More than 500 retail clients of Oztures Trading Pty Ltd, trading as Binance Australia Derivatives (Binance), were denied important consumer protections after being misclassified as wholesale clients, ASIC alleges in documents filed in the Federal Court.
ASIC alleges from 7 July 2022 to 21 April 2023, Binance offered crypto derivative products to 505 Australian retail investors who were misclassified as wholesale clients, representing 83% of its Australian client base.
Retail clients trading financial products, in this case, crypto derivative products, have important rights and consumer protections under Australian financial services laws. These include the requirement to be provided with a product disclosure statement and access to a compliant dispute resolution scheme. In addition, Binance was required to make a target market determination under design and distribution obligations.
ASIC Deputy Chair Sarah Court said Binance allegedly failed to ensure that the services it provided under its Australian financial services licence were provided efficiently, honestly and fairly.
‘Our case alleges Binance’s compliance systems were woefully inadequate and exposed more than 500 clients to high-risk, speculative products without the right consumer protections in place. Many of these clients suffered significant financial losses. In 2023, we oversaw compensation payments by Binance of approximately $13 million to affected clients.
‘Crypto derivative products are inherently risky and complex, so it is critical that retail clients are classified correctly. Those classifications ensure they receive the required consumer protections, and the information required to make an informed investment decision.’
ASIC alleges Binance, in the period July 2022 to April 2023, failed to:
- give a Product Disclosure Statement to retail clients
- make a Target Market Determination
- have a compliant internal dispute resolution system
- do all things necessary to ensure that its financial services were provided efficiently, honestly and fairly
- comply with the conditions of its licence, and
- ensure that its employees were adequately trained and competent.
Earlier this month, ASIC released Consultation paper 381 Updates to INFO 225: Digital Assets: Financial Products and Services (CP 381) outlining proposals to update Information Sheet 225 Crypto Assets (24-266MR) to provide greater clarity about how the current financial product definitions apply to digital assets and related products.
‘Many digital assets and related products are financial products under the current law. We are consulting with the sector to improve regulatory clarity, and ASIC will continue to use the full range of regulatory and enforcement tools to safeguard consumers and uphold market integrity in the digital asset sector,’ Ms Court said.
ASIC will be seeking penalties, declarations and adverse publicity orders.
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Background
Binance Australia Derivatives is part of the global Binance group, one of the world’s largest digital cryptocurrency exchanges by trading volume with registered users across the globe.
In December 2022, ASIC began a targeted review of Binance’s financial services business, including its classification of wholesale clients. This resulted in ASIC issuing a notice of hearing under s915C of the Corporations Act 2001 to consider whether the Australian financial services (AFS) licence held by Binance Australia Derivatives should be cancelled or suspended. On 6 April 2023, ASIC cancelled the AFS licence in response to a request to cancel from the entity (23-091MR).
In 2023, ASIC oversaw the compensation payments of approximately $13.1 million to reported misclassified Binance clients (23-298MR).
Under the Corporations Act 2001, AFS licensees are required to provide retail clients with important consumer rights and protections, including but not limited to, a Product Disclosure Statement (PDS), and a Target Market Determination (TMD).
The design and distribution obligations require issuers and distributors to have a consumer-centric approach to designing, marketing and distributing financial products. In particular, firms must design financial products that meet the likely objectives, financial situation and needs of the target consumer for whom they are intended. Firms must also take reasonable steps that are reasonably likely to result in the distribution of their financial products to be directed and limited to the defined target market.
ASIC has previously taken civil penalty proceedings against global digital asset exchange operator Bit Trade Pty Ltd (the operator of the Kraken crypto exchange in Australia) for design and distribution obligation failures, with the Federal Court ruling in favour of ASIC’s case (24-186MR).
ASIC’s Moneysmart website has information for consumers about the risks of investing in crypto assets.