On September 28, 2024, more than four months later, Binance founder Changpeng Zhao CZ posted a status "gm" on Twitter, announcing that he had regained his freedom.
and#CZ On the 29th, he expressed his gratitude to everyone through a long Twitter post, saying that Binance had done a good job during his absence. He also revealed to the outside world that the Giggle Academy he founded before going to prison was progressing smoothly, and that he would continue to invest in blockchain, decentralized technology, AI, and biotechnology in the future, and would spend more energy and money on charity and education.
1. The past and present of the CZ case
Relevant documents disclosed by the U.S. Department of Justice show that Binance has attracted a large number of American users since its establishment in 2017. According to relevant U.S. laws and regulations, to provide services to U.S. customers, it is necessary to register with FinCEN (the department of the U.S. Treasury responsible for combating financial crimes) and comply with relevant anti-money laundering regulations, but Binance has not implemented effective measures in compliance procedures such as anti-money laundering. In order to retain some American VIP users, Binance took the initiative to help these customers evade regulation. Between August 2017 and October 2022, U.S. users conducted trillions of dollars worth of transactions on Binance, generating more than $1.6 billion in profits for the platform.
Due to the lack of effective anti-money laundering measures, terrorist organizations such as Hamas and al-Qaeda, as well as criminal organizations such as fraud and dark web, have laundered money through Binance, and users from countries and regions such as Iran and North Korea, which are subject to US sanctions, have completed transactions with US users in the platform's matching trading system, which violates relevant US anti-money laundering and sanctions regulations. From January 2018 to May 2022, US users completed more than $898 million in transactions with users living in Iran through Binance.
On November 21, 2023, CZ Zhao Changpeng went to the United States and signed a plea agreement with the U.S. Department of Justice. In the plea agreement, Zhao Changpeng admitted that Binance failed to implement an effective anti-money laundering program and violated the U.S. Bank Secrecy Act. CZ Zhao Changpeng personally needs to pay a fine of $50 million, resign from the position of Binance CEO, and is not allowed to participate in any activities of Binance within three years. Binance agrees to confiscate assets worth $2.5 billion and pay a fine of $1.8 billion, totaling about $4.3 billion.
In the end, U.S. federal judge Richard A. Jones sentenced CZ Zhao Changpeng to four months in prison. Information from the official website of the U.S. Federal Bureau of Prisons showed that CZ had left prison on Friday, September 27, 2024.
The U.S. Federal Bureau of Prisons official website found CZ’s prison information
2. The possible criminal penalties that CZ may face in China
For a centralized exchange like Binance with a large number of domestic users, if it is aware that terrorist organizations such as Hamas and al-Qaeda or criminal organizations such as financial fraud groups and dark web are laundering money through Binance, and Binance fails to take preventive and monitoring measures in accordance with regulations, establish a complete and effective KYC system, report large and suspicious transactions, and fails to fulfill its anti-money laundering obligations, then the person in charge, CZ, may also be suspected of money laundering under the Criminal Law of the People's Republic of China and face a maximum sentence of ten years in prison.
Article 191 of the Criminal Law stipulates that whoever commits any of the following acts in order to conceal or hide the source and nature of proceeds from drug crimes, organized crimes of a mafia nature, terrorist activities, smuggling crimes, corruption and bribery crimes, crimes that undermine the financial management order, and financial fraud crimes, shall have the proceeds from the above crimes and the proceeds generated thereby confiscated, and shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall be fined or fined alone; if the circumstances are serious, he shall be sentenced to fixed-term imprisonment of not less than five years but not more than ten years, and shall be fined:
(1) Providing a funding account;
(2) Converting property into cash, financial bills, or securities;
(3) Transferring funds through account transfer or other payment settlement methods;
(4) Transferring assets across borders;
(5) Covering up or concealing the source and nature of criminal proceeds and their proceeds by other means.
If an entity commits the crime in the preceding paragraph, the entity shall be sentenced to a fine, and the directly responsible supervisor and other directly responsible persons shall be punished in accordance with the provisions of the preceding paragraph.
Article 5 of the Interpretation on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Money Laundering (hereinafter referred to as the Interpretation), which was implemented on August 20, 2024, stipulates seven behavioral patterns of money laundering crimes. Among them, the Interpretation stipulates that the transfer and conversion of criminal proceeds and their proceeds through "virtual asset" transactions and financial asset exchanges can be deemed as concealing the source and nature of criminal proceeds and their proceeds by other means.
In summary, if the CZ case happened in China, Binance knew that criminal organizations such as terrorist organizations, dark web and financial fraud groups used virtual currency and other virtual asset transactions to launder money through Binance exchange accounts. Coupled with the huge trading volume of the exchange itself and the high value of virtual currency, the amount of money laundering is likely to reach the "serious circumstances" stipulated in Article 191 of the Criminal Law. CZ and Binance will most likely be punished to the maximum extent for suspected money laundering.
III. The CZ case’s implications for the compliance of future centralized exchanges
About three years ago, some leading exchanges provided 500 BTC of KYC-free quota after registering with a mobile phone number or email address. In short, criminal gangs can register an exchange account at will without providing identity information, and can transfer tens of millions of criminal proceeds to any country in the world through virtual currency, which makes it extremely difficult for regulatory authorities to combat crime.
As the United States, the European Union and other countries and regions increase their supervision of virtual currency exchanges and crackdown on related crimes, more and more exchanges have begun to strictly implement KYC regulations and establish a sound anti-money laundering system. Especially this year, some exchange users were intercepted by the exchange's risk control when withdrawing money and were required to provide proof of the source of funds. In addition, overseas KYC accounts purchased in order to participate in exchange new listings and financial management activities will also be frozen by risk control. These all reflect the progress of exchanges in cooperating with regulatory authorities to combat virtual currency money laundering crimes.
Therefore, if centralized exchanges want to operate legally and compliantly in the future, they must attach importance to the establishment of an anti-money laundering system. Not only at the fiat currency level, but also on-chain anti-money laundering warnings and interceptions should be carried out to prevent black and gray crypto assets from mixing into the exchange.
The EU Crypto-Asset Market Regulation Act MiCA, which will be fully implemented at the end of this year, requires that when a crypto-asset service provider CASP applies for a license, if the applicant's management or shareholders have been convicted of money laundering or terrorist financing, the competent authority may refuse to grant a license for crypto-asset services. For more details, please read the in-depth analysis of the EU Crypto-Asset Market Regulation Act MiCA.
Although crypto assets may give rise to many new types of crimes due to technical features such as decentralization, posing greater challenges to law enforcement agencies, as regulatory laws and regulations in countries and regions around the world continue to improve, this technology and its derived assets will also bring huge value and promote the development of the digital economy and cross-border instant payments.
At the Tsinghua PBC Chief Economist Forum held in Beijing yesterday, Zhu Guangyao, former vice minister of the Ministry of Finance, also called for attention to the study of the development of cryptocurrencies. He said, "Although crypto assets do have negative effects, we must fully recognize its risks and harm to the capital market, but we must study the latest international changes and policy adjustments, because cryptocurrencies are a vital aspect to the development of the digital economy. Emerging market countries such as Russia, South Africa, Brazil, and BRICS countries are also taking actions in the cryptocurrency industry."
As an industry practitioner, I also hope that domestic regulatory authorities can pay more attention to the development of cryptocurrencies in other parts of the world and industry governance rules, and formulate policies and regulations that conform to the laws of industry development. One day in the future, we will see large-scale application of blockchain technology in China, and the crypto industry can develop legally and in compliance with regulations.
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