CZ gets off lightly
Binance chief’s limited jail time, IoM crypto suspension, EU AML laws, Consensys sues SEC, Ripple Labs fine
Welcome to the Token Word, your new resource for news and analysis from the crypto world.
So down to business and our debut lineup:
Binance CEO sentenced to four months in prison for AML breaches.
Crypto assets business Soteria linked to Isle of Man gaming arrests.
EU includes crypto in new AML regulations.
Consensys claims SEC going ‘too far’ in its attempt to regulate ETH.
Ripple Labs offers $10m to make $2bn fine disappear.
I hear the train a-comin', it's rolling 'round the bend.
Binance chief gets four months inside
Banged up: Binance founder Changpeng ‘CZ’ Zhao will serve four months in prison for breaching US money laundering laws after being sentenced by a Seattle court on Tuesday. Zhao was once head of the world’s largest crypto exchange, but stepped back as part of his guilty plea in November 2023, following a $4.3bn fine levied on the business.
You can ask all you want: Prosecutors had asked for three years of jail time, double the sentencing guideline of 18 months due to the magnitude of Binance’s operations and the “scope and ramifications” of the compliance failings.
Zhao’s lawyers argued in their own remarks that the Chinese-born businessman should not serve a single day as “no defendant in a remotely similar BSA [Bank Secrecy Act] case has ever been sentenced to incarceration.”
Judge Richard Jones said Zhao prioritized “Binance’s growth and profits over compliance with US laws and regulations.”
Worth an estimated $33bn, Zhao will pay a $50m fine and agreed to waive his right to appeal as the sentence was under 18 months.
Circumstances beyond our control: US Justice Department officials said Binance knowingly evaded AML regulations, allowing customers in sanctioned countries such as Iran, Cuba and Syria to transact with crypto between 2018 and 2022.
Power to the people: “You had the wherewithal, the finance capabilities and the people power to make sure that every single regulation had to be complied with, and so you failed at that opportunity,” the judge said.
The court also noted that Zhao, known by the industry as CZ, may have been entirely unaware of the compliance breaches, as he displayed deliberate disregard” for Binance’s legal and regulatory responsibilities.
Cowboy builder: Officials said in an April memorandum that Zhao ran Binance on a ‘Wild West model.’ “Zhao bet that he would not get caught and that, if he did, the consequences would not be as serious as the crime,” the memorandum stated.
“But Zhao was caught, and now the court will decide what price Zhao should pay for his crimes.”
You got lucky: Reaction to the sentencing was mixed, with some noting Zhao’s “nice guy” persona helped limit the jail time as he became “the richest US inmate ever.”
“Pretty interesting [apology] from an arrogant guy who once said to staff that it is ‘better to ask for forgiveness than permission’,” said Peter Oakes, founder of Fintech UK and a compliance expert.
“A four-month sentence is way too lenient. He should have got at least five years for his Twitter feed alone.”
“The Department of Justice is the only chicken that barks but doesn’t bite, at least when it comes to multi-billionaires who can buy their way out of serious criminal trouble,” added Jim Richards, founder and president of RegTech Consulting.
He said “tough talk” aside, the DoJ “did not hold Changpeng Zhao accountable” for crimes that threatened major economic institutions.
“Instead, with a paltry fine and pitifully short prison sentence, it is the Department of Justice that has undermined the public trust in the fairness of that particular institution,” Richards said.
Jailhouse block: Zhao’s downfall marks the second sentencing of a major crypto figure within two months. In March, FTX founder Sam Bankman-Fried got 25 years for fraud and stealing billions of dollars of customer funds after being convicted.
The pair battled for dominance in the crypto market until FTX collapsed in November 2022.
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Loose change
Brazil’s new Prizes and Betting Secretariat (SPA) has decreed that crypto payments will not be allowed within the soon-to-be-regulated online sports betting and gaming market. The body’s payment ordinance specifies that payments using “virtual assets or other types of crypto-assets” as well as credit cards are banned.
A Financial Action Task Force (FATF) report has warned of “significant loopholes for criminals and terrorists to exploit” as fewer than 30% of global jurisdictions have formally begun to regulate crypto. The AML watchdog has issued a set of recommendations for governments to follow to reduce the risks posed by crypto.
Open the gates: Investment banking giant Morgan Stanley is gearing to let its 15,000 brokers recommend Bitcoin (BTC) exchange-traded funds (ETF) to their customers, AdvisorHub has reported. The Wall Street firm opened up unsolicited Bitcoin ETF purchases following their regulatory approval in January.
Russia’s lower house has introduced a bill that would ban cryptocurrency exchanges in the country and outlaw any form of advertising of digital assets. Crypto transactions and mining firms registered with the government would still be permitted, according to state media.
What we’re reading
Bitcoin Jesus: Early crypto investor Roger Ver, who was sometimes referred to as Bitcoin Jesus, has been charged for mail fraud, tax evasion and filing false returns in order to avoid paying at least $48m in US taxes. From Bloomberg.
IoM crypto suspension
King hell: An Isle of Man-based crypto assets business called Soteria has seen its license to operate suspended by the island’s financial regulator due to shared director ties with a similarly IoM-based gaming operator, which was the subject of a series of arrests late last week.
Soteria has been operating under license from the IoM’s Financial Services Authority since 2015.
The FSA said that as Soteria’s relationship to King Gaming and Dalmine is subject to a criminal investigation, it is unable to provide any further comment at this time.
Soteria is registered at the same address as King Gaming.
Raids: King Gaming and its associated company Dalmine have been the subject of a police action and have both seen their licenses suspended by the IoM Gambling Supervision Commission. Raids late last week saw seven people associated with these companies arrested.
The bigger picture: The police said the arrests were part of a “wider fraud and money-laundering investigation being led by the IoM Constabulary’s Proactive International Money Laundering and Investigation Team in relation to King Gaming Ltd IoM.”
A Josimar article this week noted that King Gaming – whose website offerings in Asia have since been taken offline – has a complex ownership structure that leads to a Singaporean national called Liang Lingfei.
It added that the company was founded in 2017.
Crypto rolled into EU AML laws
Money, it’s a crime: EU lawmakers have approved new AML regulations that establish formal due diligence requirements for crypto asset service providers. The sixth iteration of the bloc’s ‘dirty money laws’ brings in enhanced checks on customers’ identities for a fresh set of entities, including for the first time crypto asset managers, wallet providers, mining pools and brokers.
They join the ranks of gambling firms, banks, asset managers and real estate agents who must report all forms of suspicious activity linked to money transfers.
The full AML package contains a single rulebook regulation that will cover beneficial ownership provisions and the establishment of the European Anti-Money Laundering Authority (AMLA), which will have supervisory and investigative powers to ensure compliance with AML requirements, operating in conjunction with national authorities.
“This measure aims to make crypto asset transactions more transparent and traceable, enhancing the European Union’s ability to combat money laundering and terrorism financing within this rapidly growing sector,” said Shakeel Jeeroburkan, asset management operations at Fidelity International.
No escaping this: Currently, all crypto exchanges and custodial wallet providers in the bloc are obligated to comply with many of the regulations under existing law, but the expanded definition adds legal certainty.
Crypto industry experts have warned the new requirements are more onerous than those imposed on traditional financial services firms, however, some lobbyists noted the initial set of proposals were more stringent on digital asset providers.
Last month, a majority of European Parliament legislators dropped a planned $1,080 limit on cryptocurrency payments from self-hosted crypto wallets, along with a provision to implement identity checks on self-hosted wallets receiving funds.
“European crypto watchers are keeping a close eye on these rules,” said Guido Lassally, CEO of Oxido Solutions, which specializes in crypto trading bots. “They’re worried that the requirements slapped on digital assets might be too harsh compared to what other financial players have to deal with.”
Consensys sues SEC
Call an ambulance! But not for me! Ethereum blockchain leader Consensys is suing the US Securities and Exchange Commission (SEC), much to the delight of major crypto players also in the regulator’s crosshairs.
Rather than wait for the regulator to file, the company behind the MetaMask crypto wallet struck first, lodging a suit that alleges the regulator is trying to “seize control over the future of cryptocurrency.”
Consensys claims the SEC is going too far in attempting to regulate Ethereum as a security, which the agency has not officially announced it plans to do.
The blockchain developer found support from the exchanges Uniswap, currently being sued by the SEC for acting as an unregistered securities broker, and Coinbase, also currently being sued by the SEC for acting as an unregistered securities broker.
“Thanks [to Consensys] for fighting back and defending our industry,” Uniswap founder and CEO Hayden Adams tweeted. “We’re tired of the overreach and harassment.”
Coinbase’s top legal officer Paul Grewal said on X: “I know ETH is a commodity. You know ETH is a commodity. The CFTC knows ETH is a commodity. It's time for the SEC to admit that it still knows ETH is a commodity too. No more games. Thank you to @Consensys for standing up against the SEC’s unlawful expansion of authority.”
Birds of a feather: The SEC has multiple lawsuits in the works against other leading crypto exchanges, Binance and Kraken, based on similar accusations that the businesses are selling unregistered securities. In its filing, Consensys said it had received a Wells notice from the SEC after a lengthy investigation, which informs the recipient the regulator will take legal action following an enforcement.
Rather than play ball, Consensys sued in order to get a court to rule that Ethereum is not a security, in the hope of nullifying the SEC’s argument.
Coinbase has argued similarly, but will present its case in front of a jury.
Ripple Labs balks at fine
You’re so far away from me: Contesting a proposed $2bn penalty for alleged securities fraud, Ripple Labs has offered $10m to make the case go away. The creators of XRP are being sued by the SEC in a civil case concerning unregistered sales of the token, and have asked a New York judge to deny the regulator’s request for a hefty punishment.
Ripple has frequently criticized the regulator for “overreach” and in a court filing said the proposal to order it to pay $876m in disgorgement, $198m in prejudgment interest and a $876m civil penalty was excessive.
Ripple’s defense is that XRP was never intended as an investment vehicle and should not be classified as a security.
May have committed some light treason: It said the penalty should be “no more than $10m” and that while any breach of the Securities Act is “serious matter,” its violation was “less egregious” than other crimes such as fraud or commingling funds.
“The SEC’s remedial requests are more evidence of the administrative overreach that has beset this case,” the firm’s lawyers wrote. “The agency acts as though it had prevailed entirely and had proved reckless conduct. It has done neither.”
They said the SEC was seeking a separate penalty that “exceeds by more than 20 times” what it has clawed from any other digital asset case.
The SEC was granted a deadline of April 28 to respond to Ripple’s opening bid of $10m, and the bargaining is set to continue over the course of the week.
Recall: Back in December 2020, the SEC sued Ripple and its senior management, accusing them of violating federal securities laws in selling $1.3bn worth of XRP to institutional and retail customers. In July 2023, a New York judge ruled the sale of XRP on exchanges and through algorithms did not violate US law, but the institutional sales did.
SEC chair Gary Gensler has long argued that many crypto tokens are securities that should be regulated as such, with the agency taking legal action against multiple other developers.
False dawn: Stuart Alderoty, Ripple’s chief legal officer, took to X to argue the SEC “trades in statements that are false, mischaracterized and designed to mislead”. “They stayed true to form here,” he said.
Fan tokens
Hot potato: The token industry, NFTs and cryptocurrency appeared briefly in the House of Commons last week as MPs gathered to debate the “lessons learned” from the collapse of Football Index.
FI was a product that caused sufficient ambiguity among regulators that it collapsed with over £120m of the British public’s money, and significant pressure remains on the government to help those impacted.
KiX for touch: Following an article in The Sunday Times linking disgraced Football Index chief executive Adam Cole to a new, crypto-based football trading platform, KiX, Labour MP Liz Twist called on the government to “learn the lessons and make it not possible for people to be fooled – to be misled – in that way again.”
To me, to you: It seems UK regulators are still doing their very best to attribute regulation of token-based products to anyone but themselves. Products that bridge investment, gambling and digital assets remain both politicians’ and regulators’ worst nightmare.
Justin Madders, a Labour MP, stated in the house: “The quote about digital athlete tokens means it is as clear as mud to me whether this should be regulated by the FCA or the Gambling Commission.”
Stuart Andrews, the minister for gambling, palmed off the heat on KiX, outlining it was in discussion with the UK Gambling Commission, and that it was still in the testing phase.
Taking stock: A very similar product called StocksFC is also in discussion with the UKGC. The company’s terms and conditions mention “by using the platform to buy, sell or trade NFTs, you acknowledge and agree that NFT trading is not a form of gambling or betting.”
“Consequently, StocksFC is not subject to any gambling or gaming regulations”.
US stablecoin bill
Let’s try to negotiate: After nearly two years of talks, a bill to regulate stablecoins could soon be finalized, a senior US lawmaker has said. “We are on our way to getting a stablecoin bill in the short run,” said Maxine Waters, a House Financial Services Committee Democrat.
She labeled a prior version of the legislation “deeply problematic and bad for America”, but is now fully on board with an updated set of proposals.
Payment stablecoin issuers would be subject to reserve and operational requirements, and would have to create subsidiaries specifically to issue stablecoins and deal solely in dollar-backed tokens.
“It’s about making sure investors and the people are protected. We have to ensure that they have those assets to back up stablecoins,” she said.
Waters said that the US Federal Reserve, the Treasury Department and the White House have all helped shape the legislation.
Sweet harmony: Senators Cynthia Lummis and Kirsten Gillibrand co-authored the Lummis-Gillibrand Payment Stablecoin Act, having worked together previously on digital asset regulatory efforts. Contained within are provisions to strengthen consumer protection, fight financial crime and ensure the US financial market remains dominant.
While multiple digital currency bills are in the works, straightforward passage is far from assured, legal experts have warned.
“There is bipartisan support in both chambers of Congress, but there are numerous questions surrounding the process that remain unanswered,” said Rob Andrew of law firm Akin.
The bill also “goes to great lengths” to entrench the US dollar’s central role in the global crypto market by mandating issuers only issue stablecoins backed by US dollars, Andrew said.
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