Bitcoin skyrocketed to an all-time high of over US$64,000 in April this year, but on May 19, prices of the largest cryptocurrency by market value went into a tailspin, plummeting by over 30% to below US$30,000. More than 775,000 traders had their positions forcibly closed, with US$8.6 billion worth of crypto liquidations across cryptocurrency exchanges, according to data.

Amid the crypto market crash, Binance, the world’s largest cryptocurrency exchange by trading volume, suffered a technical outage, leaving many of its customers — in particular, futures and leveraged products traders — unable to trade and in the red as their positions got automatically liquidated

Aaron Gong, vice-president of Binance Futures, in a now-deleted tweet on May 20, apologized for the Binance Futures outage and provided a link to a derivatives compensation claim form for affected users. 

Following the outage, angry customers tried to resolve their dispute directly with Binance over the platform’s failure and have been offered compensation covering about 10 to 30% of their losses. Some customers took the deal but others, unwilling to accept the small settlement that came with many strings attached, such as giving up rights to sue and a non-disclosure agreement, have considered a class-action lawsuit to recoup their losses

However, Binance’s lack of a headquarters and ambiguous corporate structure — which raises the question of which jurisdiction regulates the company — has posed challenges to claimants seeking to take legal action.

Binance’s terms of use also explicitly preclude class-action lawsuits from being brought against the company, and stipulates that claims are to be resolved by arbitration at the Hong Kong International Arbitration Center — a costly undertaking that can cost at least US$60,000 just to file the case. Arbitration is a private dispute resolution process that is an alternative to litigation in court.

Does litigation financing level the playing field?

Six investors affected by the Binance platform outage have now banded together to lead efforts to bring the claims of affected Binance customers to arbitration. The group initially organized themselves through Reddit and Discord following the platform’s downtime on May 19, and they say they expect more than 700 people to join them.

“Binance has tried to limit regulation as much as possible, and they’ve also tried to limit the possibility of getting sued by their customers,” Aija Lejniece, a Paris-based arbitration attorney advising the group, told Forkast.News in an interview. “International arbitration is much more expensive for the average person to pursue. The reason why arbitration is so expensive is because it’s a private method of dispute settlement and that makes litigation against the Binance prohibitively expensive for most individuals.”

To raise the necessary funds for the arbitration, the group has partnered with Liti Capital, a Swiss-based blockchain private equity fund that specializes in litigation financing. Launched earlier this year, Liti Capital provides funding for lawsuits or arbitrations and raises capital for the cases it wants to invest in by tokenizing shares in the company and paying out dividends to LITI equity token holders when a case in its portfolio is won.

David Kay, executive chairman and chief investment officer of Liti Capital, told Forkast.News in an interview that the company would be providing at least US$5 million to finance the claim on behalf of any and all claimants worldwide against Binance.  The claimants would just need to sign up and get access to representation without any out-of-pocket cost, and the cost and risk of the arbitration would be borne by Liti Capital. In exchange, the company would take a minority percentage of the compensation received.

A steering committee — comprising  Lejniece, Kay and three of the affected traders — has been formed to provide guidance and information about the claims process against Binance. International law firm White & Case LLP has also been engaged to represent affected individuals in the claims process.

Kay said that there was currently over US$20 million of claims of losses against Binance. He expects the claims against Binance to be “in the hundreds of millions of dollars” and thousands of people from around the world to join. “A lot of the people that have been impacted do not speak English. Our website is going to be multilingual,” Kay said. “This is a truly international case.”

“It’s the first litigation financing in the crypto space,” Kay said. “This is the point for the crypto industry to decide whether or not, and how, these companies are going to be accountable to their customers.”

Binance under growing regulatory heat

When asked to comment on the possibility of legal action by Binance users, a Binance representative told Forkast.News that the company does not publicly discuss individual case specifics and that users can approach its customer support team for assistance. 

“Our policy is fair in that we compensate users who experienced actual trading losses due to our system’s issues,” said the Binance representative. “We do not cover hypothetical ‘what could have been’ situations such as unrealized profits.”

“There are risks associated with any trading environment, and our Terms of Service discloses those risks, including the possibility of systems-related downtime, to our users,” the Binance representative added. “We strive to limit any disruptions, and we are continually working to enhance our platform capabilities to provide a best-in-class experience.” The exchange has launched a Responsible Trading program to educate users on the risks of trading as well as implemented measures such as user anti-addiction restrictions and “cooling-off” suspension features.

In an interview with Forkast.News earlier this year, Binance CEO Changpeng Zhao (CZ) said that protecting users was a priority for Binance. “We try our best to make it right for users if it’s our fault. But sometimes it’s very difficult to figure out whose fault it really is. So when there’s a massive outage, we do try to make up for it,” Zhao said. “We have a SAFU (Secure Asset Fund for Users) fund, which is an insurance fund that’s used for these types of situations, including security issues [and] system outages.”

Binance has been under increasing scrutiny from regulators around the world over its stock tokens, derivatives trading services and know-your-customer practices. The growing list of jurisdictions that have issued warnings to, or launched investigations of, Binance includes the Cayman Islands, Germany, Hong Kong, Italy, Japan, Lithuania, Malaysia, Netherlands, Poland, Thailand, the United Kingdom and the United States.

Faced with the regulatory onslaught, Binance has taken steps to step up its compliance and rein in its product offerings. Binance recently ceased offering futures and derivatives products to all users of the Netherlands, Germany, Italy and Hong Kong as well as retail users of the United Kingdom. In July, Binance cut high leverage, or the amount of debt crypto traders can take on the platform from 125x to 20x.

With Binance a giant in the nascent, but fast-growing crypto industry, the case could have potentially far-reaching consequences for the exchange and the industry as a whole. 

“This case can give a real push to regulators as well. Binance is operating as a financial institution, only unlike every other financial institution, it’s operating completely outside of regulation,” Lejniece said. “The main problem from a regulatory perspective is that crypto has grown so quickly in the past couple of years that regulators have not caught on and this case will highlight some of the many issues that exist in the lack of regulation in crypto.”

Is arbitration the ‘only hope’?

Some Binance users are refraining from the class-action path, citing the restrictions against lawsuits in Binance’s terms of use. In addition, class-action lawsuits — where one or more plaintiffs bring a lawsuit on behalf of a larger group — can take years, racking up legal costs.

Fawaz Ahmed, a crypto trader based in Canada, told Forkast.News that arbitration was “our only hope at this point because there’s no other solution.” 

Ahmed, who had been trading on Binance since 2020, said that his initial investment of 1,250 Ether had grown to 3,300 Ether — or about US$9 million — when he tried to close his position on May 19. He had tried to cut his positions when he saw the price of Ether falling, but was unable to as the Binance app wasn’t working for about an hour. 

“It’s been very tough,” said Ahmed, when asked how the loss has affected him. 

Ahmed believes that the case could be a watershed moment for Binance and for other cryptocurrency exchanges and hopes that Binance will improve the engineering of its product, compensate the customers that have been affected, and improve its customer support to show more empathy towards its customers.

“My goal is not to take the company down,” Ahmed said. “It’s added a lot of value to the ecosystem in the last few years. It has messed up and it should right the wrongs.”

See related article: How blockchain can bring litigation finance to small investors