When does decentralization stop being an experiment in technological democracy and begin to be a way of avoiding accountability?
That’s the question at the heart of a potential $ 100 million arbitration lawsuit against cryptocurrency exchange Binance, where close to 1,000 traders seek damages for losses. suffered during the site outage on May 19.
Binance experienced technical issues for several hours on May 19 amid one of the worst market downturns of the year as the global cryptocurrency market suffered a 33% drop. Traders were unable to execute trades during the Binance outage, with many finding their accounts depleted when the site came back online.
Hundreds of users have added their names to the case since it was announced on Aug. 19, said David Kay of Liti Capital, who leads the steering and advisory committee that conducts the arbitration on behalf of the plaintiffs.
Of the more than 700 original plaintiffs, only six claim damages of more than $ 20 million. But Kay believes that the total amount lost by merchants during the May 19 blackout could be more than $ 100 million.
A cloak of decentralization?
Speaking to Cointelegraph, Kay said that Binance had self-applied the label “decentralized” to great effect during its time as the world’s largest cryptocurrency exchange, but only to further its goals. He said:
“Binance tries to disguise itself as a community asset, which it is not. It is a corporation that uses community assets. […] He has done a good job of blurring the lines and getting wrapped up in the decentralization idea. “
Kay suggested that Binance used the notion of decentralization to carve dividing lines across the cryptocurrency community fostering an ‘in / out of the pool’ mentality, stating: ‘Binance will point out the fact that it is headquartered, the fact that it does not is regulated, and say: ‘If you are against us, you are against [decentralization]. ‘”
Binance founder and CEO Changpeng Zhao has eschewed the notion that the exchange requires an official headquarters, noting that Bitcoin (BTC) itself does not have a base of operations. Addressing an audience at Ethereal Summit 2020, Zhao said The Binance office was where he and his team were operating at the time:
“Where is the Bitcoin office? Bitcoin has no office. […] Wherever I sit will be the Binance office. Wherever you need someone, it will be the Binance office. “
Binance processes around $ 25 billion worth of cryptocurrency transactions daily and has seen more than $ 2 trillion move through its exchange to date. Its margin trading platform allows users to leverage trades up to 125 times their original holdings, a practice that has been banned by regulators in the United States and the United Kingdom.
In November 2020, Coinbase disabled margin trading on its professional trading platform following official guidance from the United States Commodity Futures Trading Commission. But Binance, along with many other unregulated cryptocurrency exchanges, continued to offer high-risk trading products.
The happy tramp
Merchants who suffered undue losses while using Binance systems have had few options to initiate, let alone settle, legal action against the company. As the exchange jumped out of China, Japan, and Malta in recent years (without settling anywhere), its clients had no recognized scenario on which to base a legal case.
Binance has since added a stipulation to its terms and conditions stating that it would agree to hear claims made against it at the Hong Kong International Arbitration Center. HKIAC is very expensive for people to file small claims, with every case incurring a $ 65,000 fee just to start the procedures. Additionally, claims can only be made on an individual basis, which excludes the possibility of class action lawsuits.
The prohibitive cost of using the arbitration court effectively costs most users to file a claim against the exchange. One claimant, who wishes to be known only as Jean-Jacques, lost more than $ 10,000 the day Binance fell, an amount that he would be forced to pay many times over to use the Hong Kong court as an arbitrator.
Other people lost funds ranging from $ 100 to $ 12 million on May 19 and on other dates before and after. Kate Marie, a health consultant and author from Sydney, Australia, lost between $ 160,000 and $ 250,000 when she was unable to access her futures trading account during the site outage. Marie said:
“I could not properly manage my futures account and I was quickly liquidated, and without warning my margin status had changed. It also happened again on the 23rd, even though he had security measures in place. This was going to prepare me for life. “
Retail trader Fawaz Ahmed from Toronto, Canada, lost 3,300 Ether (ETH) (worth around $ 6 million at the time) because the site’s user interface froze and prevented him from closing his position. Ahmed described experiencing symptoms of severe depression after the accident.
No witch hunt
Kay emphasized that the arbitration against Binance is not a witch hunt. He acknowledges the usefulness that such a platform can bring to the cryptocurrency space, but believes that a line needs to be drawn in the sand.
“We are not anti-Binance. We are pro-Binance. Binance can still be good for the community. It is about the fact that we all make mistakes, but that ultimately those mistakes must be rectified. We don’t want to destroy Binance, but this needs to be cleaned up, ”Kay said.
Liti Capital, the group that Kay runs, is in charge of the cost of the arbitration and will be compensated with a portion of the damages awarded if the proceedings are judged in favor of the plaintiffs.
“We will not stop if we have to sue them individually,” he said.
“If the terms are reasonably conspicuous and you actually have to click a link warning you that you agree to the terms of the site, they may in fact become part of the contract.”
The user agreement could potentially be voided, Goforth said, if the plaintiffs prove the terms were outrageous. This means that they would have to prove that the contract was unfair or abusive during its formation.
Binance had little to say about the prospect of arbitrage at the time of this writing. A spokesperson told Cointelegraph: “We are committed to the legal process to resolve disputes and do not comment on pending legal matters.”
The exchange was the target of strong regulations and laws. scrutiny during the summer of 2021, like authorities in the United States, the United Kingdom, France, India, Japan, the Cayman Islands and more they sought to ban their commercial products or to prosecute the exchange and its subsidiaries for violating national law. Since then, Binance has shut down some of its leveraged trading products and has ceased offering its services to clients in certain jurisdictions.
Plaintiffs who lend their weight to arbitration say they do so for a myriad of reasons. For some, including Kay, it’s about removing the false cloak of decentralization that Binance has used to disguise itself for so long.
“Imagine if Amazon said, ‘Sorry, our workers and customers will never be able to sue us, because we are part of the Internet, and the Internet must remain unregulated,'” said Kay. “That does not work”.