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Binance’s stand-off shows the limits of bitcoin

What’s the point of making a kill on bitcoin if you can’t afford the loot?

Customers of Binance, one of the largest cryptocurrency exchanges in the world, are facing this issue after their accounts were suddenly cut by one of the UK’s leading payment systems.

Days later the Financial Conduct Authority ordered Binance stop all regulated activities in Britain, the digital axis society signed allowing its customers to withdraw pounds via Faster Payments, a service used by high street banks. Sterling bank card transfers were also arrested.

Binance insists the FCA ban does not affect its business and says the links have been restored. Customers will also be able to transfer their stakes to other platforms. But the sudden halt highlights a key issue for the world of cryptocurrency freedom. With the notable exception of In Salvador, no country uses bitcoin as a legal tender – and even Elon Musk has refused thinks of accepting it as payment for Teslas. Instead, crypto holders need to find ways to convert them into fiat currencies.

Here lies the fruit. Regulators who have spent decades fighting money laundering and terrorist financing will not welcome floods of anonymous money from unsupervised digital currency exchanges. The anonymity of bitcoin and some of its competitors is demonstrably popular with cybercriminals and tax evaders.

Facebook had a first taste of the potential reaction in 2019 when it announced the plans revolutionize world payments system with Libra, a digital currency. The project went into a regulatory saw and was delayed repeatedly, resized and also renamed Diem.

Since then, governments have become more interested in cryptocurrencies, and much more sophisticated in their approach. Most major central banks are at least reflecting on the issuance of their own digital currencies, while bank and securities watchdogs are beginning to bring cryptographic platforms into the regulatory network.

Binance’s troubles stem directly from the UK’s move in 2020 requiring cryptocurrency companies register with the FCA and demonstrate compliance with anti-money laundering rules. The watchdog says 90 percent “unprecedented” of potential registrants, including The UK arm of Binance, have abandoned their applications rather than meet FCA standards.

In Canada, the Ontario Securities Commission has begun take legal action against unregistered crypto exchanges, encouraging Binance to pull out. German and The watch dogs of the United States they also have the cryptographic platform in sight.

Cryptocurrency optimists continue to see any regulatory repression as a positive sign of the maturation of the medium. They have a point. Banking regulators would not be assigned high risk weights to numerical currencies if certain financiers do not begin to hold them. The Japanese Financial Services Agency does not issue its second notice in three years on illegal operations if Binance did not continue to attract customers.

But there is a limit to this rosy prospect. Clampdown of China on the famous process of power of bitcoin production has burned the price of the most well-known cryptocurrency. And scrutiny elsewhere is forcing crypto providers to rethink their business models.

Until now, Binance and other cryptographic platforms have been able to operate with fewer employees and less elaborate controls on customers than their counterparts in traditional finance. This leniency window is almost certainly closed, forcing a difficult choice in the industry.

Too much scrutiny will drive away the first free wheel adopters who have fueled their rapid growth. But without proper systems and controls, the wider appeal of the crypt is limited. Coinbase, one of the largest platforms in the world, is a case in point. His April direct listing on the Nasdaq was seen as validation for the sector, but shares have fallen more than 20 percent from their first-day closing price. Investors worry that declining bitcoin prices will hurt trading volumes and increased competition and costs will cut margins.

Just look at how many regulated banks, brokers and exchanges offer an opportunity. Just Tuesday, Deutsche Börse said it had bought a Swiss crypto supplier, and Fidelity, Standard Chartered and TP ICAP have announced that they have associated to launch a crypto trading platform.

Fans of cryptocurrencies can applaud Binance’s anti-authoritarian attitude. Most investors want a platform where they can easily get their money’s worth.

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Follow Brooke Masters with myFT and also Twitter




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