CFTC files charges against digital asset exchange for multiple violations

The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action against a group of companies that operate a centralized digital asset exchange under the name KuCoin.

The CFTC filed charges against Mek Global Limited, PhoenixFin PTE, Flashdot Limited, and Peken Global Limited, which operate KuCoin, for multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations.

The complaint, filed in the U.S. District Court for the Southern District of New York, said KuCoin illegally did the following:

• 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); and

• Failed to implement an effective customer identification program (CIP).

“For too long, some offshore crypto exchanges have followed a now-familiar playbook by offering derivative products and falsely claiming people in the United States cannot use their platforms, when in reality, anyone in the U.S. with commonly used technology can trade without providing basic customer identifying information,” CFTC Director of Enforcement Ian McGinley said.

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.

“As made clear by the CFTC’s action today and its previous enforcement actions, the CFTC’s playbook should also now be familiar – the CFTC will charge such entities with failing to register with the CFTC and failing to comply with the agency’s rules that protect U.S. customers and prevent and detect terrorist financing and money laundering,” McGinley added.

From approximately July 2019 to June 2023, KuCoin offered and executed commodity derivatives and leveraged, margined, or financed commodity transactions to and for people in the U.S., but failed to implement required know-your-customer (KYC) compliance procedures, the complaint said. CFTC also alleges that while KuCoin claimed to have implemented KYC procedures, they were a sham and did not prevent U.S. customers from trading on the platform.

Further. the commission alleges that people who identified themselves as being U.S. customers were permitted to trade commodity futures, swaps, and leveraged, margined, or financed commodity transactions on the exchange, in violation of regulations. In addition, KuCoin failed to impose any IP address restrictions during the relevant period to prevent U.S. customers from trading commodity interests or account for commonly used technology such as virtual private networks (VPNs) that could potentially circumvent IP address restrictions.

In a separate criminal matter, the Southern District of New York charged PhoenixFin PTE, Flashdot Limited, and Peken Global Limited with violating the Bank Secrecy Act, operating an unlicensed money transmitter business, and conspiracy to conspiracy to do both.