Bank Secrecy Act vs crypto: A new DOJ lawsuit revives old tactic

The Department of Justice and Commodity Futures Trading Commission announced back-to-back lawsuits against KuCoin Tuesday


CHRISTOPHER E ZIMMER/Shutterstock modified by Blockworks


Old tricks in DOJ’s new KuCoin fight

The Department of Justice and Commodity Futures Trading Commission announced back-to-back lawsuits against Seychelles-based KuCoin Tuesday. 

In its criminal suit, the DOJ, among other things, alleges the crypto exchange violated anti-money laundering laws. The DOJ also hit KuCoin founders Chun Gan and Ke Tang with conspiracy charges. 

The CFTC, in its separate civil suit, says the exchange operated an unregistered futures and swaps operation. 

The DOJ brought the case under the Bank Secrecy Act (BSA), which requires financial institutions — even those not formally based in the US — to keep records and file reports associated with know-your-customer and anti-money laundering efforts. 

By skirting KYC and AML policies, the DOJ alleged, KuCoin was able to transmit more than $4 billion of “suspicious and criminal funds” and received $5 billion from operating “in the shadows of the financial markets.”

The language in the unsealed KuCoin indictment is very similar to wording US officials used when discussing Binance, which settled US criminal charges in a $4.3 billion deal last November for — you guessed it — alleged BSA violations. 

Binance’s “willful failures allowed money to flow to terrorists, cybercriminals and child abusers,” Treasury Secretary Janet Yellen said in November. 

While invoking the BSA in charging crypto companies isn’t a new trend, it could become much more common if a bipartisan group of US senators gets their way. 

Sen. Elizabeth Warren, who has likened crypto markets to the “Wild West” and long advocated for legislation that treats crypto companies the same as the traditional financial sector, wants to expand the BSA to apply to nearly all industry participants, including wallet providers and miners. 

Read more: Petty legislation is crypto’s greatest enemy

The Digital Asset Anti-Money Laundering Act, co-sponsored by Warren and Republican Sen. Roger Marshall, would classify some crypto businesses and money services businesses, subjecting them to more anti-money laundering statutes like the BSA. The bill, if passed, would prohibit financial institutions from using or engaging with transactions that have used “anonymity-enhancing technologies” like mixing services and privacy coins. 

Critics say the legislation goes too far and places impractical and at times impossible burdens on industry players, especially miners and validators. 

Regardless of whether the bill makes it to the floor — and, let’s face it, it doesn’t stand a chance in an election year — the DOJ still has a strong case for charging KuCoin with BSA violations, especially with precedent on its side. 

The CFTC’s civil suit brings up some interesting points, too, including the naming of ether and litecoin as commodities, which Crypto Twitter absolutely loved. 

Calm down, though — it’s still a massive lawsuit at one of the world’s more notable exchanges.

I wonder if the SEC is feeling left out. It’s not too late though; keep an eye on the wires today as we might see a third lawsuit. Or maybe there’s already a settlement in the works. 

— Casey Wagner

Data Center

  • Zero-knowledge layer 2 Scroll is placing higher on ETH burn leaderboards, now fourth behind Uniswap, ETH transfers and Tether with 558.76 ETH ($2 million) over the past week.
  • Solana has kept ahead of Arbitrum for total value locked for most of this month — now easily the fourth-largest DeFi ecosystem with $4.6 billion TVL.
  • Bitcoin and Solana NFT volumes are down 42% and 27% this week. Ethereum weekly volumes have meanwhile gained 4%, now $98 billion.
  • BTC remains in the $70,000 range and ETH is holding on to $3,500 despite some minor slippage on the KuCoin lawsuit news.
  • COIN shares, on the other hand, appeared to not take news of another exchange lawsuit well, closing about 5% lower Tuesday.

Twisters hit Tornado Cash trial 

After just two days, there may be more stormy skies ahead for Alexey Pertsev’s trial, according to people in attendance. 

Ethereum developer Ameen Soleimani accused the judges of being “willfully ignorant” when it comes to some of the topics being discussed in court. 

Soleimani noted that, during the second day of the trial, it felt like the judges were trying to “trap” Pertsev.

At one point, Pertsev was questioned about his use of the term “lol” when he found out about the $600 million Axie Infinity hack. Pertsev, in response to finding out about it, reportedly tacked on “‘lol’ at the end of a question.”

“Did you find this funny?” the judges asked. 

In a US court system, Pertsev would have faced a jury as his lawyers and the prosecutors face off. The Dutch court system operates differently, however, with Pertsev’s case being presented to a three-member judicial panel.

Sjors Provoost, a software developer according to his website, said the second day “went incredibly slowly” and like Soleimani, mentioned that some of the questions posed by the panel were “off the mark.”

He expressed disappointment about how “Objection!” wasn’t being used in the trial, unlike the US court system. The term was a favorite of both the defense and prosecution in Sam Bankman-Fried’s trial last November, and we quickly lost track of how many times it was used over the month-long saga.

— Katherine Ross

Things are different, but not too different

There’s more on-chain volume now than during the fiercest moments of the 2021 bull market — even if most of the space looks more or less the same.

March will mark the biggest ever month for DEXs. Decentralized exchanges have posted roughly $236.9 billion in volume, which is already $2 billion more than November 2021, with nearly a week to spare. 

Ethereum, Solana and Binance Smart Chain (BSC) are by far the largest venues, capturing over two-thirds of volume. In 2021, Ethereum and BSC contributed nearly 80%. Solana was still getting off the ground.

Read more: Cheatsheet: Ethereum and L2s on track to beat Bitcoin for active addresses

On-chain derivatives volumes are also at record highs (one wonders whether the Bank Secrecy Act violations consistently levied at offshore exchanges that offer margin on perps has a role in this). 

Still, Bitcoin, now with its own memecoins and digital collectibles, has lately processed more transactions than at any point in the past five years. 

Ethereum in January hit its own milestone of close to 2 million transactions in a single 24 hour period. The price of ether (ETH) traded 50% below its all-time high at the time.

Memecoins aside, novel stuff like Telegram bots and points farming have all boosted on-chain activity. And while there’s a mess of new layer 1s, layer 2s and DeFi apps, it’s more than likely the same projects from last cycle will continue to benefit from new developments moving forward.

The overall rate of change at the top end of the industry is slowing down. More than 80% of the cryptocurrencies in the top-200 didn’t place at all in January 2018. Between the 2018 and 2021 peaks, that figure fell to 66%.

Comparing today to November 2021 shows only 77 different cryptocurrencies that now sit in the top 200. So, nearly two-thirds of the current top-200 were also in the top-200 as markets peaked in 2021. 

Just another sign the market is maturing — even with all its silliness.

David Canellis

The Works

HSBC’s got a new tokenization play. The bank is now offering a retail-focused, gold-backed token in Hong Kong, according to the South China Morning Post. 

A US judge tossed a proposed class-action lawsuit against Apple, Inc. over the computing giant’s alleged anti-competitive behavior toward crypto app payments, Law360 reports

Collider chatted with the cast and crew of Cold Wallet, a new crypto-themed thriller that recently debuted at SXSW. The film was “presented” by Ocean’s Eleven director Steven Soderbergh

Point72 Ventures, the investment firm founded by billionaire Steve Cohen, is backing a blockchain startup focused on vehicle titles. Champ Titles raised $18 million, Bloomberg reports

Stronghold Mining is being sued by an environmental group in Pennsylvania, Reuters reports

The Morning Riff

Blast would probably prefer it if you stopped asking it to rollback the chain.

Luckily, whoever stole $97 million from NFT project Munchables returned the funds. 

No need for Blast, which launched earlier this year, to show how the sausage is made by reverting its ledger back before the hack. And there’s no need to develop billion-dollar smart contracts on the fly — by all accounts a knuckle-whitening endeavor.

Layer 2s may be necessary evils to scale Ethereum, but sticky incidents like these are bound to repeat in the near future.

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Ethereum got away with undoing The DAO hack nearly a decade ago without technically rolling back the chain. But it was a deeply controversial — and consequential — event.

It seems unlikely that the current crop of layer-2s, which includes Coinbase’s increasingly popular L2, Base, can forever avoid flexing any god-mode powers they possess.

— David Canellis

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