New Wave of Regulations Target Exchanges and Derivative Products Worldwide

Last weekend saw a wave of new restrictions come crashing down on cryptocurrency exchanges throughout the world.  

The primary crackdown targets were leveraged trading and other risky derivative products, although major exchanges were also barred from operating in certain jurisdictions altogether.

Binance and Huobi, two of the largest exchanges in the world, bore the brunt of the new restrictions, impacting users in China, Canada, Japan and the U.K.

While some view regulations on excessive leverage and derivatives as a net positive, others expressed concern that this weekend's events are just a taste of future government efforts to disrupt the Bitcoin network's growth. 

Exchanges are still a centralized on-ramp for most Bitcoin users, which makes them vulnerable chokepoints that restrict overall adoption due to regulatory hurdles.

Here is a summary of the new restrictions by country, in chronological order of announcements.  

Canada

On Friday, June 25th, Binance, the world’s largest cryptocurrency exchange, updated its terms of use to include Ontario, Canada as a restricted jurisdiction.  

The update means that Binance can no longer serve customers within Canada's most populous province. Ontario-based users were advised to close their active positions before December 31st, 2021. 

Binance appears to be acting preemptively in Ontario. The Ontario Securities Commission (OSC) recently issued direct statements against other exchanges, including one against Bybit last week and Kucoin earlier in the month, accusing the exchanges of allowing Ontario residents to trade crypto assets and derivatives in violation of Ontario securities law.

Bitmex also withdrew its services from Ontario last August, announcing the exchange had been "mandated" to do so. 

Japan

Last Friday, Japan’s Financial Services Agency (FSA) also issued a warning to Binance, stating that the company is not licensed to do business within Japan. 

"Through the internet, (Binance) is engaged in unregistered Cryptocurrency sales to Japanese residents."  (Japanese translation)

This is not the first time the FSA has spoken out against Binance's alleged operations in the country. In 2018 they released a similar warning to the company. At the time Binance CEO Changpeng "CZ" Zhao took to Twitter, unfazed by the statement. The company claims to have no operations within Japan, although its website is accessible and not blocked to Japanese IP addresses. 

Binance has yet to issue a direct response to this most recent statement by the FSA, so it is unclear what impact it will have on traders in the country.

The FSA issued a similar warning to popular exchange Bybit last month.  

United Kingdom 

On Saturday, June 26th, the United Kingdom’s Financial Conduct Authority (FCA) issued a consumer warning announcing that Binance is “not permitted to undertake any regulated activity in the UK.” 

Despite the warning, Binance announced that users would not be directly impacted:

The FCA does not directly regulate cryptocurrencies, but does regulate derivative products in the country. This means that British users will likely still be able to use the site to purchase and store crypto assets as long as derivatives are not involved.  

The announcement has caused other exchanges to reconsider their registration bids with the FCA, according to Reuters.  

China 

Huobi, China’s largest exchange, updated its user agreement on Saturday, June 26th, adding China and several other countries to its list of prohibited jurisdictions for derivative trading.  

The updated user agreement lists an additional nine countries, in addition to China, in which derivatives trading is also prohibited on the platform: 

Anyone from mainland China, Taiwan, Israel, Iraq, Bangladesh, Bolivia, Ecuador, Kyrgyzstan, Sevastopol and the U.K. (in the U.K., retail investors only) is prohibited from using the derivatives trading services provided by Huobi’s website. 

According to Sally Wang from Sino Global Capital, Chinese users are still able to use the exchange for spot trading.

China has been a hot topic in Bitcoin circles lately after major crackdowns on Bitcoin mining operations within its border.   

The People's Bank of China (PBOC), China's central bank, also ordered four state-owned banks and major payment provider Alipay to cut off any Bitcoin-linked transactions last week. 

A recent editorial in Chinese business newspaper Caixin highlighted the hawkish sentiment within the country, stating that now is the time to "declare all-out war on cryptocurrencies."

BTC China, the countries oldest exchange, "completely exited from Bitcoin (& cryptocurrency) related businesses" last Thursday in anticipation of further crackdowns by Beijing.

According to Chainanalysis, East Asia accounts for over 30% of all cryptocurrency transactions worldwide, with mainland China believed to originate the majority of those transactions. 

Impacts on Bitcoin 

While exchange-related restrictions have little influence over the Bitcoin network, they do present regulatory hurdles that could make Bitcoin more difficult to access. If governing agencies throughout the world were to coordinate to try to block Bitcoin adoption, exchanges would provide the perfect centralized chokepoint to do so.  

However, these recent crackdowns seem to revolve around leveraged trading and derivatives in particular, so in most cases they do not affect users ability to buy, hold and use Bitcoin. Over-leveraged trades were likely a major factor in Bitcoin's price crash in May, which means the crackdowns could help prevent future volatility. 

Some even argue that regulation legitimizes cryptocurrency and shows maturity within the industry.

Regardless of what happens in the future, Bitcoin's growth has clearly drawn the attention of government regulators, for better or worse.