FTC v. Binance: What Are the Relevant Financial Products Offered by Binance?

V. FACTS

B. Relevant Financial Products Offered by Binance

56. Beginning in July 2019, Binance has offered leverage to retail customers (that is, non-ECPs) trading in its spot markets, which generally include its markets for BTC, ETH, and other digital assets. These leveraged transactions do not result in actual delivery of the digital asset within 28 days of the transaction.

According to Binance, “leverage refers to using borrowed capital to make trades. Leverage trading can amplify your buying or selling power, allowing [the customer] to trade larger [notional] amounts.” Zhao approved Binance’s retail leverage trading products before they were launched.

57. When a retail customer trades in Binance’s spot markets using leverage, Binance extends thecustomer a loan that is denominated in a digital asset that is selected by the customer. The customer may then use the loan proceeds to transact in Binance’s spot markets.

Until the loan is paid back by the customer, Binance retains a security interest in the loan proceeds and in any assets purchased with the loan proceeds, up to the value of the loan.

58. Beginning in April 2020, Binance has offered a product called “Binance Options.” According to Binance, Binance Options are a financial derivative that “give traders the right but not the obligation to buy or sell the underlying asset” upon the expiration of the options contract.

The underlying assets for Binance Options include BTC, ETH, and BNB. Binance Options are denominated and settled in USDT, not the option’s underlying digital asset.

59. At times during the Relevant Period, Binance has been the sole seller of Binance Options. An options seller is one counterparty to an options transaction, so when Binance sells options it is trading against its customers.

60. During the Relevant Period, Binance has also offered two categories of digital asset derivatives that it calls “futures”—one category, called quarterly futures, is composed of contracts that have pre-determined expiration dates while the other category, perpetual contracts, is composed of contracts that do not have an expiration date.

These products all derive their value from the price of the underlying digital asset.

61. Binance began offering quarterly futures in or around September 2019. Binance’s quarterly futures are futures contracts. Binance customers trade quarterly futures with numerous digital assets as the base asset (what would in traditional financial markets be called the underlier), including BTC, ETH, and LTC.

Binance’s quarterly futures are settled in whatever digital asset the customer uses to collateralize their trading.

62. Following in the footsteps of its competitors, since at least September 2019 Binance has offered a product that Binance calls perpetuals contracts, sometimes called simply “perpetuals” by Binance’s customers. Binance’s perpetuals are swaps. Binance’s perpetuals transfer the price risk of the underlying digital asset as between the counterparties to a transaction.

Binance’s perpetuals do not have a pre-determined expiration date; a trader closes a position in perpetual contracts by entering into an offsetting transaction, at which time the trade settles in whatever digital asset the customer uses to collateralize their trading.

Binance offers perpetuals on numerous digital assets, including contracts with BTC, ETH, and LTC as the base asset. Its most popular perpetuals include BTC/USDT, ETH/USDT and BTC/BUSD.

63. Every eight hours, Binance causes the counterparties to a transaction in its perpetuals to exchange a payment that Binance calls a “funding fee.”

In the context of Binance’s perpetuals, the funding fee is intended to ensure the price of the perpetual contract stays sufficiently correlated to the price of the underlying digital asset as reflected by a price index that is determined by Binance and calculated based on prices reported by other digital asset exchanges.

64. Transactions in Binance’s quarterly futures and perpetual contracts do not result in an exchange of the underlying digital asset between the counterparties to a trade. As explained by Binance: “Crypto futures are contracts that represent the value of a specific cryptocurrency. You do not own the underlying cryptocurrency when you purchase a futures contract.

Instead, you own a contract under which you have agreed to buy or sell a specific cryptocurrency at a later date.” In this way, a derivatives trade on Binance is more like placing a bet on the price of a digital asset, rather than a way to purchase digital assets themselves.

65. Customers have had the option to collateralize their trading in Binance’s quarterly futures and perpetual contracts with either certain stablecoins, including USDT or BUSD, or certain non-stablecoin digital assets, including BTC.

66. Binance customers may trade quarterly futures and perpetual contracts on margin, or with leverage. The amount of leverage offered by Binance for trading in its quarterly futures and perpetual contracts has varied over time across its products and categories of customers.

During the Relevant Period, customers have been allowed to trade Binance’s quarterly futures and perpetual contracts with leverage ratios of up to 125x. A leverage ratio of 125x means a customer with one BTC in their account can assume a position worth 125 BTC.

Unlike the leverage that Binance offers in connection with its spot markets, Binance does not actually extend its customers a loan when providing leverage to trade in Binance’s derivatives markets.

67. Zhao has been directly involved in Binance’s product offerings. He has monitored the derivative products offered by competing digital asset exchanges and brainstormed ways for Binance to keep pace with its competition.

For example, in an October 28, 2020 chat among the Binance Market Intelligence Group, Zhao circulated a web link referencing “gamified-crypto trading” and told an employee to “keep an eye on this.” The employee responded:

We have done some research on this . . . . Right now most of the gamification trading are based on some complex derivative financial instruments, such as binary options, exotic options or perpetual swaps.

The reason why we did the Futures Battle is we wanted to lower the barrier of complex financial products and increase the conversion/retention rate. But there is [sic] 2 things we need to be very careful:

1. Usually this kind of products looks like gambling, which may bring us some compliance and reputation risk. So we need to make sure the product does not look like a gamble game.

2. User might be much easier to get addicted to these products. So we need to enhance responsible trading (or you could say playing) as well

Binance currently offers a “Battle function” that “allows users to compete with each other and earn points” by trading Binance derivative contracts in a “head to head battle to see who is the most profitable” in “a one-minute battle period.”

68. In an August 2020 blog post announcing the launch of BTC-margined perpetuals (in addition to USDT-margined perpetuals, which had been offered since September 2019) at up to 125x leverage, Binance touted the success of its perpetual contracts.

Binance stated that its “perpetual futures consistently owns the largest trading volume, with recent monthly market share averaging 37%.”

In that same blog post, Binance highlighted its “competitive leverage of up to 125x” and Zhao lauded that “shortly after hitting an all-time-high of $13 billion in daily futures volume last month, we crossed the $1 billion mark in open interest last week.”