Two days ago at an exhibition in Hong Kong, a friend from Beijing greeted me and said: Lawyer Liu, have you read the news? A project owner on Filecoin was arrested! Do you know why? I said I hadn’t paid attention to it yet. In the following days, I heard friends in the circle talking about this matter one after another. I think there are probably two reasons:
1. The reason why the Hong Kong Carnival is so lively is that friends in the circle always feel that it is unsafe to stay in China. Any news related to any Web3 project and the Chinese police can make web3 practitioners highly sensitive.
2. As a popular project in the cryptocurrency circle, most of the friends in the cryptocurrency circle have been hurt by Filecoin to some extent, either by losses in mining or by being cheated in the secondary market. In fact, this is not the first time that Filecoin has been targeted by the Chinese police. In November 2021, the FIL miner Interstellar Alliance, which was engaged in the virtual currency custody mining business of #Filecoin, was arrested by the Fengxian Branch of the Xuzhou Public Security Bureau for suspected organizing and leading pyramid schemes, using high returns as bait, recruiting members through online platforms, and conducting illegal fundraising.
According to public reports, in the Interstellar Alliance alone, the police arrested 31 criminal suspects and seized virtual currencies such as Ethereum, Tether, and FIL worth approximately RMB 400 million.
On December 14, 2021, several senior executives of Renmin Mine, another well-known domestic FIL miner, were taken away by the police for investigation at their office in Chengdu. They were charged with pyramid schemes, money laundering, illegal fundraising and other crimes.
The news event that everyone has been talking about in the past two days about the arrest of the Filecoin project team is actually the team of the liquid pledge protocol#STFILProtocolon Filecoin. According to the project's official website, the STFIL protocol is the first Filecoin liquid pledge protocol launched on FVM. It enables $FIL token holders to obtain stable returns without a lock-up period, and provides collateral for storage providers to engage in leveraged mining.
On April 9, the team announced on the X platform that its core technical team was being investigated by local Chinese police. While the core technical team was being detained, 2.56 million FIL (about 23 million U.S. dollars) on the STFIL platform were transferred to an unknown external address. Currently, these FILs are still basically at this address and no further transfer has occurred.
STFIL also claimed that there had been “unusual, unplanned escalations” in the protocol during the course of its investigation over the past few days.
Based on the above information and Mr. Honglin’s experience in handling related cases in the past, the general situation of the story is as follows:
1. The operation model of the STFIL Protocol project itself or the user assets it receives are suspected of money laundering-related criminal activities, so the domestic public security has filed a criminal case;
2. After the police filed a case, they detained the technical personnel in China and obtained the mnemonics of the private keys controlled by the team through interrogation and search;
3. In order to prevent the funds involved in the case from being transferred, the public security, with the cooperation of the security company, transferred the relevant assets to a wallet address controllable by the public security.
In fact, we can probably predict the plot that follows.
1. The tens of millions of dollars of digital assets involved in the case will be found as soon as possible to be converted into legal currency by a disposal company. After all, the case needs to be handled, and the total amount involved in the case is in RMB.
2. With the efforts and coordination of all parties, those involved in the case who are arrested in China will be released on bail pending trial, or continue to wait for further investigation until the truth is revealed.
3. For individual investors who participated in the Defi project, can they get their funds back? Lawyer Honglin is pessimistic. There is a high probability that the assets involved in the case cannot be refunded. After all, it is all anonymous information on the chain, who knows who is who. Do you want to verify that you are the payer of a certain amount of money through the private key mnemonic? There is a high probability that the police will not cooperate with you. If you really want to entangle, the police may just say that virtual currency investment is not protected by law and the risk is borne by oneself.
2. Mankiw’s Compliance Advice
What lessons can we learn from the past? What lessons can we learn from the STFIL arrest? What kind of risk prevention should we do?
Previously, Lawyer Honglin wrote an article titled "Starting from the arrest of the cross-chain bridge Multichain: What legal risks should be paid attention to when starting a cross-chain technology business?" Although it is about cross-chain, the prevention of legal risks is also a reference for most Defi project parties. There are several key points:
(1) Conduct security audits on smart contracts
Ensure that smart contracts have been audited to prevent vulnerabilities and attacks from a technical perspective. The design and implementation of technical protocols related to user funds need to take security into consideration from the beginning, and no matter how rigorous it is, it is not too rigorous. In addition, it is best to audit the protocol by at least two security audit companies to reduce security risks. Do not introduce unnecessary administrator identities, and limit the permissions of protocol deployers and administrators to prevent the entire protocol's funds from being exposed to security risks due to the leakage of a single account.
(2) Write a good user agreement and disclaimer for the website.
Ensure that the user agreements and contract terms between the project party and its partners, investors and users are clear and unambiguous, and try to specify in the text the responsibilities and obligations of each party in the event of a security incident, as well as the compensation mechanism in the event of loss of user assets.
(3) Do a good job in KYT and anti-money laundering
Due to some characteristics of Defi technology itself, such as anonymity and difficulty to track, it is easy for criminal groups to target it and use it as a tool for money laundering. Statistics from OKLink Research Institute show that money laundering, fraud, pyramid schemes, and gambling are the four most common forms of virtual currency crimes in 2022, of which 54.72% of virtual currency crimes are related to money laundering and 21.13% are related to fraud.
Governments do not like virtual currencies, and a very important reason is that it has been abused by bad people. Once the criminal gangs are targeted by regulators, the DEFI projects that provide assistance to the criminal assets of the criminal gangs will naturally be involved. In August 2022, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) sanctioned the mixer Tornado Cash. According to the sanctions documents, Tornado has been used to launder more than $7 billion worth of crypto assets since its creation in 2019, including more than $455 million in crypto assets stolen by the North Korean hacker group Lazarus Group from two blockchain applications.
Doing a good job of KYT (Know Your Transaction) and AML (Anti-Money Laundering) can effectively reduce the aforementioned risks. KYT is a process used by financial institutions to monitor and track whether there is fraud or suspicious activities in financial transactions. It can help financial institutions identify the source and destination of each transaction, assess transaction risks, take appropriate measures, and report suspicious transactions to regulatory authorities. KYT will help blockchain users identify which addresses and transactions are at risk, find the black addresses of suspicious illegal transactions, and trace the black addresses back to the starting and ending points of the transaction. Suspicious transaction behaviors, transaction addresses in the dark web, its associated addresses, and KYC records of a certain address in the exchange can link the on-chain address with the corresponding entity, thereby linking the anonymous on-chain world with the real-name offline identity. Implement an effective transaction monitoring mechanism to identify and report any suspicious or abnormal transaction activities. Use technical tools and systems to monitor customers' transaction patterns, capital flows, and risk behaviors, and take necessary measures to investigate and report in a timely manner. If KYT is a plus point in the traditional financial field at this stage, in virtual asset transactions, KYT may become a necessity to deal with risks.
#FARM #asr #ENA
