Special Declaration: This article is an original work by Attorney Shao Shiwei. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For article reposting, legal consultation, or business exchanges, please add: sswls66
Recently, news that Binance, the world’s largest cryptocurrency exchange, was fined $4.3 billion by U.S. authorities and that its founder, Changpeng Zhao (also known as CZ), was sentenced to four months’ imprisonment by a U.S. court has sent shockwaves through the crypto community.
Author of this article | Attorney Shao Shiwei
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Overview of the Binance Case Penalized in the United States
1. Record of Major Events
In June 2023, the U.S. Securities and Exchange Commission (SEC) similarly disclosed that it had filed a civil lawsuit in the U.S. District Court for the District of Columbia, raising 13 charges including, but not limited to, “operating an illegal trading platform in the United States, operating an unregistered exchange, unregistered securities offerings and sales, and failing to restrict U.S. customers from using its platform.”
According to Reuters, since 2020, the U.S. Department of Justice has launched an investigation into Changpeng Zhao and the Binance company he operates. During the investigation, the Department of Justice issued requests to Binance, seeking internal records related to anti-money laundering checks, as well as Changpeng Zhao’s personal communication records.
In November 2023, facing successive litigation pressures from multiple U.S. government agencies, and to ensure the long-term stable operation of Binance, Changpeng Zhao voluntarily appeared at the U.S. District Court for the Western District of Washington in Seattle and pleaded guilty to criminal charges of violating anti-money laundering regulations under the U.S. Bank Secrecy Act,and reached a plea agreement with the U.S. Department of Justice,which included:
On April 30, 2024, the U.S. Federal Court in Seattle sentenced Changpeng Zhao to four months’ imprisonment for failing to prevent money laundering on the exchange.
2. Measures Taken by Changpeng Zhao to Evade Regulatory Oversight in Various Countries
According to public reports, in 2017, Changpeng Zhao assembled the founding team in Shanghai, China. In September 2017, China issued policies prohibiting Initial Coin Offerings (ICOs), after which Binance left China and registered Binance Holdings Limited in George Town, Cayman Islands. In response to regulatory requirements from various governments, Changpeng Zhao led his team to Japan, the United Kingdom, the United States, Singapore, and other locations. In March 2018, Binance relocated its headquarters to Malta, a European island nation.
Additionally, to evade legal regulation, Binance adopted a distributed office model, with three to four thousand employees distributed across more than 60 countries and regions worldwide. Meanwhile, in addition to holding Canadian citizenship, Changpeng Zhao acquired citizenship in the United Arab Emirates (UAE) and has resided there for an extended period. Since there is no extradition treaty between the UAE and the United States, as long as Changpeng Zhao does not leave the country, the United States cannot arrest him across borders.
From the above, it can be seen that Changpeng Zhao’s measures to evade regulatory oversight from the United States and other countries regarding Binance appear to have been taken to the extreme. Therefore,what is the basis for U.S. jurisdiction over him?
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U.S. Cross-Border Judicial Jurisdiction
1. U.S. Regulatory Agencies and Law Enforcement Characteristics in the Web3 Industry
The Web3 industry is jointly regulated at both the federal and state levels in the United States. Due to differing understandings of virtual assets among various law enforcement departments, different regulatory bodies are involved in practice, specifically including the SEC (U.S. Securities and Exchange Commission), CFTC (U.S. Commodity Futures Trading Commission), FinCEN (U.S. Financial Crimes Enforcement Network), and OFAC (U.S. Office of Foreign Assets Control).
SECIt defines virtual assets (including but not limited to cryptocurrencies, NFTs, or other forms of virtual assets) as “securities,” believing that, except for absolutely decentralized cryptocurrencies like Bitcoin, virtual currencies issued by other projects must apply for registration or exemption with the SEC.
CTFCIt defines virtual assets as “commodities.” Therefore, in the view of this department, since virtual currencies fall within the category of commodities, contract products based on commodities naturally fall within its jurisdiction.
FinCENIt is an agency under the U.S. Department of the Treasury, fulfilling duties such as combating and preventing money laundering and combating terrorist financing. It regulates all entities engaged in virtual currency transactions to comply with obligations under the Bank Secrecy Act (BSA) and other regulations, such as establishing corresponding anti-money laundering compliance systems, collecting customer information, and reporting suspicious financial activities.
OFACIt is also an agency under the U.S. Department of the Treasury, responsible for enforcing economic and trade sanctions against foreign individuals and organizations. In 2021, it published the “Sanctions Compliance Guidance for the Virtual Currency Industry,” outlining OFAC’s sanction requirements and procedures, including licensing and enforcement procedures.
2. Long-Arm Jurisdiction System
The U.S. long-arm jurisdiction system originated from the 1945 case “International Shoe Co. v. Washington.” Originally, it referred to the civil litigation jurisdiction exercised by U.S. states over defendants who were not residents of the state (as long as the defendant had “minimum contacts” with the court). However, as U.S. judicial organs continuously expanded the scope of jurisdiction, the concept gradually expanded to refer to the extraterritorial application of U.S. legislative, judicial, and law enforcement powers. It is a manifestation of U.S. judicial hegemony and power politics.
From thelegislative perspective, the United States asserts the “effects” doctrine for jurisdiction, meaning that regardless of where the conduct occurs, if the effects of the conduct impact the United States, such conduct is subject to U.S. jurisdiction;
from thejudicial perspective, the international community generally recognizes a principle: any country executing legal actions on another country’s territory must obtain explicit permission from that country. However, U.S. law enforcement agencies take enforcement actions against entities in other countries without obtaining authorization from those countries’ law enforcement;
from thelaw enforcement perspective, such enforcement actions are very common. For example, in January 2023, U.S. Deputy Attorney General Lisa Monaco announced international law enforcement actions against the cryptocurrency exchange Bitzlato and arrested the company’s founder, Russian national Anatoly Legkodymov, who resides in China. In February 2022, two co-founders of BitMEX, Arthur Hayes and Benjamin Delo, pleaded guilty in a New York court to violating the U.S. Bank Secrecy Act. The U.S. Department of Justice characterized BitMEX as a “money laundering platform.” The company’s former CEO, Arthur Hayes, admitted to violating anti-money laundering laws and was sentenced to two years’ probation. BitMEX (once the world’s largest cryptocurrency derivatives trading platform) was registered in the Republic of Seychelles, with its headquarters located in Hong Kong.
3. Reasons for U.S. Sanctions Against Binance
Although the U.S. sanctions against Binance also fall within the scope of “long-arm jurisdiction,” according to publicly reported information, there are many lessons for Web3 entrepreneurs. This is because the reasons and bases for Binance’s penalty share many commonalities with U.S. sanctions against other Web3 industry participants.
First, evading U.S. government regulation and illegally providing services to U.S. users.
Initially, Binance provided services to U.S. users through its global platform. As U.S. regulation of cryptocurrencies intensified, Binance launched an independent platform, “Binance.US,” in 2019, specifically designed for U.S. customers. However, according to SEC complaint documents, the SEC alleged that Binance CEO Changpeng Zhao and Binance operated illegally in the United States. Although Binance.US and BAM Trading claimed to operate independently, Changpeng Zhao was the actual controller behind them. Additionally, the plea agreement stated that, as a Money Services Business (MSB) operating in the United States, Binance failed to obtain an MSB license from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
The plea agreement mentioned that from June 2017 to 2022, Binance had more than one million U.S. users. These U.S. users conducted deposits and withdrawals totaling $65 billion and spot cryptocurrency transactions totaling $550 billion.
Second, failure to implement KYC and anti-money laundering measures.
According to the plea agreement, as Binance’s CEO and daily manager, Changpeng Zhao “willfully” failed to conduct effective transaction monitoring for a considerable period, allowing Binance to neglect effective Know Your Customer (KYC) and Anti-Money Laundering (AML) measures.
Finally, providing services to countries sanctioned by the United States.
Binance did not implement control measures to prevent U.S. users from transacting with users in regions sanctioned by the United States. From January 2018 to May 2022, it allowed users to open accounts and conduct transactions without submitting any identity information other than an email address, resulting in transactions between U.S. users and Iranian users exceeding $898 million.
[Analysis]
According to the U.S. Patriot Act, when foreign entities engage in money laundering, if the transaction occurs in the United States or involves opening a bank account in the United States, U.S. justice can exercise long-arm jurisdiction. Binance not only lacked an effective KYC system but even employed various methods, such as helping U.S. customers modify their IP addresses, to evade U.S. regulation.
Such operations would also be illegal under Chinese law if a foreign Web3 project ostensibly implemented certain blocking measures but actually still allowed users within China to use its services.
Under U.S. anti-money laundering laws, if a party transfers funds from outside the United States into the country, or from inside the country to outside, to conceal illegal activities, it may constitute the crime of money laundering. Changpeng Zhao believed that requiring customers to provide identity information would drive customers away.
The decentralized philosophy of Web3 seems to have been in a tug-of-war with state regulation. However, actively embracing regulation appears to be the only choice for the Web3 industry to seek long-term, stable development. Because Binance failed to implement effective KYC, it involved not only U.S. dollar fund businesses within the United States involving U.S. customers but also transactions between the United States and regions sanctioned by the United States. U.S. sanctions laws prohibit Americans from transacting with their customers subject to U.S. sanctions, including customers in fully sanctioned jurisdictions such as Iran. Thus, the United States established jurisdiction.
Failure to implement anti-money laundering measures, failure to implement KYC, failure to restrict transactions by U.S. users, and providing services to U.S. users without obtaining the required U.S. regulatory licenses are all unreasonable. Even under Chinese law, these behaviors are illegal and non-compliant. However, if some enterprises or projects provide services to regions sanctioned by the United States (such as Iran), they will be subject to U.S. sanctions. This is a manifestation of the power politics of U.S. long-arm jurisdiction (for example, the well-known incident: in 2018, Meng Wanzhou, Vice Chairwoman and CFO of Huawei, was arrested at Vancouver Airport in Canada, with the United States citing her violation of sanctions regulations against Iran as the reason).
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Concluding Remarks
Although the Web3 industry is still in its early stages of development, regulatory authorities in various countries are actively exploring ways for the industry to develop in compliance. However, due to differences in legal norms, regulatory attitudes, and law enforcement approaches among countries, different nations have varying regulatory and compliance requirements for the Web3 industry in practice.
Binance’s payment of a $4.3 billion fine became the largest penalty in the cryptocurrency sector in the history of the U.S. Department of the Treasury. Meanwhile, founder Changpeng Zhao is the second executive in the cryptocurrency sector to be sentenced to imprisonment (SBF, co-founder of the cryptocurrency trading platform FTX, was sentenced to 25 years’ imprisonment in the United States).These events mark the end of an era of disorderly growth and lack of regulation in the cryptocurrency industry.
Therefore, Web3 industry entrepreneurs must comprehensively understand and comply with the laws and regulatory requirements of the countries where their users are located, and establish compliance systems, to achieve long-term development in the industry.
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