When Canadian cryptocurrency trader Fawaz Ahmed saw the price of ethereum dropping, he knew it was time to get out. Unfortunately for him, he couldn’t.

Ahmed was trading on Binance, the world’s largest digital currency exchange by trading volume. And on May 19, Binance experienced a major outage which meant that, for about an hour, he was unable to exit his position.

That day, bitcoin and ethereum posted their biggest one-day drops since March 2020, with the entire crypto market losing roughly $1 trillion in value. When prices fell below a certain point, Ahmed’s position got wiped out. His personal losses came to about $6 million.

“This loss was not fair,” Ahmed, a 33-year-old who trades full-time, told CNBC. “This is something which was out of my control.”

Binance’s customer service team gave Ahmed an “absurdly” low offer of compensation, he said.

Ahmed is one of hundreds of investors expected to take part in arbitration proceedings against Binance, seeking damages for the money they lost when the cryptocurrency exchange went offline.

Binance was not immediately available for comment at the time of publication.

Binance has experienced several outages over the years in times of heightened volatility for virtual currencies. That can be costly for traders, especially when prices are plunging.

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And those losses can balloon to millions of dollars when investors make risky bets using leverage, or borrowed money, to augment trades — which, on Binance, is something users do often.

Binance recently cut the maximum leverage customers can take on futures — financial derivatives that oblige investors to buy an asset at an agreed-upon time at a later date — to 20 times from a previous limit of 125 times.

Binance wasn’t the only crypto exchange to face disruption to its service on May 19. Coinbase users were also temporarily unable to access its site. Bitcoin plunged as much as 30% to nearly $30,000 that day. It has since recovered to $45,790.

No headquarters

Changpeng “CZ” Zhao, Binance’s boss, has previously said the exchange has no official headquarters. That makes it extremely difficult for investors to figure out how, and where, to take the company to court.

A group of crypto traders hopes to change that. With the help of Liti Capital, a little-known private equity firm providing litigation financing, nearly 1,000 people are expected to join arbitration proceedings in Hong Kong to seek damages from Binance.

“This is a landmark case for the industry,” David Kay, chief investment officer of Liti Capital, told CNBC.

Binance is “the first company that has ever grown to any size in any industry — much less the financial industry — where there is no regulation,” he said. “They have no home, they have no headquarters, they have no office.”

“The only place where Binance has said they have jurisdiction is in a Hong Kong international arbitration court,” Kay added. “This will be the largest consumer international arbitration in history.”

Kay said that Liti Capital began working on the Binance case after receiving a call from Aija Lejniece, an independent lawyer working with a group of crypto traders in France. Lejniece specializes in international arbitration cases.

Binance’s terms of use say that any legal dispute must be resolved through arbitration at the Hong Kong International Arbitration Centre. Arbitration proceedings, unlike class action lawsuits, aim to settle disputes out of court.

The format makes it harder for the average consumer to make a claim, Kay said, as claimants have to pay arbitration fees and additional costs — for instance, traveling to Hong Kong. Individually, that could set each claimant back an estimated $65,000. To cover those costs, Liti Capital has promised to provide a minimum of $5 million in funding.

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White & Case, a New York-based law firm, has been hired to represent the claimants. Abby Cohen Smutny and Darryl Lew, two White & Case partners based in Washington, D.C., will serve as their lawyers.

Crypto crackdown

Crypto, a nascent industry, is still largely unregulated. While some firms in the space, like Coinbase, have sought to build rapport with regulators, Binance and many others operate mainly outside the purview of established rules.

That hasn’t gone unnoticed by regulators, who are racing to catch up with new innovations in financial services. Two main concerns with crypto are a lack of protections for consumers and the risk of money laundering and other illicit activity.

Binance, in particular, has attracted attention from authorities in multiple countries. Britain’s Financial Conduct Authority recently banned the firm’s U.K. subsidiary after finding it failed to meet anti-money laundering requirements. Meanwhile, financial watchdogs in Japan, Canada and Italy have issued warnings saying Binance does not have the authority to operate in the countries.

To add to Binance’s woes, the company lost its U.S. chief Brian Brooks, who was formerly acting head of the Office of the Comptroller of the Currency, a U.S. banking regulator.

The company, which was founded by Zhao in China four years ago, recently said it was pivoting to become a regulated institution, with plans to obtain licenses in multiple jurisdictions and set up regional headquarters. Zhao has said he is willing to step down from the exchange to hand the baton to someone with more regulatory experience.