The KuCoin Case: A Prelude to Major Cleanups?

Photo - The KuCoin Case: A Prelude to Major Cleanups?
KuCoin, serving 30 million users, finds itself at the center of legal scrutiny following allegations by the U.S. authorities. The exchange, along with its founders Chun Gan and Ke Tang, is accused of conspiracy to run an unlicensed money transmitting business and violate the Bank Secrecy Act.
The Hong Kong-based exchange, registered in the Seychelles, has long been under the close watch of the U.S. Department of Justice. In March 2023, Attorney General Letitia James charged KuCoin's leadership with failing to undergo official state registration, leading to nearly ten months of legal battles. At that time, KuCoin even considered ceasing operations and selling the exchange. Eventually, the founders agreed to settle by paying $5.3 million in penalties, reimbursing American investors with $16.7 million in crypto assets, and denying platform access to New York state residents. 

However, as recent developments show, the KuCoin case remains unresolved. On March 26, the Department of Justice released a statement announcing criminal charges against the exchange's founders for breaches of the Bank Secrecy Act and operating an unlicensed money transmitting business.

What Are the Allegations Against KuCoin?

The U.S. judiciary deemed the fines and investor reimbursements insufficient for the exchange to continue its U.S. operations. This conclusion is drawn particularly because the charges include violations that occurred before December 2023, despite the exchange having fulfilled all requirements from the lawsuits at that time. 

The accusations detail:

  1. Failure to maintain adequate Anti-Money Laundering (AML) and Know Your Customer (KYC) programs, highlighting that the platform did not mandate client verification until July 2023.
  2. The concealment of a significant U.S.-based clientele, misleadingly stating that American citizens did not engage in trading on the platform.
  3. Transaction of over $9 billion in suspect and illicit funds through KuCoin, implicated in money laundering linked to darknet operations, malware, ransomware, and scams.
  4. Lack of registration with the CFTC (Commodity Futures Trading Commission) and FinCEN (Financial Crimes Enforcement Network).

While the issue of operating without regulatory approval to serve U.S. clients is straightforward, other allegations against KuCoin provoke further inquiry:

  1. Can criminal charges be pursued for an already remedied violation?
  2. Should the exchange have to verify the citizenship of clients who hold dual citizenship, considering the U.S. permits dual nationality?
  3. How was the amount of laundered criminal funds through KuCoin determined? The charges mention that since its inception in 2017, the exchange received $5 billion of questionable origin and withdrew $4 billion. However, it's unclear how the conclusion about laundering criminal funds was reached without identifying the senders and recipients of the money.

If these charges are proven, Chun Gan and Ke Tang could face up to five years in prison for each count, totaling 20 years. Alternatively, the exchange might face substantial fines and restrictions again.

Currently, the U.S. Department of Justice is seeking the extradition of the founders to the U.S. for trial; unconfirmed reports suggest they are in Hong Kong.

What Implications Does the KuCoin Trial Have for the Crypto Market?

The KuCoin charge sends a clear message to other crypto exchanges operating in the U.S. market. If the legal action against Binance was not persuasive enough, this serves as a "final warning": either comply with U.S. authorities or cease U.S. operations.

U.S. regulators aim to ensure crypto exchanges are as transparent for their oversight as traditional financial (TradFi) institutions. The collapse of FTX and subsequent banking failures have significantly impacted the country's financial system. 

The U.S. Department of Justice will make every effort to ban non-compliant companies, ensuring their founders are penalized. Moreover, the Commodity Futures Trading Commission (CFTC) also filed a civil lawsuit against KuCoin on March 26, seeking a ban on unjust enrichment for the exchange's top management and compensation for contract violations.
For too long, some offshore crypto exchanges have followed a now-familiar playbook by offering derivative products and falsely claiming people in the United States cannot use their platforms, when in reality, anyone in the U.S. with commonly used technology can trade without providing basic customer identifying information,
said Director of Enforcement Ian McGinley.
U.S. crypto users are now betting on which global exchanges will be the next lawsuit targets and whether they can negotiate a settlement with authorities, akin to what Richard Teng did.