Cryptocurrency exchanges have long been the subject of controversy, especially in relation to the numerous incidents of hacking and problems related to anti-money laundering controls. However, regulatory focus is slowly turning to their core activity, trading.

While cryptocurrency trading is not directly regulated in the UK, offering services, such as
cryptocurrency derivatives trading, requires authorisation. Last Friday, the UK’s financial regulator ordered Binance, one of the world’s largest cryptocurrency exchanges, to cease all regulated activity and issued a warning to consumers about the platform, which has come under increasing global scrutiny. The UK ban comes a day after Japan’s financial regulator, the Financial Services Agency, warned that Binaryance is not registered to do business in the country. The exchange has until Wednesday evening to confirm that it is complying with the FCA’s demands. As part of the FCA’s action, the regulator ordered Binance to display on its website by next Wednesday that “Binance Markets Limited is not authorised to carry on regulated activity in the UK.” Binance Markets Limited is among the 90% of crypto firms that have withdrawn their applications to register with the FCA. Binance withdrew its application on 17 May “following intensive engagement with the FCA.”

Since January, the FCA has required all firms offering cryptocurrency services to register and show they comply with anti-money laundering rules. However, this month it said only five firms had registered and that the majority were not yet compliant. Given the fundamental role cryptocurrency exchanges play in the overall crypto ecosystem and the growing degree of interconnectedness between crypto and conventional finance, it is important to understand not only whether crypto exchanges are regulated, but how they are regulated.

Binance is only loosely regulated. Despite the fact that Binance is a prominent figure in the crypto space, the exchange platform is not regulated in any popular jurisdiction. Hence, the reason why the exchange can list more coins and offer certain services that Binance competitors cannot without requiring customers to go through a user verification process in some cases. While some other leading exchanges operate as licensed Money Service Businesses (MSBs) or equivalent – including Coinbase. This means they have to register with the Financial Crimes Enforcement Network (FinCEN) in the US and/or the Financial Conduct Authority (FCA) under the Payment Services Regulations 2017 in the UK. Nevertheless, it does not mean that their trading activities are regulated.