The growing pains of industry transformation, KuCoin may reach a settlement with the CFTC in the short term

Author: BlockBeats

Eleven years after the Winklevoss twins first applied for a Bitcoin spot ETF, the Bitcoin spot ETF was approved for trading by the U.S. Securities and Exchange Commission (SEC) on January 11, 2024. The Ethereum spot ETF is also just one step away from going live.

However, with the development of the cryptocurrency market, regulators' focus on market compliance and transparency is also increasing.

In March 2023, the U.S. Commodity Futures Trading Commission (CFTC) filed charges against Binance and its founder CZ, accusing them of violating the Commodity Exchange Act (CEA) and CFTC regulations. In November 2023, Binance reached a settlement with the CFTC after 8 months, agreeing to pay a total of $2.85 billion in fines and committing to comply with relevant regulations. Of this, $1.35 billion was from trading fees earned due to bad assets, $1.35 billion was a fine, and the remaining $150 million was a civil penalty borne by CZ.

After Binance reached a settlement with the CFTC, KuCoin became the next target of the CFTC.

KuCoin May Settle with CFTC in the Short Term

On March 26, 2024, the CFTC accused KuCoin of violating multiple provisions of the Commodity Exchange Act (CEA) and CFTC regulations. This is another significant case following Binance, with exactly one year between the two cases.

Both Binance and KuCoin were accused of violating the U.S. Commodity Exchange Act and CFTC regulations, but the specific allegations differ.

The CFTC brought multiple charges against Binance and CZ. Specifically, the CFTC accused Binance and its operating company of violating the Commodity Exchange Act and CFTC regulations, and Binance's former Chief Compliance Officer Samuel Lim was also accused of assisting and encouraging these violations.

The charges against KuCoin mainly involve illegal over-the-counter commodity futures trading without effectively supervising its business and failing to implement customer identification procedures (KYC), among others. Compared to the charges against Binance, the CFTC's accusations against KuCoin are more focused on operations and compliance, without mentioning intentional evasion of regulation.

Information disclosed by the CFTC indicates that the charges against Binance are more comprehensive, involving intentional circumvention of the law and systematic guidance for customers to evade regulation. In contrast, KuCoin's case is relatively lighter, possibly due to negligence or mismanagement rather than premeditated illegal actions, and neither party's accusations involve user funds.

In May 2024, the CFTC announced that Falcon Labs, Ltd., a digital asset brokerage based in Seychelles, reached a settlement with the CFTC for failing to register as a futures commission merchant (FCM) as required, agreeing to pay approximately $1.2 million in illegal gains and a $600,000 civil penalty.

If we take cases like Binance and Falcon Labs as precedents, despite facing charges, KuCoin's case is relatively minor, mainly involving operational and management issues, without any intentional evasion of regulation. KuCoin may settle with the CFTC in the short term by paying a fine.

Short-term Bearish, Long-term Bullish

Founded in 2017, KuCoin is one of the largest cryptocurrency trading platforms in the world. According to CoinMarketCap data, KuCoin ranks seventh globally in both cryptocurrency spot and derivatives trading.

After being sued by the CFTC, KuCoin's total assets experienced a net outflow in the short term but gradually stabilized afterward. According to CMC data, KuCoin's total assets are currently approximately $4.6 billion. KuCoin's latest proof of reserves (PoR) shows that the value of BTC, ETH, and stablecoin assets on the platform exceeds $2.5 billion, with reserve ratios of 115% for BTC and ETH, and 109% and 120% for USDT and USDC, respectively, all exceeding user assets and fully redeemable.

A similar situation occurred at Binance, which also faced a lawsuit from the CFTC and experienced a brief outflow of funds, but after reaching a settlement with the CFTC, Binance's total assets reached $120.2 billion, setting a new historical high.

In the face of regulatory challenges, KuCoin chose to respond proactively rather than shutting down withdrawals. The platform promptly airdropped a total of $28.95 million in KCS and BTC to users supporting its development. Although KCS experienced a brief drop after the news broke, it rebounded nearly 45%, with the number of holders exceeding 2 million, a 4.06% increase from the previous quarter. Historical cases show that U.S. regulators do not intend to stifle the cryptocurrency industry and its companies, but rather aim to ensure the long-term health and sustainability of the industry while protecting participants from unnecessary risks.

According to CoinGecko statistics, among cryptocurrency companies sued by U.S. regulators with settlement amounts exceeding $10 million, more than half continue to operate normally, including Telegram (Ton), which is now ranked in the top ten by market capitalization among all cryptocurrencies, the largest compliant cryptocurrency trading platform Coinbase, and the world's largest stablecoin issuer Tether.

According to public data, as of March 2024, KuCoin's total registered users approached 32 million, a 4.32% increase from the previous quarter. Notably, user growth in Latin America reached 16.26%, while the Middle East and Africa grew by 11.29%, and Europe by 6.98%. In the first quarter of 2024, KuCoin's spot trading volume increased by 121.85% year-on-year, with the Middle East and North Africa (MENA) region growing by 263.91%. These data indicate that KuCoin's services are gaining widespread recognition and acceptance globally.

Although KuCoin currently faces a lawsuit from the CFTC, which may have some short-term impact, based on its latest corporate data and business strategies, this incident is unlikely to have a significant negative impact on its existing business in the long term. On the contrary, this may be an important step towards compliance in the cryptocurrency industry, paving the way for attracting more traditional capital into the market. Compliance will bring more opportunities to the cryptocurrency industry, promoting healthier and more sustainable development.

Farewell to the Era of Wild Growth

In the early stages of development in any industry, a wild growth phase is often inevitable, and the cryptocurrency industry is no exception. Behind the rapid development lies the market's high volatility and frequent regulatory disputes.

This phenomenon is not unique to the cryptocurrency industry. In traditional finance, U.S. banks have faced 156 lawsuits, paying over $41 billion in fines, while Goldman Sachs encountered 58 lawsuits, paying $13.1 billion in fines. History shows that even the most mature financial institutions face regulatory challenges.

The CFTC's lawsuit against KuCoin may mark an important turning point for the cryptocurrency industry. The era of wild growth is coming to an end, and a new era of compliance is about to begin. The approval of the Bitcoin spot ETF has accelerated this process. This transition is an inevitable trend in the industry's development; only through compliant operations and market regulations can more traditional capital be attracted to participate.

The cryptocurrency industry is undergoing a transformation from wild growth to compliant operations. For companies like Binance and KuCoin that face challenges in the compliance process, this feels more like growing pains. However, these challenges are not only obstacles to industry development but also a sign of its maturity. After experiencing these growing pains, the cryptocurrency industry can become more robust, attracting more mainstream investors' attention and participation, ultimately achieving healthy and sustainable development.