‘Woefully inadequate’: ASIC sues Binance for consumer protection failures

Delicensed crypto trader Binance Australia Derivatives, part of the global cryptocurrency juggernaut Binance group, is being sued by Australia’s financial services regulator for its alleged failure to provide retail investor clients mandated consumer protections.

In documents filed to the Federal Court, ASIC alleges that between July 2022 and April 2023, Binance Australia misclassified 505 retail investors – representing more than four-fifths (83%) of its Australian client base – as wholesale clients.

As a result, ASIC alleges that these clients were unreasonably exposed to “high-risk, speculative” crypto derivative products (including crypto futures and options investment products) without adequate protections.

The court documents reveal that among the affected clients were two individuals – incorrectly classified as meeting the Professional Investor Test – who allegedly lost in excess of $1.3 million.

ASIC found that the misclassified clients were able to open trading accounts without providing proof of their wholesale status.

As a result of the misclassification, ASIC alleges that Binance failed to provide its retail investors mandated protections as part of its corporate and Australian Financial Services (AFS) licence obligations. This included requirements for the business to provide retail investors with:

• a Product Disclosure Statement for retail clients
• a Target Market Determination, under its DDO
• a compliant internal dispute resolution system
• financial services that are efficient, honest and fair
• services that are compliant with the conditions of its AFS licence, and
• assurance that its employees were adequately trained and competent.

At the company’s request, ASIC cancelled Binance’s AFS licence on 6 April 2023, following a targeted review, commencing in late 2022, which identified anomalies in Binance’s classification processes.

In 2023, ASIC oversaw compensation payments by Binance of approximately $13.1 million, including aggregate losses and fees, to affected clients found to have suffered significant financial losses as a result of the misclassification.

ASIC deputy chair Sarah Court labelled Binance’s compliance systems “woefully inadequate”, exposing affected clients to “high-risk, speculative products without the right consumer protections in place”.

“Many of these clients suffered significant financial losses,” Court added.

As stated by ASIC in its court filings: “The inadequacy of the Defendant’s systems and processes can be inferred from the result of those systems: the widespread, significant, repeated or systemic errors in classification that occurred throughout the period in which the Defendant classified Clients. It must necessarily follow from the errors in classification of Clients as Retail Clients that the Defendant had not put in place systems which were adequate to prevent such errors.”

Court concluded: “Crypto derivative products are inherently risky and complex, so it is critical that retail clients are classified correctly. Those classifications ensure they receive the required consumer protections, and the information required to make an informed investment decision.”

ASIC in its suit will be seeking penalties, declarations and adverse publicity orders.