Background to the event
On November 22, 2023, Binance, the world's largest cryptocurrency exchange, pleaded guilty to engaging in money laundering, unlicensed money transfers, and sanctions violations, and will pay a $4.3 billion fine in the face of charges from the U.S. Department of JusticeBinance founder and CEO Changpeng Zhao pleaded guilty and went to the United States to reach a plea agreement, which could result in 18 months in prison. The incident caused a sensation in the cryptocurrency circle, financial circle, scientific and technological circles, economic fields, and national organizations.
The timeline of Binance Development and the penalty is as follows:
2017: Binance was founded and quickly became dominant in the cryptocurrency industry, with the largest number of U.S. individuals and entities among global traders. 2018: Binance has a trading capacity of 1.4 million transactions per second, providing more than 150 cryptocurrencies and derivatives such as Bitcoin, Ethereum, and Litecoin. 2022: FTX, the world's second-largest centralized cryptocurrency broker, went bankrupt and Binance continued to grow strongly. August 2023: The U.S. Department of Justice and prosecutors formally filed criminal and civil charges against Binance after several internal discussions about how to hold Binance accountable while reducing the impact on the market and customers. November 2023: Binance pleaded guilty and accepted punishment, and Changpeng Zhao resigned. Reviews
1. The gray area of decentralized finance
Binance's decentralized finance (DeFi) services have built an open financial system through decentralized protocols such as blockchain, and for a long time, Binance has provided privacy for trading entities without requiring customers to provide identity informationMoreover, DeFi services can quickly change hands and be difficult to trace through a series of operations such as exchanging assets into easy-to-use virtual assets on a certain blockchain, transferring them to other blockchains with cross-chain bridges, and sending virtual assets through coin mixers. Traders can circumvent regulation and tracking in various countries, which quickly attracts attention from all sides, creating a huge gray area, which includes at least:
In Myanmar, the Middle East and other places, drug lords and other criminal organizations can quickly launder moneyTerrorist organizations carry out financing and money laundering;A country that is subject to unilateral long-arm sanctions by an international country acquires and dispatches funds through DeFi transactions. Binance, as the largest exchange in DeFi, may control 1 3 of the cryptocurrency spot and 1 2 derivatives trading, and has made a lot of gains in the gray area. Even after the penalty, Binance still controls $65 billion in assets.
2. Regulatory attitudes in China and the United States
As the world's top 2 economies, China and the United States have very different attitudes towards DeFi.
In China, in September 2017, the People's Bank of China and seven other departments issued the "Announcement on Preventing the Risk of Token Issuance and Financing", proposing that no organization or individual shall illegally engage in token issuance and financing activities. In May 2021, the Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China issued a joint announcement, clarifying that financial institutions and payment institutions shall not use virtual currency to price and underwrite products and services, or provide customers with all services such as virtual currency registration, trading, clearing, payment and settlement, exchange, depository, derivative financial transactions, trusts, and investment targets. In September 2021, ten departments, including the People's Bank of China, the Cyberspace Administration of China, the Supreme People's Court, and the Supreme People's Procuratorate, issued the Notice on Further Preventing and Handling the Risk of Speculation in Virtual Currency Transactions, once again emphasizing that virtual currency should not and cannot be used as currency in the market, and that virtual currency-related business activities (including overseas virtual currency exchanges providing services to residents in China through the Internet) are illegal financial activities and are strictly prohibited. The attitude of the United States, on the other hand, is more complicated. The United States already has a systematic anti-money laundering system, and together with its globalized finance, the long arm of jurisdiction is covering the world, and they are certainly worried about the impact of the new DeFi on the existing system, but they are also trying to restrain its adverse effects and bring it into the scope of supervision. The Bank Secrecy Act of 1970 and the Anti-Money Laundering Act of 2021 are the three pillars of the U.S. anti-money laundering system, which regulate cash smuggling, dollar-settled money laundering, and the provision of finance, goods, or services to U.S. sanctioned entities. According to the U.S. Anti-Money Laundering Act, a person who transfers money from outside the U.S. to a country in order to conceal illegal activities can constitute the crime of money laundering. The PATRIOT Act also provides that when a foreign entity launders money, the transaction takes place in the United States, or a bank account is opened in the United States, and the U.S. judiciary has long-arm jurisdiction. Although Binance's main trading is carried out in a decentralized manner, and the Binance exchange is registered in Malta, an offshore financial location, a considerable part of US customers' US dollar funds are traded with Binance in the United States, which gives the United States jurisdiction.
3. The reason why the United States attacked and left room for Binance to comply with the law
On April 7 this year, the U.S. Department of the Treasury released the "2023 Decentralized Finance Illegal Finance Risk Assessment", which shows how criminals use DeFi (decentralized finance) and how U.S. anti-money laundering and anti-terrorist financing regulation and enforcement should improve and strengthen supervision around DeFi.
The Bank Secrecy Act imposes anti-money laundering and counter-terrorist financing obligations on "traditional" financial institutions, such as banks, such as requirements to establish and implement anti-money laundering programs, record keeping and reporting. The new regulations define DeFi service providers as financial institutions that are subject to the same regulatory obligations and are not exempt from digital intelligence and virtualization, as well as the economic sanctions program administered and administered by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC).
With the issuance of the above assessment, the United States began to close the net on Binance, and accused Binance of trading and profiting from criminal organizations and sanctioned countries. Perhaps intimidated by the power of U.S. jurisdiction, Binance and Changpeng Zhao pleaded guilty and accepted punishment.
However, unlike the rapid collapse of FTX after the crash, after Binance pleaded guilty and accepted punishment, users and consumers from all walks of life traded as usual, the impact on the cryptocurrency circle was controllable, and Binance itself seemed to operate sustainably. From the limited evidence, there are no small differences between Binance and FTX. FTX is "greedy" to customers, defrauding traders, making market making, chaotic accounts, misappropriation of funds, and once a thunderstorm, customers are run, and the goodwill is completely bankrupt and cannot survive;Binance is "reckless", and while stepping on the minefield of money laundering and sanctions violations, it has accumulated considerable scale, profits, and brands in commercial, financial, and derivatives transactions, and all parties believe that it is enough to continue to operate stably after paying fines.
In fact, there is a view that the Binance case also reflects that the United States has long been eyeing the large turnover and huge profits of cryptocurrency, "sheep fat and killing again", and through the Binance case, it will deter other DeFi exchanges, increase the identifiability of user identities and the traceability of transactions, and gradually control the new economic model of DeFi cryptocurrency, adding another brick to its own financial and legal system.
4. Compliance implications for Chinese enterprises operating cross-border business
Chinese companies that operate cross-border businesses are typically involved in a wide range of financial transactions, not only in the traditional real economy, but also in virtual emerging economic forms such as cryptocurrencies. When dealing with these virtual emerging economic formations, businesses need to pay special attention to:
1.Cryptocurrencies should not be used in any scenario. The global financial market is volatile, and some countries where the business is located have large foreign exchange controls and local currency activities, and virtual currencies are quite attractive as a means of gray exchange. In any case, business entities and individual employees should avoid virtual currencies in their transactions. On the one hand, this is suspected of circumventing the supervision of domestic virtual currency, and on the other hand, it may also lead to the loss of funds due to the anonymous, concealed and other technical means of virtual currency in the process of repatriation, and even be involved in illegal and criminal acts
2.Counterparty surveys. At the level of anti-money laundering, based on international anti-money laundering sanctions and their broad relevance and the long-arm jurisdiction of the United States, it is necessary to fully understand and comply with local anti-money laundering and anti-terrorism measures when operating and investing overseas
3.Precautions related to blockchain and web3. After the Binance case, the DeFi industry will enter the compliance stage, ushering in more and stronger supervision, blockchain, Web30 and other technologies will face a series of first-class control, data security, and financial security regulations. If an enterprise is involved in related business, it must integrate compliance and security throughout the entire technology life cycle, implement the main responsibility of security, achieve traceability and traceability, ensure cross-border compliance of data processing, clarify the legal responsibilities and risks of decentralized smart contracts, and ensure business compliance.
*: Compliance Tips.
Editor: Yoyo