Shalini Nagarajan

Binance employees reportedly helped some users in China skirt local regulatory controls meant to keep locals out of the top crypto exchange.



China’s central bank declared all crypto transactions illegal in 2021, a move that essentially <a href="https://blockworks.co/news/crypto-markets-tumble-on-pboc-news">restricted</a> international crypto exchanges from the region.



But CNBC has <a href="https://www.cnbc.com/2023/03/23/binance-employees-volunteers-tell-users-how-to-evade-china-crypto-ban.html" target="_blank" rel="noreferrer noopener">reported</a> details of Binance’s Discord and Telegram official chatroom histories. The outlet found accounts identified as Binance employees (or Binance-trained volunteers known as “Angels”) had taught China-based users methods of avoiding know-your-customer (KYC) checks and verification systems.&nbsp;



These approaches involved falsified documents such as forged bank statements and wrong addresses, CNBC said.



Mainland China residents were reportedly sent video guides and other resources by employees, volunteers and other customers, showing them how to fabricate their country of residence so they could get access to the exchange’s debit card.&nbsp;



A <a href="https://blockworks.co/tag/binance" target="_blank" rel="noreferrer noopener">Binance</a> spokesperson told Blockworks that the exchange has taken action against employees who might have violated its policies that include giving advice against internal standards.&nbsp;



“We have strict policies requiring all users to pass KYC by providing us with their country of residence and other personal identification information,” the spokesperson said, adding that employees are unauthorized to support users in skirting local laws or regulatory policies and that they would be “dismissed or audited” if found to be in violation.&nbsp;



They didn’t respond to a query on how many employees were involved in the matter.



Alongside reported crackdowns on local and foreign crypto exchanges operating in the mainland, Chinese officials have repeatedly warned residents to steer clear from the digital asset market.&nbsp;



KYC checks and other anti-money laundering measures are key to disallowing users from either sanctioned countries or those where trading is deemed illegal.&nbsp;



<h2>Binance and restricted jurisdictions</h2>



Binance had been blocked in China since 2017 when local crypto exchanges were ordered to cease operations. After the 2021 ban, Binance <a href="https://markets.businessinsider.com/news/currencies/china-crypto-ban-binance-huobi-cut-ties-mainland-users-reactions-2021-9" target="_blank" rel="noreferrer noopener">told</a> Insider it didn’t hold exchange operations in China and that the Binance app is not available for downloads there.&nbsp;



<a href="https://blockworks.co/news/crypto-traders-in-iran-skirted-binance-ban-following-us-sanctions" target="_blank" rel="noreferrer noopener">Reuters</a> previously reported that Binance accommodated crypto traders in Iran on its platform despite US sanctions and a company ban. At the time, Binance’s global head of sanctions, Chagri Poyraz said traders can manage to avoid geographical restrictions through the use of virtual private networks (VPNs).



A Binance spokesperson told Blockworks the company has implemented detection tools to crack down on users in restricted and sanctioned regions that had access to sophisticated masking tools, including VPNs.



“Users who are found to have used any sort of workaround to avoid local law are restricted immediately,” they added.&nbsp;



“However, it is extraordinarily rare for users to be able to implement workarounds as we have multiple manual and AI-driven processes to ensure users cannot circumvent these processes, and AI processes cannot circumvent these processes.”



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Binance ‘Angels’ Helped China-based Users Evade KYC: Report

Casey Wagner

<div id="highlights-block_62f6b8cfa0914" class="highlights">
 <ul>
 <li>Chainalysis reports 10.5% of funds ran through Tornado Cash were stolen</li>
 <li>Classifying code as an entity for the purpose of sanctions laws gets complicated, experts say</li>
 </ul>
 
</div>



The Treasury Department’s decision to sanction a second <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">crypto mixing service</a> has sent blockchain enthusiasts and privacy chauvinists in an uproar this week. 



On Monday, <a href="https://cms.blockworks.co/treasurys-tornado-cash-sanctions-have-companies-stepping-back-from-users/" target="_blank" rel="noreferrer noopener">Tornado Cash</a>, a cryptocurrency mixing service allegedly used to launder stolen funds linked to major hacks, was added to the Office of Foreign Asset Control’s Specially Designated Nationals (SDN) list, along with 45 associated Ethereum wallet addresses.&nbsp;



“OFAC’s designation of Tornado Cash is a crucial moment in the fight against cryptocurrency-based crime,” a <a href="https://blog.chainalysis.com/reports/tornado-cash-ofac-designation-sanctions/" target="_blank" rel="noreferrer noopener">report</a> from blockchain analytics firm Chainalysis said. 



Read more: <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">Coin Mixers and Privacy Coins: Can They Resist Censorship?</a>



“For one thing, it’s especially timely: More cryptocurrency is being stolen than ever, and in almost every hack we’ve observed this year, Tornado Cash has received at least some of the stolen funds.”



The Treasury alleges that North Korea-sponsored hacking group <a href="https://cms.blockworks.co/fbi-says-north-korea-behind-625m-ronin-hack/" target="_blank" rel="noreferrer noopener">Lazarus Group</a>, which in March stole over $620 million in cryptocurrency from the Ronin Bridge protocol, attempted to conceal the origin of the funds with Tornado Cash. Chainalysis agrees.&nbsp;



“Lazarus Group is one of the biggest perpetrators of these [decentralized finance] hacks,” Chainalysis said in its report. “Soon after the Ronin Bridge theft, the hackers sent much of those funds to Tornado Cash in order to be laundered.”&nbsp;



<h3>Not the first mixing service to be targeted&nbsp;&nbsp;</h3>



It’s not the first time OFAC has sanctioned a cryptocurrency mixer. In May, officials targeted <a href="https://cms.blockworks.co/us-treasury-sanctions-first-crypto-mixing-service-following-record-hack/" target="_blank" rel="noreferrer noopener">Blender.io</a>, a centralized service Lazarus Group also allegedly used to conceal stolen funds. But Tornado Cash is different, some experts say.&nbsp;



“Blender.io was designated back in May of this year, but it&#8217;s different and in a pretty meaningful way, which is that was a centralized custodial service and this…is just code,” Michael Mosier, former deputy chief in the Department of Justice’s money laundering and asset recovery section, said during a <a href="https://twitter.com/i/spaces/1vOxwyrdLeEGB?s=20" target="_blank" rel="noreferrer noopener">Twitter Spaces</a> discussion Friday.



As a smart contract-based mixing service, Tornado Cash can continue to run without individual actors, those who oppose the sanctions insist. It’s an argument that Tornado Cash co-founder Roman Semenov has long <a href="https://www.bloomberg.com/news/articles/2022-03-10/crypto-obfuscator-tornado-says-sanctions-cant-affect-smart-contracts?sref=3REHEaVI#xj4y7vzkg" target="_blank" rel="noreferrer noopener">used himself</a>, but others have expressed doubt in this line of reasoning.&nbsp;



“I do not think personally, although we&#8217;re still kind of working through arguments…that you can necessarily make a particularly strong argument that Tornado Cash is not an entity,” Peter Van Valkenburgh, director of research at Coin Center, said during the Twitter Spaces. “As far as I know, Blender.io wasn&#8217;t incorporated in any legal jurisdiction, either.”&nbsp;



Some people retain a level of control over Tornado Cash&#8217;s admin keys, Van Valkenburgh said, allowing them to make changes to the code and therefore would be the ‘entity’ in the eyes of the government.&nbsp;



It gets murky though, Van Valkenburgh added, because Tornado Cash, as code, is not in and of itself ‘property.’&nbsp;



“It would be almost like we discovered that Phillips, the person who invented the Phillips head screwdriver, did something very, very bad, and we sanctioned his bank accounts, but then we also said that no one is allowed to use Phillips head screwdrivers anymore,” he said.&nbsp;



The blanket sanctions have collateral consequences, Rebecca Rettig, general counsel at Aave, said during the Twitter Spaces. Targeting every wallet that has come in contact with funds from Tornado Cash, no matter how far removed, is still a hypothetical scenario, but it’s one that could have a significant negative impact, Rettig said.&nbsp;



“The thought process through what all the unanticipated consequences would be was very narrow here, because it seems like a very severe reaction to software that is being used for some illicit activity,” she added.&nbsp;



<h3>Tornado Cash’s compliance responsibility&nbsp;</h3>



OFAC’s decision suggests that all protocols, decentralized or not, are subject to the same compliance obligations, Chainalysis’ report said. It is the responsibility of the mixer itself to stop illicit activity, officials say.&nbsp;



“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks,” Brian Nelson, the Treasury’s under secretary for terrorism and financial sntelligence, said after the sanctions were announced.&nbsp;



Since its launch in August 2019, Tornado Cash has received over $7.6 billion worth of ether, “a sizable portion of which have come from illicit or high-risk sources,” Chainalysis’ report noted. Of this figure, about 18% of funds came from sanctioned entities, but, the report notes, almost all of the funds were received before the entities were added to the sanctions list.&nbsp;



Less than 11% of funds received by the recently-sanctioned crypto mixing service Tornado Cash were stolen from other cryptocurrency exchanges and protocols, according to Chainalysis.



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Decentralized or Not, Officials Say Tornado Cash Responsible for Illicit Activity

Sebastian Sinclair

<div id="highlights-block_628eca8bddf7b" class="highlights">
 <ul>
 <li>Data analytics firm Kharon and cloud-native screening provider Neterium will assist Binance in its efforts</li>
 <li>The exchange says the partnership will complement its existing screening controls for illicit crypto activity including sanctions measures</li>
 </ul>
 
</div>



Cryptocurrency exchange Binance is vying to bolster its know your customer (KYC) controls and sanctions screening via a new partnership aimed at curbing the exchange&#8217;s potential risk.



The company said Wednesday it has tapped data analytics firm Kharon and cloud-native screening provider Neterium to further its efforts to detect illegal crypto activity on its platform.



&#8220;Working with Kharon and Neterium allows us to leverage Kharon&#8217;s best-in-class data with Neterium&#8217;s innovative technology to address our risk,&#8221; Binance Global Head of Sanctions Chagri Poyraz said in a statement. 



The exchange assertd the partnership will complement its existing screening technology, while simultaneously addressing its regulatory requirements. Among those obligations — imposed by regulators worldwide — has been to monitor for and enforce sanctions requirements.



The European Union&#8217;s <a href="https://www.consilium.europa.eu/en/press/press-releases/2022/04/08/eu-adopts-fifth-round-of-sanctions-against-russia-over-its-military-aggression-against-ukraine/" target="_blank" rel="noreferrer noopener">latest round of sanctions</a>, issued last month, includes a series of targeted economic measures with a section aimed at an extended prohibition on deposits to crypto wallets. 



Previously hesitant about imposing restrictions on Russians, Binance CEO Changpeng “CZ” Zhao said in an interview with&nbsp;<a href="https://www.bloomberg.com/news/articles/2022-03-02/biggest-crypto-exchange-says-blocking-all-russians-unethical" target="_blank" rel="noreferrer noopener">Bloomberg</a> in March his exchange would resist calls to limit services to “normal people.”



A month later, Binance moved to <a href="https://cms.blockworks.co/binance-to-limit-services-to-russians-following-latest-round-of-eu-sanctions/" target="_blank" rel="noreferrer noopener">restrict its services</a> to Russian users following the country&#8217;s invasion of Ukraine in February and reactionary financial sanctions designed to curb capital flows to Europe&#8217;s largest nation. Russian nationals with holdings above 10,000 euros ($10,703) have been limited to withdrawal-only mode.



Binance, which has previously ended up in hot water with regulators over its alleged failure to apply or register for financial services licenses in multiple jurisdictions, appears willing to play ball.



&#8220;Virtual asset service providers require the highest quality data and technology to support their compliance programs,&#8221; Kharon Chief Client Officer Howard Mendelsohn said. &#8220;Partnering with Binance to provide data and analytic tools is a critical development to address expanding regulatory expectations and mitigate risk.&#8221;



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