Warrants are out for the arrest of the co-founders of KuCoin with the multi-count criminal indictment providing a spectacular bookend to the story of the world’s once-fourth largest crypto exchange. But where did it all go wrong and how did KuCoin even start in the first place?
The story of KuCoin starts not at its September 2017 founding or its 50% pre-mined ICO, but where everyone knew it would end: the US Attorney’s office in the Southern District of New York. Despite KuCoin’s repeated claims that it never served nor advertised to US residents, like all similar claims by numerous large crypto exchanges, that was a lie.
Indeed, KuCoin has always served US customers, which would be fine if it had followed US laws. Unfortunately, it didn’t.
According to the chief federal law enforcement officer of the world’s largest financial center, KuCoin’s expansive operations can be easily summarized in one sentence. KuCoin was “a multibillion-dollar criminal conspiracy.”
‘A multibillion-dollar criminal conspiracy’
For years, KuCoin had it all: 30 million customers across 207 countries and territories, a 35%-founder and 15%-angel pre-mined ICO, and multiple offices across Asia. It listed over 700 spot cryptos, 1,300 trading pairs, and offered insurance plus proof of reserves.
Chinese co-founders ‘Michael’ (Chun Gan) and ‘Eric’ (Ke Tang) used three companies to run KuCoin: Flashdot, Phoenixfin, and Peken Global. The companies branched out around the world and attracted a customer base that transacted billions of dollars daily, summing the exchange’s lifetime volume into the trillions.
KuCoin offered degenerate margin rates of up to 100X leverage. Like BitMEX, Binance, and many other exchanges, the net effect was a continuous stream of liquidated customer positions into the accounts of wealthy market-makers. It also offered popular derivatives like options, inverse contracts, leveraged tokens, lotteries, linear contracts, and an API to trade via bots.
KuCoin survived a staggering $280 million hack in 2020, recovered those funds, and grew even stronger. KCS, its self-created token, is still up 40X from its $0.25 ICO price — even after its 25% drop since the US attorney indicted its founders. For years, KuCoin outranked the titans of the crypto exchange industry by transaction volume, besting OKX, Crypto.com, Gemini, and Bitstamp.
To distract from secret operations
With millions of customers and billions in daily transactions washing across hundreds of crypto assets, KuCoin became the perfect place to hide. As a result, the exchange allegedly attracted criminals looking to exploit, extort, and launder money.
According to a US Attorney and Homeland Security chief, KuCoin and its executives knew about criminal conduct yet never submitted a single Suspicious Activity Report (SAR), as required by US law, for over six continuous years.
Prosecutors also allege that KuCoin allowed Office of Foreign Assets Control (OFAC)-sanctioned individuals to launder millions of stolen dollars from US banks and other crypto exchanges. That laundering continued for at least two continuous years, according to the indictment.
Most importantly, KuCoin advertised and encouraged US customer trading despite its superficial disavowals. Although KuCoin claimed to deny US service, it once tweeted that know-your-customer (KYC) “is not supported to USA users, however, it is not mandatory on KuCoin to do KYC. Usual transactions can be done using an unverified account.”
Read more: KuCoin banned in Ontario, Canada after ghosting securities commission
What’s next for KuCoin?
In the end, whether KuCoin made its founders rich primarily from its KCS token, trading commissions, liquidations into affiliated market-makers, token listing kickbacks, tether incentives, money-laundering, or other shady activities, the list of misdeeds in its criminal indictment spooked customers enough to withdraw over $1 billion from the exchange in the immediate aftermath.
Of course, an indictment is merely a list of accusations. According to US law, all defendants are presumed innocent unless and until proven guilty. It’s possible that KuCoin and its co-founders could exonerate themselves of all criminal charges and prove to the world that KuCoin has not committed these alleged crimes.
KuCoin is still operational today. Protos has reached out to KuCoin for comment and will update if we receive a response.