Week In Crypto: KuCoin Founders Face Jail Time In Major US AML Case

April 2, 2024
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KuCoin is hit with criminal charges in the US, Coinbase celebrates a small victory over the SEC, and Binance is set to be blocked in the Philippines.

KuCoin is hit with criminal charges in the US, Coinbase celebrates a small victory over the SEC, and Binance is set to be blocked in the Philippines.

The co-founders of global crypto exchange KuCoin are each facing up to ten years in prison after being hit with criminal charges by the US Department of Justice (DOJ).

Chun Gan, 34, and Ke Tang, 39, are each charged with one count of conspiring to violate the Bank Secrecy Act and one count of conspiring to operate an unlicensed money transmitting business.

Three corporate entities linked to KuCoin have also been charged with the same two counts, plus one additional count of violating the Bank Secrecy Act.

Both Gan and Tang are Chinese nationals who founded KuCoin in 2017, and have since been the majority shareholders of the corporate owners of the exchange.

Since March 2022, Gan and Tang have together held 75 percent of the shares in Flashdot, KuCoin’s current holding company, which was also indicted.

The other two corporate entities named as defendants are subsidiaries “and/or” affiliates of Flashdot, according to the indictment.

Since 2017, the DOJ alleges that KuCoin has “actively sought” to serve users in the US, including in the Southern District of New York, where the case was filed.

At “all relevant times” in the indictment, KuCoin has therefore operated as a US money transmitting business and was required to register with the Treasury’s Financial Crimes Enforcement Network (FinCEN).

In addition, the DOJ alleges that KuCoin “wilfully failed” to establish, implement and maintain an adequate and effective anti-money laundering (AML) programme, as required under the Bank Secrecy Act.

Key to these violations was KuCoin’s alleged failure to implement any know your customer (KYC) controls for users of the exchange.

The DOJ notes that KuCoin “affirmatively” attempted to conceal the fact that it had a “substantial” base of US customers, who comprised about 17 percent of its total customers in 2018.

KuCoin employed various deceptions to ensure that US customers did not realise that the platform they had signed up to was subject to US AML and KYC laws, the indictment notes.

“Indeed, KuCoin actively prevented its US customers from even identifying themselves as such when establishing KuCoin accounts,” said Damian Williams, prosecuting attorney.

“Moreover, KuCoin lied to at least one investor regarding the geographic location of its customers, falsely representing that it had no US customers.”

Between 2017 and July 2023, the DOJ believes that KuCoin received more than $5.3bn and transmitted more than $4bn in suspicious or criminal proceeds.

These funds, which should have been reported to FinCEN, include proceeds from sanctions violations, darknet markets, fraud, malware and ransomware attacks.

“Many KuCoin customers used its trading platform specifically because of the anonymity of the services it provided,” said Williams.

“In other words, KuCoin's no-KYC policy was integral to its growth and success.”

KuCoin did not implement any KYC controls until July 2023, when the company first learned that it was under criminal investigation.

Although even after that date, KuCoin users continued to receive transactions that should have been flagged as suspicious, says the DOJ.

This includes more than $3.2m received from addresses linked to Tornado Cash, the virtual currency mixer that was sanctioned by the US Treasury in August 2022.

In the first 24 hours since the charges were filed, KuCoin users withdrew almost $1bn of Ethereum-compatible digital assets from the exchange, according to blockchain analytics firm Nansen.

In a statement shared with Vixio, a KuCoin spokesperson said: "In the early stages of the industry, global exchanges are under regulatory scrutiny as the industry infrastructure is still at its developing stage. It is a natural progression for any emerging entity.

"As the case is still at an early stage, please understand that we cannot disclose any details for now."

Coinbase motion to dismiss SEC case mostly fails

A federal judge has ruled that the US Securities and Exchange Commission (SEC) may proceed with its civil complaint against Coinbase on all but one element of the case.

In an 84-page opinion, Judge Katherine Polk Failla denied most of Coinbase’s motion to dismiss the case, except for the SEC’s claims against Coinbase Wallet.

“The SEC has sufficiently pleaded that Coinbase operates as an exchange, as a broker and as a clearing agency under the federal securities laws, and, through its Staking Program, engages in the unregistered offer and sale of securities,” wrote Judge Failla.

“The court grants defendants’ motion, however, with respect to the SEC’s claims regarding Wallet.”

In June last year, when the SEC opened the case, it claimed that Coinbase was acting as an unregistered securities brokerage by operating the Coinbase Wallet.

The Coinbase Wallet is a self-custody wallet that allows users to trade crypto-assets directly with one another on a peer-to-peer (P2P) basis. It contrasts with a regular wallet on the Coinbase exchange, where the funds in the wallet and the private key to access them are both held by Coinbase.

But Coinbase Wallet was only a small part of the case. The main charge — that Coinbase has facilitated billions of dollars of securities trading without registration — remains intact and is “well-pleaded”, according to Judge Failla.

However, this did not stop Coinbase from celebrating the ruling. “Great progress on the SEC case — and a huge win for self-custodial wallets,” said CEO Brian Armstrong.

“This ensures the on-chain ecosystem will continue to innovate and create economic freedom around the world.”

Binance to be blocked in the Philippines

The Philippines Securities and Exchange Commission (SEC) has announced plans to block the Binance website and delist the Binance iOS and Android apps.

The SEC said it made the decision on March 12, when it agreed to send a formal block request to the National Telecommunications Commission.

“The SEC has concluded that the public’s continued access to these websites and apps poses a threat to the security of the funds of investing Filipinos,” said SEC chair Emilio Aquino.

Due to the “size and volume” of Binance’s current operations in the Philippines, the SEC said customers will be given time to exit their positions and withdraw funds before the exchange is blocked.

However, it did not specify when exactly it expects the block to be implemented.

In November last year, the SEC issued an investor warning reminding Filipinos that Binance is not registered in the Philippines and does not hold a licence to offer or sell any form of securities in the country.

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