Analysis of the Core Terms of the Settlement Agreement and Its Impact on Industry Compliance Development

Author: An Shouzheng Legal Services Co., Ltd.

On February 25, 2025, according to official news from OKX, the Seychelles subsidiary of OKX has reached a settlement with the U.S. Department of Justice today regarding an investigation, admitting that due to historical deficiencies in compliance controls, a small number of U.S. customers had traded on the company's global platform.

According to the settlement agreement, OKX agrees to pay a fine of $84 million and to forfeit approximately $421 million in revenue obtained from U.S. customers during this period, most of which came from a few institutional clients. This article will provide a comprehensive interpretation of this incident, focusing on the core terms of the settlement agreement and its impact on the development of industry compliance.

I. Incident Overview

Timeline

Since 2018, OKX Seychelles has provided cryptocurrency spot and derivative trading services to U.S. customers through the global platform OKX.com, during a time when the cryptocurrency market was booming and new platforms were emerging. Although OKX is headquartered in Seychelles, the U.S. Bank Secrecy Act and the Money Transmission Act require that entities providing fiat currency exchange or asset transfer services to U.S. users apply for licenses from FinCEN and state regulatory authorities.

From 2018 to 2019, OKX Seychelles did not adequately assess the complexities of U.S. financial regulation and hastily conducted business with the U.S. market. At that time, global regulation of the cryptocurrency industry was in a gray area, and companies generally did not prioritize compliance, including OKX Seychelles.

From 2019 to 2023, issues became prominent as OKX Seychelles did not obtain any state remittance business licenses in the U.S., such as New York's BitLicense or Florida's money service license. It exploited technical loopholes, such as insufficient IP address blocking, allowing approximately 32,000 U.S. users to trade, involving funds of $4.21 billion, accounting for 5% of global revenue, with a large scale of non-compliant business.

Specific Violations

1. Lack of Licenses and Regulatory Violations: Failure to apply for the MSB license from U.S. FinCEN led to its inability to meet mandatory anti-money laundering (AML) and customer identity verification (KYC) requirements, and it lacked the qualifications to legally operate money service businesses.

Failure to obtain state-level remittance licenses (e.g., California) violated state regulations regarding fund security, financial strength, and risk management, raising doubts about the legality of its business.

2. Ineffective Anti-Money Laundering Mechanism: For high-risk U.S. customers (e.g., those involved in sensitive regions/industries), it did not implement enhanced due diligence (EDD), nor did it track the source of funds and transaction purposes, providing loopholes for laundering illegal funds. This violated the core principles of the Bank Secrecy Act and could become a channel for the circulation of transnational criminal funds.

3. Geographic Blocking Technology Deficiencies: Technical loopholes led to ineffective blocking of U.S. IP access, due to reasons such as outdated IP databases and algorithm flaws, allowing U.S. users to still use services illegally. This directly violated Section 5330 of the Bank Secrecy Act and Title 18, Section 1960 of the U.S. Code (operating a money transmission business without a license), constituting systemic compliance failure.

Investigation and Settlement Process

In 2022, the U.S. Department of Justice (DOJ), Department of Homeland Security (DHS), and Commodity Futures Trading Commission (CFTC) jointly initiated an investigation into OKX Seychelles, with the three parties collaborating:

DOJ: Verifying legal loopholes and business process compliance; DHS: Tracking the flow of funds and user information; CFTC: Special review of violations in cryptocurrency futures trading.

Core Terms of the Settlement Agreement (December 2023)

1. Economic Penalty: OKX Seychelles is required to pay a fine of $84 million, of which $60 million goes to the DOJ and $24 million to the CFTC.

2. Business Restrictions: OKX Seychelles must not only forfeit $4.21 billion in revenue from U.S. customers but is also required to permanently exit the U.S. market. This measure completely severs OKX Seychelles' business ties with the U.S. market, fundamentally eliminating the possibility of its continued illegal operations in the U.S. The decision to permanently exit the U.S. market has a significant impact on OKX Seychelles' global business layout.

3. Compliance Rectification: OKX must undergo independent compliance monitoring for the next three years. The independent compliance monitor will comprehensively supervise all aspects of its business operations, including the implementation of anti-money laundering measures, customer identity verification processes, and transaction record retention. By introducing independent third-party oversight, it ensures that OKX Seychelles truly establishes an effective compliance system, achieving a transition from illegal operations to compliant operations.

II. Legal Analysis

Core Logic of U.S. Cryptocurrency Regulation

U.S. regulation of the cryptocurrency industry is centered on "functional regulation," a highly targeted and scientific regulatory concept.

1. Securities Law (SEC Dominance): If a token meets the "Howey Test," it is considered a security. The Howey Test primarily assesses four aspects: first, the existence of a monetary investment; second, investment in a common enterprise; third, based on a reasonable expectation of future profits; fourth, profits primarily derived from the efforts of others.

For example, certain initial coin offering (ICO) projects may be deemed securities if investors purchase tokens with the expectation of future returns based on the project team's operations, and the token's value primarily relies on the project team's efforts. Once classified as a security, the project must comply with relevant securities laws, such as registering the security and disclosing related information.

2. Commodity Law (CFTC Jurisdiction): Bitcoin and Ethereum are classified as commodities. The CFTC regulates commodity futures trading to maintain market fairness, justice, and transparency. For futures trading of cryptocurrencies like Bitcoin and Ethereum, the CFTC requires trading platforms to have robust risk management mechanisms to prevent market manipulation and fraud. For instance, the CFTC strictly regulates aspects such as position limits and large trader reporting to ensure stable market operations.

3. Anti-Money Laundering Law (FinCEN Enforcement): All entities involved in fiat currency exchange must register as MSBs. This regulation aims to prevent money laundering and terrorist financing from the outset. Registered MSBs must establish strict anti-money laundering procedures, including customer identity verification, transaction monitoring, and suspicious transaction reporting.

For example, a cryptocurrency trading platform must verify the identity of each customer during fiat currency exchange operations, confirm the authenticity of their identity information, and monitor customer transactions in real-time. If suspicious transactions are detected, they must be reported to FinCEN promptly.

In the OKX case, the DOJ charged OKX with "operating without a money transmission license" rather than "securities fraud," indicating a preference for using established financial regulations to combat cross-border violations. This is because the main violation of OKX Seychelles was conducting remittance business without a license, directly violating U.S. financial regulations regarding remittance business licensing. Compared to securities fraud charges, the charge of operating without a license is more direct and clear, allowing for quick and effective classification and handling of the violations.

Comparison with Similar Cases

1. Sentencing Gradient: In terms of penalties, Binance faced the most severe punishment, with fines reaching $4.3 billion and the CEO resigning and accepting oversight from a monitor, due to violations involving sanctions law that crossed international sanction red lines.

BitMEX was fined $100 million, and its founder faced imprisonment for violations including operating an unregistered futures trading platform and ineffective anti-money laundering measures, significantly impacting the compliance and stability of the financial market. OKX's penalty was relatively light, primarily civil settlement, paying a fine of $84 million, mainly because its violations were concentrated in unlicensed remittance and technical control deficiencies.

2. Judicial Innovation: The OKX case explicitly identified "geographic blocking technology deficiencies" as a legal violation for the first time, providing a precedent for subsequent cross-border regulatory actions. In previous cryptocurrency regulatory cases, while the application of technical means in compliance was also a focus, geographic blocking technology deficiencies were not separately identified as a legal violation.

This determination in the OKX case provides regulatory authorities with clearer legal grounds and regulatory direction for handling similar cross-border business violations in the future, further improving the regulatory framework for the cryptocurrency industry.

Legal Significance of the Settlement Agreement

1. Efficiency Priority: The settlement avoided a lengthy litigation process. For example, the Ripple case lasted three years, consuming significant judicial and corporate resources. In contrast, the OKX case reached a settlement quickly, recovering fines just over a year after the investigation began, clearing market violators and greatly enhancing regulatory efficiency, allowing regulatory agencies to focus more on other important regulatory matters.

2. Deterrent Balance: The substantial fine paid by OKX (20% of annual revenue) serves as a warning to the entire cryptocurrency industry, making other companies acutely aware of the serious economic consequences of illegal operations. However, the absence of criminal charges preserves the company's space for survival, providing an opportunity for rectification and re-compliance. This method of punishment deters violations while also considering the industry's development needs, avoiding unnecessary shocks to the industry due to overly harsh penalties that could lead to company bankruptcies.

3. Compliance Guidance: The mandatory introduction of an independent monitor promotes the establishment of a "verifiable compliance system" within the company. The presence of an independent monitor means that OKX must accept oversight and guidance from external professional organizations during the establishment of its compliance system, ensuring that its compliance measures are effectively implemented. This not only helps OKX achieve compliant operations but also sets a replicable compliance construction model for the entire cryptocurrency industry, promoting the overall improvement of compliance levels in the industry.

III. Global Regulatory Trend Analysis

In recent years, global regulation of cryptocurrency assets has shown a multidimensional strengthening trend. The EU's Markets in Crypto-Assets Regulation (MiCA) will take effect in 2024, requiring exchanges to provide white paper filings and reserve proof; the U.S. has established the "Cryptocurrency Enforcement Team" (NCET) to enhance inter-departmental enforcement collaboration; the FATF's "Travel Rule" has been extended to DeFi, requiring DApp developers to attach user information to on-chain transactions; at the same time, the UAE and Singapore are attracting compliant companies with "loose licenses," forming a regulatory competition with Europe and the U.S.

The OKX settlement case highlights that under the regulatory framework dominated by the U.S. and Europe, cryptocurrency companies need to internalize compliance as a core competitive advantage. In contrast to Binance's "expand first, rectify later" strategy, Coinbase invested heavily in compliance early on, achieving high global license coverage and becoming the preferred partner for traditional institutions. In the future, only those companies that integrate compliance into their technological architecture, organizational culture, and business strategy will be able to seize opportunities in the regulatory reshuffle.

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