In recent years, the legal characterization of cryptocurrency futures contract business by Chinese judicial authorities has sparked widespread controversy. In 2020, the 'Star Coin Global' platform's 50x USDT contract business was identified as operating a casino in Jilin Baishan. Recently, the Hunan Pingjiang County Court publicly released 8 criminal judgments involving BKEX exchange, recognizing its perpetual contract business as gambling behavior, with related agent channels and employees sentenced for the crime of operating a casino, with the highest sentence reaching five years and the amount involved exceeding 300 million yuan.
These judgments not only impact the perceptions of professionals in the cryptocurrency circle but also reflect the high-risk nature of cryptocurrency derivative businesses within China's legal framework. So, do all cryptocurrency futures contract businesses really constitute operating a casino?
1. Why was BKEX exchange's perpetual contract business identified as operating a casino?
In Western economics, gambling is generally defined as betting money or items of material value on an event with uncertain outcomes, primarily aiming to win more money or material value. In simple terms, gambling is a game of luck, where participants engage in a contest with money or property to obtain a sense of spiritual pleasure. Professor Zhang Mingkai believes gambling refers to the act of betting or playing games of chance based on the randomness of winnings or losses.
Therefore, determining whether a behavior constitutes gambling requires the elements of chance, speculation, and risk, as well as the need to wager money or property.
Contract trading in the cryptocurrency circle is divided into perpetual contracts and fixed contracts. Whether it's coin-based or USDT-based, they are all secured by virtual currencies. Profits are obtained by opening positions on virtual currencies such as Bitcoin and Ethereum. Price fluctuations may be affected by factors such as Bitcoin halving and ETF launches. The underlying logic is the same as that of futures contracts for stocks and commodities in traditional financial markets.
Therefore, I believe that the contract trading launched by exchanges like OKEx, Binance, and Coinbase does not constitute gambling, while BKEX exchange's perpetual contracts are related to its business model.
The following image shows some facts from the BKEX exchange judgment, where it can be clearly seen that in addition to ordinary perpetual contracts, BKEX exchange also launched crazy contracts with leverage ranging from 125 times to 1000 times.
This crazy contract business with a leverage limit of 1000 times essentially amplifies the randomness and speculation of trading. As long as the price fluctuates by 0.1%, it will lead to liquidation, causing investors to lose all their principal. Such hundreds or thousands of times of contract trading is essentially the same as gambling, largely unrelated to the price fluctuations of the underlying perpetual contracts. Participants in crazy contracts frequently face liquidation. In addition, BKEX exchange also engages in trading behaviors that involve gambling with users.
This behavior is similar to the Supreme Court's 2020 guiding case No. 146 for operating a casino, where the results of profits and losses are not linked to the actual price fluctuations of the underlying assets. Investors who bet correctly on the price direction benefit, while those who bet incorrectly lose their principal to the website (the dealer).
In summary, BKEX exchange's contract business is essentially the same as the gambling behavior of 'betting on size and winning or losing', constituting a casino disguised as a contract.
2. After BKEX exchange is identified as operating a casino, which individuals will be involved in the case?
In 2010, the Supreme Court, the Supreme People's Procuratorate, and the Ministry of Public Security issued (Opinions on Several Issues Concerning the Application of Law in Handling Internet Gambling Crimes), hereinafter referred to as (Opinions). Article 2 of the (Opinions) states that knowingly providing the following services or assistance to a gambling website constitutes a co-conspirator in the crime of operating a casino, punishable according to Article 303, Paragraph 2 of the Criminal Law:
(1) Providing internet access, server hosting, network storage space, communication transmission channels, placing advertisements, developing members, software development, technical support, and other services for gambling websites, charging service fees of more than 20,000 yuan;
(2) Providing payment settlement services for gambling websites, charging service fees of more than 10,000 yuan or helping to collect gambling funds of more than 200,000 yuan;
(3) Placing advertisements related to more than 10 gambling websites concerning URLs, odds, and other information, or placing a total of more than 100 advertisements for gambling websites.
The individuals involved in the BKEX exchange judgment publicly released by the Pingjiang County Court in Hunan Province include domestic heads of the exchange and commission agent channels.
Mr. Zheng, the head of the wallet team of BKEX exchange's Chengdu team, is mainly responsible for the technical development and maintenance of on-chain fund circulation for all users' deposits and withdrawals on the platform, providing payment settlement services for the platform in conjunction with the audit and asset departments. The court ultimately determined that Mr. Zheng provided technical support for a gambling website, sought illegal profits, and that the circumstances were serious, constituting the crime of operating a casino.
Wang, the head of the audit department of BKEX exchange's Chengdu team, is mainly responsible for KYC (user real-name) certification and the review of virtual currency deposits and withdrawals. Together with the wallet department and asset department of the Chengdu team, he provides payment settlement services for the platform, with a monthly salary of approximately 8,000 yuan. The court ultimately determined that Wang provided payment settlement services for a gambling website, sought illegal profits, and that the circumstances were serious, constituting the crime of operating a casino.
BKEX exchange's high-leverage contract business was identified as operating a casino. The person in charge of developing the wallet technology services provided by the exchange and the person responsible for reviewing fund inflow and outflow for payment settlement, knowing that BKEX exchange was a gambling website, are co-conspirators in the crime of operating a casino according to the provisions of Article 2, Paragraphs 1 and 2 of the (Opinion).
In addition, personnel from the commission agent channels are also involved because they knowingly promoted BKEX exchange's registration link in WeChat groups and other channels, which, according to Article 2, Paragraph 3 of the (Opinions), constitutes co-conspirators in the crime of operating a casino.
From the judgments involving BKEX exchange mentioned above, it can be seen that whether the relevant business leaders of cryptocurrency exchanges and commission agent channels have criminal risks of operating a casino primarily depends on whether the contract business of the exchange they work for or represent is identified as operating a casino. According to the provisions in the (Opinions), only if the staff and channel agents are aware does it constitute co-conspirators in the crime of operating a casino.
Therefore, Web3 workers and KOL commission channels must deeply understand whether the profit and loss of the exchange's contract business model is detached from the price fluctuations of the underlying assets when seeking job opportunities and collaborations. The platform's behavior of gambling with users must not be overlooked. Commission channels should avoid cooperating with small exchanges' contract businesses for the sake of ultra-high commission rates and rapid user growth.
3. Reducing the amount involved is an effective defense strategy.
The public security organs' approach to handling cases of exchanges operating casinos is mainly to assist in obtaining the exchange's backend commission data through technical investigation companies. Investigations start from this data to explore related commission channels. This data is calculated based on transaction fees generated from various channels like KOLs and ultimately returned to the agents' accounts.
Currently, many commission channels attract channel users to register by returning part of the commission after receiving platform commissions. Therefore, during the defense, the portion of commissions returned to users should be reduced.
In the BKEX casino case, the agent Wang returned commissions to lower-tier personnel through internal transfers at BKEX exchange, which were reduced during the audit. Additionally, after the incident, co-defendants transferred most of the exchange's assets, leading to users being unable to withdraw funds, so many USDT commissions in agent accounts were also unable to be withdrawn, and the court also reduced the recognized commission amount.
Therefore, for the cases of exchanges operating casinos, defending the amounts involved will be an effective direction for defense.
4. Off-topic
The judgment document in the BKEX case only mentioned that the involved personnel voluntarily exchanged the virtual currencies seized by the public security organs for RMB, and that co-defendants transferred most of the exchange's assets, indicating that the public security organs did not seize a large amount of virtual assets from the BKEX trading platform.
Wang, the head of the audit department responsible for the exchange's payment settlement, was captured in Chengdu on May 29, 2023. On-chain data shows that BKEX exchange's large wallet address has been transferring assets to a certain user's deposit address on Binance daily since 2021, but there have been no records of USDT transfers to Binance from the large address after May 28, 2023. Perhaps this mode of capital aggregation ultimately led to co-defendants transferring a large amount of platform assets.
From this on-chain data, can it be inferred that the actual controller of BKEX exchange withdraws large amounts of assets from the platform address daily, and that the platform does not need to keep many reserves to handle large withdrawals from users? Does this indicate that very few exchange users can make large profits and ultimately withdraw funds in such high-leverage contracts? This indirectly corroborates the fact in the judgment that BKEX platform engages in gambling with users.
Before the incident, the exchange frequently withdrew USDT to a certain address, accumulating nearly 5 million USDT. This address is still in normal use. Is it controlled by Mr. Ji mentioned in the BKEX exchange judgment, who is a co-defendant on the run? These questions need to be answered in subsequent public judgments.
