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Crypto traders want payback after losing millions to Binance glitches

Traders are teaming up to take legal action against the crypto exchange, but they face an uphill battle.
Image: Sable Martin at her home in Douglasville, Ga.
Sable Martin lost access to her Binance account without clear explanation.Elijah Nouvelage / for NBC News

Sable Martin, 25, a biology graduate and expectant mother in Atlanta, spends her days trading stocks. In 2017, drawn to their potential for wild profitability, she started dabbling in cryptocurrencies, investing about $500 apiece in Bitcoin, Ethereum, XRP and Tron through the crypto exchange Binance.

"The fees weren't too crazy, and the platform seemed pretty stable," she said. "Everything was going great, even with the really deep dips we've had the past few months, because I got in early."

On May 19, everything changed. She started seeing reports that Binance, the world's largest crypto exchange by trading volume, according to CoinMarketCap, was crashing and preventing people from moving their money, while others were saying their accounts had been closed with no explanation.

"That's when I panicked," she said.

She quickly logged on to Binance.com to check on her funds and saw an error message saying that her account had been closed and that if she wanted to keep her coins, she would need to set up a new account on Binance.US to transfer them to.

She followed the site's instructions. But they asked her to log back in to her original account, which she could no longer access, to move the coins, which are now worth many times what she paid for them in 2017. She contacted customer service. But, like many others who reported similar account freezes on Reddit and a Discord server set up by disgruntled Binance users, she got no response.

"You can't get in contact with anybody," she said. "Where are they putting everybody's money?"

Sable Martin at her home in Douglasville, Ga.Elijah Nouvelage / for NBC News

Martin is one of about 700 crypto traders from dozens of countries who have come together online to explore how they can take action against Binance after they either lost access to their accounts without clear explanation or recourse or they lost money when the exchange crashed on May 19, leaving them unable to move their funds despite their frantic efforts as the prices of cryptocurrencies tumbled.

After months of organizing and consulting with legal experts, the group has settled on the unusual strategy, announced Thursday, to pursue international arbitration, a form of cross-border dispute resolution typically used by multinational companies, to hold a largely unregulated, borderless company with no headquarters to account.

"It's going to be a historic case, and it's definitely going to attract a lot of regulators' attention," said Aija Lejniece, an international arbitration lawyer based in Paris who is advising the complainants. "Binance is basically operating like a financial institution but is not encumbered by any of the regulations such an institution would typically have to comply with."

Binance spokesman Riley Kim declined to comment on the pending arbitration. He said the "exponential growth of cryptocurrency can occasionally pose technical bottlenecks for exchange platforms due to real-time market fluctuations associated with periods of high trading volume."

In response to allegations that users like Martin have had their accounts frozen, Kim said: "Unless there are outstanding account security or compliance matters, users can always move or withdraw their funds. In any case, users can always approach our customer support team if they require assistance."

The path to compensation

But the path to potential compensation won't be easy. Binance has attracted scrutiny from financial watchdogs around the globe over allegations that it skirted regulation for years by shifting its operations to different jurisdictions and claiming to have no headquarters, although it has been domiciled in several countries. It also requires users who sign up to agree to terms of use that waive their rights to class-action lawsuits. The only way users can resolve disputes, according to the terms of use, is through arbitration in Hong Kong's International Arbitration Center, where the cost of having a case heard is $65,000 — prohibitively expensive for the average amateur crypto trader.

A second catch buried in Binance's terms of use is the stipulation that damages are capped at 12 months' worth of trading fees — a fraction of a percentage of the value of trades made on the exchange.

The two clauses mean that if all 700 traders wanted to act individually, they would, under the terms of service, have to pay more than $45 million in international arbitration fees for the chance to win a tiny fraction of that sum back.

However, they now have a secret weapon: the backing of Lejniece and litigation finance strategist David Kay. Kay, through his startup Liti Capital, has provided $5 million in financing to bring the claim before Hong Kong's international arbitrators, drawing on Lejniece's expertise in litigation and cross-border disputes, the pair announced Thursday.

Together, they hope to first get an international arbitrator to decide that Binance's contract terms are "unconscionable," a legal concept recognized in the case law of most developed countries, including Hong Kong's "unconscionability doctrine," and therefore unenforceable. If they succeed, they will then seek what Kay estimates will be $50 million to $150 million in compensation for the damages incurred by the complainants, depending on how many formally sign up for the case.

So far, more than 700 have joined the Discord server to outline their losses, but only a small proportion of them, with combined losses of more than $20 million, have signed the paperwork formalizing the process with the legal team.

Kay and Lejniece are calling on people who believe they have been harmed by Binance to join the case through a dedicated website, Binanceclaim.com. Claimants can join the case for free, with Liti Capital footing the legal fees. Kay said that he believes the initial $5 million will be enough to cover "thousands" of claimants but that Liti Capital will add more funds if needed. If the group succeeds, Liti Capital will take a 30 percent cut of the damages.

"We think it's going to be a landmark case," Kay said. "Can a company without borders, rules and regulation treat customers with complete impunity and set up these barriers to entry that make it effectively impossible to get any kind of justice? We think the answer is going to be a no."

Kim of Binance said that there are risks associated with any trading environment and that the company's terms of service disclose those risks, "including the possibility of systems-related downtime, to our users."

"We strive to limit any disruptions, and we are continually working to enhance our platform capabilities to provide a best-in-class experience," Kim said.

Broader crackdown

The case reflects broader scrutiny of Binance — from regulators, legal experts and researchers — in several markets as the platform has grown, including an investigation by the Justice Department and the IRS exploring allegations of money laundering and tax offenses, according to a report by Bloomberg citing people with knowledge of the matter. Experts believe it's only a matter of time before Binance makes significant changes to how it operates.

"Binance's current situation is unsustainable," said Kevin Werbach, a professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania. "For cryptocurrencies to be trusted and successful as an asset class, they can't simply be outside the rule of law. Governments have laws to protect their citizens, and it doesn't make sense for entities to try to opt out of them, even if they have distributed operations and no clear headquarters."

The Binance cryptocurrency trading app on an Apple iPhone.Elijah Nouvelage / for NBC News

Big losers

The 700 or so potential complainants include traders from around the world, some of whom casually invest in cryptocurrencies in their spare time and others who dedicate their lives to it. Fawaz Ahmed, 33, a former Uber employee in Toronto, falls into the second category. He started trading full time early last year and would generally make big bets every few months.

On May 19, he saw that the price of ether was crashing and decided he needed to cut his losses and close his position. He opened the Binance app on his iPhone and started frantically clicking on the "close position" button to salvage his funds. Nothing happened. He said he tried again and again, opening and closing the app and calling friends for advice for almost an hour as he watched his losses skyrocket.

"For 50 minutes I couldn't do anything. I couldn't close, manage or hedge my position. My hands were literally shaking," he said.

At a certain point, Binance liquidated Ahmed's trade — a process that happens automatically when losses on a bet exceed investors' deposits. He lost everything. Had he been able to close his position when he wanted to, he said, he would still have 3,300 ether — worth about $10 million today.

"It was a very big hit," he said. "Mentally I was in very bad shape. I wanted to use this money to retire my parents, pay for my siblings' education and get a house in the future."

He felt numb for hours, he said, but thought Binance would compensate him because he was liquidated only because of an apparent technical glitch with the app. The next day, Binance released a compensation claim form, which Ahmed filled out in the hope he would be made whole. But over the next few weeks, he heard dozens of reports from others in the Discord server who had filled out the form that they were offered only a small fraction of what they lost, typically up to 30 percent. Ahmed said Binance eventually offered him about 20 percent of what he lost.

It was at that point that he and others in the group started exploring more aggressive remedies, including a class action — which lawyers they consulted ruled out because of the contracts they had signed — before they homed in on international arbitration.

Ahmed said that he and others just want "justice and compensation" and that he has one message for Binance's CEO, Changpeng Zhao: "Do the right thing."

Kate Marie, 58, a health care consultant from Sydney, had also planned to use the proceeds from crypto trading to secure her future. She started trading early last year with about $20,000 and said she had turned it into about $250,000 just before she lost everything during the May 19 outage, when she wasn't able to move her funds.

"I thought I had finally found a way to pay for my retirement, because my prospects at work were so limited," she said. "When you are a female in your late 50s or 60s, you are not considered for normal jobs anymore."

Marie, who is among the complainants to have already signed up for the case, hopes the group arbitration will help clean up the market.

"I want to see people protected," she said.

Kim, the Binance spokesman, declined to comment about individual customers.

"On 19 May, nearly all cryptocurrency exchanges suffered temporary outages due to extreme market volatility,” he said. "At Binance, we took immediate steps to engage with users affected by the outage, and we worked quickly to restore trading."

Binance has been bullish in its response to allegations of wrongdoing. After the May 19 outage and subsequent coverage by The Wall Street Journal, Binance published a blog post that said it had investigated some of the claims and "could not identify any relevant technical or system issues that impacted their trading."

The blog post described three cases, without naming the people, and appeared to blame the losses on the users.

In response to questions, Kim said: "We are aware of a very small number of users who are attempting to extract unreasonable demands from us. Our policy is fair in that we compensate users who experienced actual trading losses due to our system's issues. We do not cover hypothetical 'what could have been' situations, such as unrealized profits."

Kim added that he wasn't referring to any of the customers named in this article.

The company's apparent lack of compassion and accountability frustrates Francis Kim, an experienced derivatives trader in Melbourne, Australia, who said he lost about $170,000 on May 19, when the app stopped working and he was unable to manage his funds.

"You are seeing tens of thousands of dollars evaporate every minute," he said.

Francis Kim said that he is very aware of the risks of trading derivatives and that he has "made and lost $170,000 many times." But the May 19 incident was different because of how the company dealt with customer complaints. Kim said that he filled out a compensation claim but that the company offered to cover only a third of his losses.

Like Marie, Ahmed and Martin, Francis Kim wants Binance to own up to its mistakes and compensate users to make things right.

"Even if we are degenerate gamblers, that doesn't give the company the right to reach into our stack of chips and take them," he said.