”. 

“We do not cover hypothetical ‘what could have been’ situations such as unrealised profits,” Binance said. It has said some of its users may have “neglect[ed] the inherent risk in all trading activities”.

The exchange has since said it will stop offering derivatives in several jurisdictions, including in Europe and Hong Kong, following scrutiny from regulators. The exchange has also cut the amount it will let retail traders borrow to amp up their bets. 

Binance’s terms of service limit clients to taking legal action at the Hong Kong International Arbitration Centre, which seldom hears consumer cases and charges hefty fees to adjudicate disputes. However, lawyers for the traders say a ruling in this venue could be enforced worldwide under the 1958 New York Arbitration Convention. 

The impending legal action in Hong Kong comes after Lexia, an Italian law firm, last month announced plans to launch an action against Binance on behalf of European investors who claim they lost money during outages, including on May 19. Binance declined to comment on the specific allegations, but said “we remain happy to speak to anyone who reaches out to us with a concern about the outage”.

Angelo Messore, head of Lexia’s financial services practice, said: “What makes this case peculiar and special is that Binance is everywhere and nowhere.”

The reporters on this story can be reached by email at joshua.oliver@ft.com and laurence.fletcher@ft.com