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KuCoin ‘Ether’ Lawsuit, CoinFLEX Rebrand, Gate Group Visa Crypto Card Rollout, and More Updates



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The second week of March has been marked by a return of chaos in the digital asset space as the dragnets cast by market regulators ensnare more entities in violation of stipulated laws or those operating unlawfully in the sector. Earlier this week, South Korean authorities confirmed they are still investigating Terraform Labs and its principal cofounder, Do Kwon, for his role in the collapse of Terra last summer. Here is a rundown of other legal developments thus far this week:

CoinFLEX rebrands as Open Exchange, announces changes in leadership

Coinflex, the latest crypto venture from the controversial Three Arrows Capital duo Kyle Davies and Su Zhu, communicated earlier this week that it received the green light on its restructuring plan from a court in Seychelles, where it is headquartered. A Tuesday statement from the exchange, which suspended withdrawals last June, conveyed that it was awaiting a written order before proceeding with the next steps in its resolution process. Coinflex's operation came to a halt the exchange was brought down to its knees alongside other crypto companies following the downfall of Terra. The exchange reported a $47 million hole in its book as a subsequent ripple effect of the ecosystem's collapse.

Though the exchange allowed users to withdraw a fraction (10%) of the held assets in July, its financial pains cropped up again when it announced staff cuts. Coinflex chalked up the decision to the declining market and uncertainty involving one of its counterparties. It also clarified that the remaining headcount would shift focus toward product and technology vertices before proposing a restructuring plan to meet its obligations to investors and employees later in September. The exchange clarified in the Mar 7 communication that trading locked assets wouldn't be immediately available after the order is published, rather will be reinstated 24 hours after – a window it deems sufficient for all locked asset holders to become “sufficiently informed.”

Transition into the Open Exchange

The approved plan will see 65% of the company equity used to settle with creditors and another 15% proportion vested in employees. In addition to the ‘major milestone' on the restructuring plans, Coinflex rebranded to Open Exchange (OPNX) – a new entity led by Leslie Lamb, who shared the news on LinkedIn. Worth mentioning, the initial restructuring proposal tabled by CoinFLEX didn't bear any mention of the newly-adopted name. The majority of the crypto community has remained skeptical about the exchange – primarily due to close its history that can be traced to 3AC cofounders Davies and Zhu.

The former hedge fund execs had a decent track record in the space before their firm's long-only bet went up into flames prompting the liquidation of the Three Arrow Capital fund. The events consequently resulted in even more significant losses across the market in June as the contagion spread to lending and other firms that had exposure. Reasonably, the crypto community's sore point has remained the exchange's scope – claims and derivatives related to funds held on failed trading platforms. In a Twitter Spaces session on Thursday, Lamb said OPNX would leverage zero-proof for its user balances audits.

KuCoin named in a lawsuit alleging Ether is a security

Spooking the industry’s close followers, New York AG Letitia James on Thursday filed a lawsuit against Seychelles-based digital assets trading platform KuCoin. The suit claims that the exchange violated securities laws by offering unregistered digital assets– including Ethereum's native token (Ether). The NYAG's office defined the latter and other tokens as security under the Martin Act. The NYAG's office indicated that the action is part of efforts by authorities to regulate the sector by stamping out unscrupulous players, including unregistered crypto platforms.

“The petition argues that ETH, just like LUNA and UST, is a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST,” the Mar 9 press release said.

In her argument, James also noted that KuCoin sold unregistered securities through a lending and staking product, KuCoin Earn. The AG office suit seeks to dismantle KuCoin's exchange business in the state. Notably, this is not the first legal dispute for KuCoin. It was similarly accused by both South Korean and Dutch market regulators of running operations without securing licensing. The latest suit marks the first legal challenge centered around the contentious debate of whether Ether is (or not) a security. Several agencies including the US Securities and Exchange Commission (SEC) have in the past alluded to the claim.

To learn more about Ethereum, check out our Investing in Ethereum guide.

Gemini clarifies banking relationship with banking giant JP Morgan is intact

Existing ties between banks and centralized crypto exchanges operating in the US have been under intense scrutiny recently. Several agencies, including the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve have seemingly teamed up to caution banking institutions of the illiquidity potentially associated with crypto entities. This week, reports suggested JPMorgan had severed ties with Gemini exchange. In the following hours, however, the cofounders, Cameron and Tyler Winklevoss dismissed reports indicating the banking giant had ended its association. A person familiar with the matter also told CoinDesk that the bank's arrangement with Coinbase, which alongside Gemini, was among the bank's first clients from the crypto industry, remains unscathed.

Binance thrives against the depressing market and regulatory pressure

The last few months have been themed by enforcement action on crypto firms that has, in turn, affected their operations. Notwithstanding this setback of sorts, some companies like Binance have fared better, achieving record high spot volume last month despite the weight of regulatory fears. Binance grew its standing in terms of spot market share in February to a new record high.

The exchange's spot volume reached $504 billion, translating to a 13.7 % increase to a record-high market share, according to a report from market data and analytics platform CryptoCompare. Meanwhile, the proportion of the derivative exchanges market increased in February, reaching its highest-ever recorded monthly market share of 62.9%. OKX and Bybit trailed with 14% and 13.3%, respectively.

Market participants' faith and substantial liquidity boost Binance's market share

Binance's record high numbers came at a time when regulators are haunting crypto exchanges. The global firm has been through its share of regulatory woes, as has its US affiliate. Binance.US has most recently been accused by an SEC official who spoke at Voyager's bankruptcy hearing, saying the agency staff believes the exchange is running an unregistered securities business in the jurisdiction.

CryptoCompare research analyst Jacob Joseph told CoinDesk that despite the exchange's recent troubles, market participants persist in seeking homage with it under the belief that the prominent exchange is one of the more dependable trading platforms. He added that Binance's dominance in the market could also be attributed to its substantial liquidity, which means decreased slippage costs and spreads, thereby offering traders a compelling advantage. Joseph also pointed to the fact that Binance provides an extensive range of trading pairs and services.

Binance more tokens to its Proof of Reserve listing

Earlier this week, Binance revealed in a separate announcement it added 11 new tokens to its Proof of Reserve (PoR) system that now supports 24 tokens. The latest entrants to the list include DOGE, WRX, GRT, 1INCH, SSV, ENJ, CVP, MASK, HFT, CRV, and CHR, bringing the total funds in the PoR system to over $63 billion. The system was introduced in late 2022 to provide users with greater transparency and assure their assets are backed 1:1 in custody.

To learn more about Graph, check out our Investing in The Graph guide.

Accounting firms are reluctant to work with Binance

Though the reinforced PoR system shows the exchange backs user funds, there are concerns that it's insufficient to provide the desired transparency, and an audit is needed. Last year, the audit, accounting, and consulting group Mazars released a contentious agreed-upon procedure (AUP) report inaccurately touted as an audit report.

Following the backlash it received, the global firm eventually paused all work with crypto entities on proof-of-reserves reports. Early last month, Binance Head of Asia-Pacific Leon Foong said undergoing this process might take a long time as auditing firms typically lack expertise in crypto. While Deloitte continues auditing the financial reports of Coinbase, it, alongside fellow big four accounting firms KPMG, Ernst & Young, and PricewaterhouseCoopers, are unwilling to work with Binance.

Binance.US wins legal battle to conclude the purchase of Voyager Digital's assets

Binance's US operating side Binance.US this week came out on top in its dispute involving the SEC. The exchange was granted the right to purchase defunct Voyager Digital's assets after a four-day hearing. Bankruptcy judge of the Southern District of New York, Michael Wiles, authorized the parties to progress with the deal, rejecting several arguments by the regulator. In his ruling, Judge Wiles said the SEC's arguments lacked specificity and failed to provide sufficient evidence to support its claims of a possible violation of securities laws. He added that the Commission had delayed until the last minute before lodging complaints about its reservations.

The deal offers Voyager creditors the best recovery option

Binance.US can now go ahead with its $1.3 billion deal, giving back Voyager's creditors as much as 73% recovery of lost assets. Before Voyager customers can receive payment tokens for recovery, some due diligence is pending. The defunct lender has a few weeks to conclude whether to proceed with the sale of assets or self-liquidate to pay back the creditors. Lead investment banker of Voyager Brian Tichenor told the court last Friday that the restructuring plan with Binance.US would result in customers receiving approximately $100 million more than if the company were to liquidate. Customer payouts are also contingent on the outcome of Voyager's legal battle with Alameda Research – it claims $446 million.

Gate to launch a Visa crypto debit card serving European users

Elsewhere in the spotlight today, Gate Group, the company behind exchange, announced plans to introduce a Visa crypto debit card available to Europe-based users. The Mar 9 announcement reflects the strategy that exchange companies have resolved to, i.e., increasingly exploring crypto card offerings. The company said a waitlist is open for users in the European Economic Area to register for the Gate Visa crypto debit card to be launched through Gate Global. For utility, cardholders will be able to convert their crypto into fiat and spend the funds for online and in-store purchases in the real world.

The exchange's parent company said it plans to expand the availability of the new card to other regions. Last month, revealed plans to expand its operation to Hong Kong. The special administrative region has assumed a receptive tone to digital assets this year in contrast to mainland China. The exchange said it is pursuing permits and licenses to set up shop in the region via proper channels. Gate Group joins a growing list of crypto companies working with Visa, which, alongside MasterCard, were rumored to be mulling a break in their crypto ventures. Wirex, a payments platform, revealed a similar long-term strategic partnership for crypto-enabled debit and prepaid cards in mid-February. The crypto payments app had a previous arrangement featuring crypto-linked visa debit cards in the US. Following the new agreement, the London-based firm can now issue the cards in Asia-Pacific (APAC) and the UK.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.