SDNY Dismisses RICO and State Law Claims Against KuCoin and Chainalysis Over Laundered Cryptocurrency

In Reca v. Flashdot Limited, Judge Gregory Woods of the Southern District of New York recently dismissed RICO and state law claims against cryptocurrency exchange KuCoin and blockchain analytics firm Chainalysis brought by victims of cryptocurrency theft who alleged their stolen assets were laundered through KuCoin by unknown hackers.  Judge Woods’ decision addresses key pleading issues in suits seeking to hold cryptocurrency exchanges and related service providers liable when stolen assets pass through their platforms, and provides some guidance on the potential scope of such liability.

The plaintiffs alleged that KuCoin, which utilized Chainalysis’s blockchain analytics software, failed to implement adequate “know-your-customer” (KYC) and anti-money laundering (AML) procedures and, as a result, were unable to track and potentially recover their assets after they were deposited into KuCoin.

First, Judge Woods concluded that the plaintiffs’ RICO claim against KuCoin failed because they failed to allege a RICO enterprise distinct from KuCoin’s regular business operations.  Judge Woods’ ruling notes that “the pursuit of maximizing revenue” that is “indistinguishable” from a business’s regular purpose does not establish a “separate and distinct” RICO enterprise.  Additionally, regarding Chainalysis, Judge Woods concluded that the plaintiffs, who merely alleged that Chainalysis provided its software to KuCoin, failed to allege the necessary two predicate acts of racketeering by Chainalysis.

Second, Judge Woods concluded that the real cause of the plaintiffs’ injuries was the initial theft of their assets, and not any alleged KYC/AML failings by KuCoin or Chainalysis.  In doing so, he rejected the plaintiffs’ “two-phase theory of injury,” which sought to shift the Court’s attention from the theft of their assets to their subsequent inability to track those assets when they were deposited into KuCoin.  Even accepting that there was some independent value in the plaintiffs being able to track their stolen assets, Judge Woods concluded that value only arose after the initial theft by the unknown hackers.

Regarding the state law claims, Judge Woods concluded that the plaintiffs failed to allege that KuCoin and Chainalysis had “actual knowledge” that the relevant assets were stolen, a necessary element for the relevant conversion and aiding-and-abetting claims.

Judge Woods permitted one of the plaintiffs to amend his state law claims, but otherwise dismissed the RICO and state law claims against KuCoin and Chainalysis with prejudice.