CFTC Charges Crypto Platform KuCoin with Operating Illegal Digital Asset Derivatives Exchange and DOJ Files BSA/AML Charges | Practical Law

CFTC Charges Crypto Platform KuCoin with Operating Illegal Digital Asset Derivatives Exchange and DOJ Files BSA/AML Charges | Practical Law

The CFTC charged operators of the KuCoin centralized digital asset exchange with multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations. Separately a federal criminal indictment was unsealed against KuCoin and its founders.

CFTC Charges Crypto Platform KuCoin with Operating Illegal Digital Asset Derivatives Exchange and DOJ Files BSA/AML Charges

by Practical Law Finance
Published on 27 Mar 2024 • USA (National/Federal)
The CFTC charged operators of the KuCoin centralized digital asset exchange with multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations. Separately a federal criminal indictment was unsealed against KuCoin and its founders.
On March 26, 2024, the CFTC charged Mek Global Limited (a Republic of Seychelles incorporated entity), PhoenixFin PTE Ltd. (a Singapore incorporated entity), Flashdot Limited (a Cayman Islands incorporated entity), and Peken Global Limited (a Republic of Seychelles incorporated entity), which collectively operate centralized digital asset exchange KuCoin (collectively, KuCoin), with multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations (see CFTC KuCoin Action). Separately, a criminal indictment was unsealed in the US District Court for the Southern District of New York (SDNY) against KuCoin and its founders (see DOJ KuCoin Action).

CFTC KuCoin Action

The CFTC action, filed in the SDNY, alleges that, from approximately July 2019 to approximately June 2023, KuCoin:
  • Illegally dealt in off-exchange commodity futures transactions and leveraged, margined, or financed retail commodity transactions.
  • Solicited and accepted orders for commodity futures, swaps, and leveraged, margined, or financed retail commodity transactions without registering with the CFTC as a futures commission merchant (FCM).
  • Failed to diligently supervise its FCM activities.
  • Operated a facility for the trading or processing of swaps without registering with the CFTC as a swap execution facility (SEF) or designated contract market (DCM).
  • Failed to implement an effective customer identification program (CIP).
The CFTC alleges in its complaint that:
  • KuCoin offered and executed commodity derivatives and leveraged, margined, or financed commodity transactions to and for people in the US and failed to implement required know-your-customer (KYC) compliance procedures.
  • Although KuCoin claimed to have implemented KYC procedures, those procedures were a sham and did not prevent US customers from trading commodity interests and derivatives on the platform.
  • People who identified themselves as being US customers were permitted by KuCoin to trade commodity futures, swaps, and leveraged, margined, or financed commodity transactions on the KuCoin exchange, in violation of the CEA and CFTC regulations.
  • KuCoin failed to impose any IP address restrictions during the relevant period to prevent US customers from trading commodity interests and failed to account for commonly used technology such as virtual private networks (VPNs) that could potentially circumvent IP address restrictions.
The CFTC further alleges in its complaint that:
  • KuCoin solicited and accepted orders for, accepted property to margin, and operated a facility for the trading of futures, swaps, and leveraged, margined, or financed retail transactions involving digital assets that are commodities including bitcoin (BTC), ether (ETH), and litecoin (LTC).
  • According to KuCoin’s own promotional materials between 20% and 50% of KuCoin’s customers were based in the US.
  • These actions brought KuCoin squarely within the CFTC’s authority and required that KuCoin register with the CFTC and comply with all applicable CFTC regulations.
The CFTC seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations.
Certain crypto legal commenters have interpreted the language in the CFTC complaint as a CFTC jurisdictional claim over digital assets as commodities, primarily ETH, as the SEC reportedly conducts an ongoing investigation of ETH.
In a separate prior action, on December 12, 2023, New York Attorney General (NYAG) Letitia James entered into a stipulation and consent order in the Supreme Court of the State of New York with the KuCoin entities to resolves charges brought by the NYAG against KuCoin for failing to register as a securities or commodities broker-dealer with the NYAG and for falsely representing itself as a cryptocurrency exchange despite being unregistered with the SEC and CFTC (see Legal Updates, New York Attorney General Takes Action Against Crypto Platform KuCoin and Crypto Trading Platform KuCoin Settles with NYAG for Registration Failures).

DOJ KuCoin Action

In a separate federal criminal matter, on March 26, 2024, the US Attorney’s Office for the SDNY unsealed and filed an indictment against KuCoin, as well as KuCoin's two founders, Chun Gan a/k/a "Michael," and Ke Tang a/k/a "Eric," for allegedly conspiring to operate an unlicensed money transmitting business and conspiring to violate the Bank Secrecy Act (BSA) by willfully failing to:
  • Maintain an adequate anti-money laundering (AML) program designed to prevent KuCoin from being used for money laundering and terrorist financing.
  • Maintain reasonable procedures for verifying the identity of customers.
  • File any suspicious activity reports.
This update is based in part on material provided by Thomson Reuters Regulatory Intelligence (TRRI).