Introduction

Recently, some users have posted on social media expressing that their Ouyi accounts have been frozen, restricted from withdrawals, or even banned. When users apply for unfreezing, the exchange requires them to provide proof of income and other documentation.

Some users also shared their experiences with Ouyi in the comments, speculating that the blogger might be permanently banned, and expressed that they had expended a lot of energy trying to resolve the account unfreezing issue, but ultimately failed the review.

As a web3 lawyer, Lawyer Liu tries to provide a legal analysis of this event and the financial security issues encountered by residents in mainland China when using all centralized exchanges from an objective and neutral perspective, deeply interpreting the real risks for residents in mainland China in the field of virtual currency.

1. How does the exchange respond?

Ouyi exchange also responded promptly to the public opinion online. For example, Ouyi employee Mercy stated that completely compliant and normal users may also be mistakenly identified as engaging in 'malicious behavior' by the system, thus Ouyi is working to improve the accuracy of identifying malicious behavior; at the same time, the employee stated, 'As long as you are not engaging in any illegal activities, your account and funds will not be affected.'

CEO Xu Mingxing of Ouyi stated that due to false positives, about 1% of users may receive inquiries about 'source of funds or past work and residence information'; the main reasons for false positives include users accessing via VPN, using TOR to access the dark web, logging into multiple accounts from a single device, or users sharing names with certain sanctioned or political figures.

Afterwards, Ouyi's CEO issued a statement apologizing to users and explained the significance and impact of 'compliance and risk control' for virtual currency exchanges, while also clarifying the following content:

Once it is confirmed that an account is in violation of laws or platform agreements, we (Ouyi) may take measures including but not limited to the following:

Issuing warnings, requesting additional information and materials, suspending certain functions, and even closing accounts. In very rare cases involving sanctions, terrorist activities, etc., we have a legal obligation to freeze related assets.

At the same time, it also explained the reasons for 'false positives' (i.e., the system mistakenly identifies normal users as risk users).

2. Legal risks for Chinese residents using overseas virtual currency exchanges

Recently, there have been rumors that Ouyi is going to conduct an IPO in the US stock market, although it cannot be confirmed whether this news is true or false. However, if it is true, then Ouyi's strict KYC policy seems very understandable.

Of course, the IPO could also be a false rumor. Therefore, we need to interpret and analyze from a higher level the legal risks for mainland users registering with virtual currency exchanges, especially regarding trading behaviors.

Currently, there are many virtual currency regulatory policies applicable in mainland China (see: (Summary of Regulatory Documents for the Web 3.0 Industry in Mainland China)), among which the 2017 '9.4 Announcement' expelled mainland virtual currency exchanges overseas, and the most powerful one currently is the '9.24 Notice' ((Notice on Further Preventing and Handling Risks of Virtual Currency Trading Speculation)).

The '9.24 Notice' systematically and comprehensively regulates the business activities of overseas virtual currency exchanges.

(1) Providing services to residents in our country through the internet by overseas virtual currency exchanges is considered illegal financial activity.

(2) Domestic personnel of overseas virtual currency exchanges, and legal entities, non-legal entities, and individuals who knowingly or should have known that they are engaging in virtual currency-related business but still provide marketing, payment settlement, technical support, and other services, will be held legally accountable.

In other words, from the perspective of regulators in mainland China, the services provided by overseas virtual currency exchanges to residents in mainland China are considered illegal financial activities. However, since law enforcement agencies in mainland China do not have extraterritorial enforcement power, they cannot force overseas virtual currency exchanges to shut down their servers or even provide services to residents in mainland China via the internet.

From the perspective of residents in mainland China, there are currently no regulations prohibiting them from using overseas virtual currency exchanges. The '9.24 Notice' only prohibits exchanges from conducting business in mainland China but does not prohibit residents in mainland China from using the exchanges.

Thus, the current situation is that even if exchanges know that conducting business in mainland China is prohibited, due to the sheer size of the mainland market, no one will give up this large market, so exchanges will continue to provide services to the mainland. Users registered in the mainland, even if they use a '+86' phone number, or register with a mainland resident ID or Chinese passport, can still pass KYC.

Of course, licensed exchanges in Hong Kong (such as OSL, HashKey, etc.), and exchanges in other countries (such as Coinbase in the US, or even Kraken, etc.) still do not support account opening for individuals with mainland identities or who reside and work there according to China's regulatory policies.

Therefore, the risk for residents in mainland China is that even though you can normally use exchanges like Binance and Ouyi, you need to know that according to the regulatory provisions in mainland China, the services provided by exchanges to residents in mainland China are considered illegal financial activities. Some friends may wonder, if that is the case, why haven't I 'run into trouble' yet? Please wait a moment and see Lawyer Liu's analysis below.

3. What insights can we gain from the FTX bankruptcy case to the Ouyi incident?

On July 4th, there was an opinion regarding the bankruptcy plan of FTX exchange: if users are from restricted foreign jurisdictions, their compensation funds may be confiscated. Among all the involved funds from 'restricted countries', 82% come from China.

In other words, if your own country does not protect virtual currency investment activities, expecting other countries or exchanges to protect you is somewhat wishful thinking. Therefore, the web3 nomads in mainland China, especially those involved in cryptocurrency, are truly 'orphans of the crypto world in Asia.'

Finally, Lawyer Liu wants to say that for users from mainland China using centralized exchanges, if their accounts are frozen, apart from cooperating with the exchange's requirements to unfreeze, it is difficult to have any other 'hard' means. According to the legal jurisdiction agreement on Ouyi's official website, if one wants to 'sue' Ouyi, they need to go to the Hong Kong International Arbitration Center, which is too costly for many ordinary users (travel expenses, lost work, attorney fees, etc.).

(Source: Ouyi Official Website)