The U.S. Department of Justice sues KuCoin, is it just a warning to all exchanges? Or is it a prelude to a crackdown?

Written by: jk, Odaily Planet Daily

On Tuesday local time in the United States, the Department of Justice and the Commodity Futures Trading Commission (CFTC) filed criminal charges against the cryptocurrency exchange KuCoin and its two founders. This event marks a further regulatory action by U.S. authorities on the cryptocurrency market and is part of their ongoing efforts to combat money laundering following the Binance case.

According to the indictment released by the Department of Justice on Tuesday, the charges target KuCoin and its underlying entities, as well as its two founders, Chun Gan and Ke Tang, accusing them of operating an unlicensed money transmission business and violating the Bank Secrecy Act. Meanwhile, the CFTC submitted another indictment on the same day, stating that KuCoin illegally operated a digital asset derivatives exchange.

The two departments that issued the indictment stated that the exchange failed to maintain adequate anti-money laundering procedures, did not implement "reasonable procedures" to verify customer identities, failed to submit suspicious activity reports, and did not register with the CFTC and FinCEN. These actions made KuCoin a tool for laundering large amounts of criminal proceeds, involving over $9 billion.

Details of the Charges: What Did KuCoin Violate?

According to the press release from the Department of Justice, KuCoin and its founders were charged with conspiring to operate an unlicensed money transmission business and conspiring to violate the Bank Secrecy Act, involving a willful failure to maintain sufficient anti-money laundering (AML) procedures designed to prevent KuCoin from being used for money laundering and financing terrorism. They also failed to maintain reasonable procedures to verify customer identities and did not submit any suspicious activity reports. KuCoin is also accused of operating an unlicensed money transmission business and materially violating the Bank Secrecy Act.

It is important to note that the SEC was not included in this indictment, and therefore the charges do not include the SEC's "favorite"—the sale of unregistered securities, as securities-related matters are not under the jurisdiction of the indicting agencies.

The indictment states that KuCoin deliberately evaded U.S. AML and Know Your Customer (KYC) regulations by "falsely representing that it had no U.S. customers," while in reality, KuCoin had a large number of U.S. customers. The indicting agencies claim that KuCoin allowed its platform to be used for laundering over $9 billion.

KuCoin solicited business from U.S. customers through its spot trading platform and later through its futures trading platform launched in July 2019. Since its establishment in 2017, KuCoin has become one of the largest cryptocurrency exchanges in the world, with over 30 million customers and daily trading volumes reaching billions of dollars. KuCoin's website promotes its ranking among global cryptocurrency exchanges as being in the top five. One public ranking lists KuCoin as the fourth-largest cryptocurrency derivatives exchange and the fifth-largest cryptocurrency spot exchange.

In the statement released by the Department of Justice, the founders and KuCoin entities were aware of their obligations under U.S. AML laws but deliberately chose to ignore these requirements: KuCoin failed to implement a sufficient Know Your Customer (KYC) program. In fact, until at least July 2023, KuCoin did not require customers to provide any identifying information. Only in July 2023, after KuCoin was notified of a federal criminal investigation into its activities, did KuCoin adopt a KYC program for new customers. However, this KYC process only applied to new customers and not to KuCoin's millions of existing customers, including many located in the U.S. KuCoin also never submitted any required suspicious activity reports, never registered with the CFTC as a futures commission merchant, and did not register with FinCEN as a money transmission business until at least the end of 2023.

For example, the Department of Justice stated that from August 2022 to November 2023, approximately 197 KuCoin deposit addresses indirectly or directly received $3.2 million worth of cryptocurrency from the virtual currency mixer Tornado Cash, which has been sanctioned.

The release stated, "In fact, KuCoin actively attempted to hide the existence of U.S. customers to make it appear as though KuCoin was exempt from U.S. AML and KYC requirements. Although KuCoin collected and tracked its customers' location information, KuCoin actively prevented its U.S. customers from identifying themselves when opening KuCoin accounts. Moreover, KuCoin lied to at least one investor in 2022 about the location of its customers, falsely stating that it had no U.S. customers, while in reality, KuCoin had a large number of U.S. customers. In fact, in many social media posts, KuCoin actively marketed itself as an exchange for U.S. customers where they could trade without undergoing KYC. For example, in an April 2022 tweet, KuCoin stated: 'KYC does not support U.S. users; however, KYC on KuCoin is not mandatory. Typically, trades can be completed using unverified accounts.'"

Due to KuCoin's willful failure to maintain the required AML and KYC procedures, KuCoin was used as a tool for laundering large amounts of criminal proceeds, including proceeds from dark web markets, malware, ransomware, and fraud schemes. Since its establishment in 2017, KuCoin has received over $5 billion and sent over $4 billion in suspicious and criminal proceeds. Many KuCoin customers specifically use its trading platform because of the anonymity it offers. In other words, KuCoin's no KYC policy is a key part of its growth and success.

Source of the funds mentioned in the indictment: U.S. Department of Justice indictment

Each charge against the two founders carries a maximum sentence of five years in prison.

U.S. Attorney Damian Williams stated, "As alleged in today's indictment, KuCoin and its founders deliberately concealed the fact that a large number of U.S. users were trading on the KuCoin platform. In fact, KuCoin allegedly leveraged its large U.S. customer base to become one of the largest cryptocurrency derivatives and spot exchanges in the world, with daily trading volumes reaching billions of dollars and annual trading volumes in the trillions. However, financial institutions like KuCoin that exploit unique opportunities available in the U.S. must also comply with U.S. laws to help identify and eradicate criminal and corrupt financing schemes. KuCoin allegedly chose not to do so. As alleged, by failing to implement basic anti-money laundering policies, the defendants allowed KuCoin to operate in the shadows of the financial markets and be used as a haven for illegal money laundering, receiving over $5 billion and sending over $4 billion in suspicious and criminal funds. Cryptocurrency exchanges like KuCoin cannot have it both ways. Today's indictment should send a clear message to other cryptocurrency exchanges: If you plan to serve U.S. customers, you must follow U.S. laws, plain and simple."

The CFTC also filed a parallel civil lawsuit against KuCoin on Tuesday. The CFTC seeks restitution of unjust enrichment, civil monetary penalties, permanent trading and registration bans, and permanent injunctions against future violations.

Currently, KuCoin has responded: "KuCoin is operating well, and our users' assets are absolutely safe. We have noted the relevant reports and are investigating the details through our lawyers. KuCoin respects the laws and regulations of all countries and strictly adheres to compliance standards."

KuCoin CEO Johnny Lyu stated in a post on X: "While we handle this matter, the platform is unaffected and operating normally as usual. Your assets are safe with us. My team and I will keep you updated on progress."

This is already the second time KuCoin has had a legal conflict. New York Attorney General Letitia James sued the exchange in March 2023 for violating the state's laws on securities and commodities trading.

What Will Happen Next?

A simple analysis can conclude that the U.S. Department of Justice has actually achieved considerable results from the Binance case, and the next target will likely be exchanges that actually have U.S. customers (at that time, Binance also faced a charge regarding U.S. customers circumventing U.S. KYC to use the more liquid Binance exchange instead of Binance.US), as some exchanges have not registered with U.S. authorities, just as mentioned in today's KuCoin case.

One possible scenario is that the lawsuits will be targeted, with another case following after the conclusion of a case against a specific exchange; if most exchanges similar to KuCoin are sued simultaneously in a short period, it is likely that a situation will arise where "not receiving an indictment means you cannot claim to be a major exchange," meaning that major exchanges may collectively handle or have other possibilities. Handling them one by one and implementing punitive measures can ensure the highest success rate.

Overall, this criminal charge sends a clear signal to global cryptocurrency exchanges that companies operating in or servicing U.S. customers must strictly comply with U.S. laws. As the cryptocurrency industry rapidly evolves, regulators are intensifying efforts to ensure the health and sustainability of the industry and protect investors from illegal activities. All these efforts point to a common goal: to establish a safer and more transparent digital currency market.

In this context, the development of the KuCoin case is worth close attention from all parties inside and outside the industry, and Odaily Planet Daily will provide ongoing coverage for readers.