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China is pointing its regulatory bazooka at a lucrative and sprawling part of the digital asset market: crypto exchanges that set up shop abroad to dodge local regulations.
In the latest of a series of crypto crackdowns, the country’s central bank said on Friday that overseas facilities offering services inside China are “illegal”. It warned that any local staff who help these businesses operate, or even provide marketing and technical support, “shall be investigated”.
It marked one of the most direct crackdowns by a major regulator against “offshore” exchanges that have proliferated as interest among traders has boomed in recent years.
Many large crypto venues provide services in jurisdictions without having their operations, web servers and staff in those countries. These offshore venues often offer a wide variety of products, such as trading digital tokens in the “spot” market, derivatives like futures and even “yield” products that look similar to fixed-income securities.
It is fiendishly difficult for financial watchdogs to exert much control over these firms.
Crypto providers are often able to bypass local rules and regulations by allowing customers to come to them, and not directly soliciting clients in those areas. For example, UK users can access Binance, one of the world’s largest crypto platforms, even though the group is not authorised to carry out any crypto business or regulated financial services in the country. Many other firms work in the same way, carefully choosing where to base their operations or declining to name a particular address for their headquarters.
Rules vary by country, but many national regulators are unable to directly enforce the types of financial transactions its residents can perform outside its borders. Many rely instead on issuing warnings to investors indicating that the services offshore exchanges provide are not officially authorised. Cayman Islands-registered Binance has been the subject of several consumer warnings, including in the UK, Italy and Japan. In August, Spanish regulators added Huobi, another massive exchange, to its list of unauthorised financial operators.
Binance has said it is “committed to working with regulators and policymakers” around the world. Huobi did not immediately respond to a request for comment.
Last month, a US federal court ordered crypto operator Bitmex to pay a $100m civil penalty for offering leveraged crypto trading through a web of US and non-US entities. One of the key pillars of the Commodity Futures Trading Commission complaint against the company revolved around its “extensive solicitation of and access to US customers” without the appropriate authorisations. Bitmex said at the time that it takes its “responsibilities extremely seriously, and will continue to actively engage with regulators around the world”.
The court ruling, which came almost a year after an action by the CFTC, is seen in the crypto community as something of a landmark case. But while after-the-fact enforcement may deter some activity, it takes tremendous amounts of time and resources.
What is clear is that even powerful regulators like those in Washington and Beijing have struggled to get a grip on this part of the crypto industry. Just how long their tentacles reach will play a big role in how the sector evolves.
The author of this article can be reached on email at adam.samson or Telegram at @adamsamsonFT.
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