KuCoin And its Founders Charged By U.S. Justice Department

On Tuesday, local U.S. time, the U.S. Department of Justice and the Commodity Futures Trading Commission (CFTC) brought criminal charges against the cryptocurrency exchange KuCoin and its two founders. This event marks further regulation of the cryptocurrency market by U.S. regulatory bodies and is part of their continued plan to combat money laundering following the case against Binance.

According to the indictment released by the U.S. Department of Justice on Tuesday, the charges against KuCoin, its underlying entity, and its two founders, Chun Gan and Ke Tang, include operating an unlicensed money transmitting business and violating the Bank Secrecy Act. Additionally, the CFTC filed a separate complaint on the same day, alleging that KuCoin illegally operated a digital asset derivatives exchange.

The two departments issuing the indictments stated that the exchange failed to maintain adequate anti-money laundering procedures, did not implement “reasonable procedures” to verify customer identities, failed to file suspicious activity reports, and did not register with the CFTC and FinCEN. These actions made KuCoin a tool for laundering large amounts of criminal funds, involving more than $9 billion.

Indictment Details: What is KuCoin Accused Of?

According to a press release by the U.S. Department of Justice, KuCoin and its founders are charged with conspiracy to operate an unlicensed money transmitting business and conspiracy to violate the Bank Secrecy Act. They are accused of intentionally failing to maintain adequate anti-money laundering (AML) procedures intended to prevent KuCoin from being used for money laundering and financing terrorism, not maintaining reasonable procedures to verify customer identities, and failing to file any suspicious activity reports. KuCoin is also accused of operating an unlicensed money transmitting business and essentially violating the Bank Secrecy Act.

It’s important to note that the SEC is not included in this prosecution, so the charges do not involve the SEC’s area of concern—selling unregistered securities—since securities-related matters are not under the jurisdiction of the prosecuting agencies.

The indictment states that KuCoin “intentionally evaded U.S. AML and KYC regulations by falsely representing that it had no U.S. customers,” while in fact, KuCoin had a large number of U.S. customers. The prosecuting 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 its futures trading platform launched in July 2019. Since its establishment in 2017, KuCoin has become one of the world’s largest cryptocurrency trading platforms, with over 30 million customers and billions of dollars in daily cryptocurrency trading volume. KuCoin’s website boasts its ranking among the top five in global cryptocurrency exchange public listings, with one public listing ranking 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 entity knew their obligations under U.S. anti-money laundering laws but intentionally chose to ignore these requirements: KuCoin failed to implement an adequate Know Your Customer (KYC) procedure. In fact, until at least July 2023, KuCoin did not require customers to provide any identification information. Only in July 2023, after KuCoin was notified of the federal criminal investigation into its activities, did KuCoin adopt a KYC procedure for new customers. However, this KYC process only applied to new customers and not to the millions of existing customers of KuCoin, including a significant number located in the United States. KuCoin also never filed any required suspicious activity reports, never registered with the CFTC as a futures commission merchant, and at least until the end of 2023, never registered with FinCEN as a money transmitting business.

For example, the Department of Justice stated that from August 2022 to November 2023, about 197 KuCoin deposit addresses indirectly or directly received cryptocurrency valued at $3.2 million from the virtual currency mixer Tornado Cash, which has been placed on the sanctions list.

The release stated, “In fact, KuCoin actively attempted to conceal the presence of U.S. customers to appear as though it was exempt from U.S. AML and KYC requirements. Despite collecting and tracking 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 claiming it had no U.S. customers, while in reality, KuCoin had a significant number of U.S. customers. In fact, in many social media posts, KuCoin actively marketed itself to U.S. customers as an exchange where they could trade without undergoing KYC. For example, a message from KuCoin on Twitter in April 2022 stated: ‘KYC does not support U.S. users, however, KYC on KuCoin is not mandatory. Normal transactions can be done with an unverified account.'”

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

Each charge against the founders carries a maximum penalty 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 significant number of U.S. users were trading on the KuCoin platform. In fact, KuCoin allegedly leveraged its vast U.S. customer base to become one of the world’s largest cryptocurrency derivatives and spot exchanges, with daily transactions worth billions of dollars and annual transactions reaching trillions of dollars. However, financial institutions like KuCoin that take advantage of the unique opportunities available in the U.S. must also comply with U.S. laws to help identify and eliminate criminal and corrupt financing schemes. KuCoin allegedly chose not to do so deliberately. As charged, due to a failure to implement basic anti-money laundering policies, the defendants allowed KuCoin to operate in the shadows of the financial market and be used as a haven for illegal money laundering, with KuCoin 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. It’s that simple.”

The Commodity Futures Trading Commission also filed a parallel civil suit against KuCoin on Tuesday. The CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against future violations.

KuCoin has responded, “KuCoin is operating well, and our users’ assets are absolutely safe. We have noticed the related report 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 as usual. Your assets are safe with us. My team and I will update you on the progress in a timely manner.”

This is the second time KuCoin has had legal conflicts. In March 2023, New York Attorney General Letitia James sued the exchange for violating state laws on securities and commodities trading.

What Happens Next?

A simple analysis can reveal that the U.S. Department of Justice has indeed achieved significant results from the Binance case, and following this, exchanges that actually have U.S. customers will become the next targets of lawsuits (at the time, one of the accusations against Binance was instructing U.S. customers on how to bypass U.S. KYC to use the more liquid Binance exchange, rather than Binance.US), because some exchanges have not registered with U.S. official institutions, as mentioned in the KuCoin case today.

One possible scenario is that lawsuits will be targeted, with another following the conclusion of a case against a particular exchange; if most exchanges similar to KuCoin were sued at the same time in a short period, it might lead to a situation where “you can’t claim to be a big exchange if you haven’t received a lawsuit,” meaning major exchanges might collectively address or face other possibilities. Handling each case one by one and implementing punitive measures can ensure the highest success rate.

Overall, this criminal indictment sends a clear message to cryptocurrency exchanges worldwide: companies operating in the United States or serving U.S. customers must strictly comply with U.S. laws. As the cryptocurrency industry rapidly evolves, regulators are intensifying their efforts to ensure the industry’s health and sustainable development, protecting investors from illegal activities. All these efforts are directed towards a common goal: establishing a more secure and transparent digital currency market.