BitMEX founder arrested for violation of US anti-money laundering laws

On Thursday the U.S. Commodity Futures Trading Commission announced the filing of a civil enforcement action in the U.S. District Court for the Southern District of New York charging five entities and three individuals that own and operate the BitMEX trading platform with operating an unregistered trading platform and violating multiple CFTC regulations, including failing to implement required anti-money laundering procedures.

BitMEX co-founders Arthur Hayes (CEO), Ben Delo, and Samuel Reed (CTO) were named as defendants in the complaint. Samuel Reed, the only defendant to be based in the U.S., was arrested in Massachusetts while the other defendants remain at large.

In addition to the CFTC charges, the U.S. Department of Justice has accused the same defendants of “violating the Bank Secrecy Act and conspiring to violate the Bank Secrecy Act, by willfully failing to establish, implement, and maintain an adequate anti-money laundering (AML) program at the Bitcoin Mercantile Exchange or “BitMEX.” The case has been assigned to United States District Judge John G. Koeltl.

The CFTC alleges that BitMEX has received more than $11 billion in bitcoin deposits and made more than $1 billion in fees, “while conducting significant aspects of its business from the U.S. and accepting orders and funds from U.S. customers.”

Acting Manhattan U.S. Attorney Audrey Strauss said, “With the opportunities and advantages of operating a financial institution in the United States comes the obligation for those businesses to do their part to help in driving out crime and corruption. As alleged, these defendants flouted that obligation and undertook to operate a purportedly ‘off-shore’ crypto exchange while willfully failing to implement and maintain even basic anti-money laundering policies. In so doing, they allegedly allowed BitMEX to operate as a platform in the shadows of the financial markets. Today’s indictment is another push by this Office and our partners at the FBI to bring platforms for money laundering into the light.”

FBI Assistant Director William F. Sweeney Jr. said, “As we allege here today, the four defendants, through their company’s BitMEX cryptocurrency trading platform, willfully violated the Bank Secrecy Act by evading U.S. anti-money laundering requirements. One defendant went as far as to brag the company incorporated in a jurisdiction outside the U.S. because bribing regulators in that jurisdiction cost just ‘a coconut.’ Thanks to the diligent work of our agents, analysts, and partners with the CFTC, they will soon learn the price of their alleged crimes will not be paid with tropical fruit, but rather could result in fines, restitution, and federal prison time."

BitMEX has been under investigation by U.S. authorities for the last 12 months, and in response, the exchange put in place KYC processes in April of this year to ensure that U.S. users could not access the platform.

However, this has not deterred authorities from pursuing charges. The CFTC said, “BitMEX touts itself as the world’s largest cryptocurrency derivatives platform in the world with billions of dollars’ worth of trading each day. Much of this trading volume and its profitability derives from its extensive access to United States markets and customers. Nevertheless, BitMEX has never been registered with the CFTC in any capacity and has not complied with the laws and regulations that are essential to the integrity and vitality of the U.S. markets.”

It’s important to note that the CFTC recognizes the potential of the digital asset space. “Digital assets hold great promise for our derivatives markets and for our economy,” said Chairman Heath P. Tarbert. “For the United States to be a global leader in this space, it is imperative that we root out illegal activity like that alleged in this case. New and innovative financial products can flourish only if there is market integrity. We can’t allow bad actors that break the law to gain an advantage over exchanges that are doing the right thing by complying with our rules.”

“As the CFTC has made clear, registration requirements are a cornerstone of the regulatory framework that protects Americans and U.S. financial markets,” added Division of Enforcement Director James McDonald. “Effective anti-money laundering procedures are among the fundamental requirements of intermediaries in the derivatives markets, whether in traditional products or in the growing digital asset market. This action shows the CFTC will continue to work vigilantly to protect the integrity of these markets.”

Hours after the charges were announced, BitMEX released a statement on its website. The statement says, “We strongly disagree with the U.S. government’s heavy-handed decision to bring these charges, and intend to defend the allegations vigorously. From our early days as a start-up, we have always sought to comply with applicable U.S. laws, as those laws were understood at the time and based on available guidance.”

In the meantime, the BitMEX platform appears to be operating normally and withdrawal requests are being processed.

The market response has been relatively muted. The open interest (BTC) on BitMEX hit a yearly low of 61,869 BTC as Bitmex traders unwound their positions, however, the global spot price of Bitcoin has remained steady at around $10,600.

Crypto commentators had mixed views on the significance and likely effects of the charges. Trader and economist Alex Kruger said that the news is short-term bearish, long-term bullish, arguing that a successful prosecution of BitMEX would increase the likelihood of a Bitcoin ETF. “Assume the CFTC & DOJ bring BitMEX down,” said Kruger. “The absence of BitMEX may then result in US exchanges and OTC desks becoming markets of significant size, sharply increasing the odds of the SEC approving an ETF.”

Ikigai Fund founder Travis Kling also sees the charges against BitMEX as positive for an eventual ETF approval. “The legal action taken against BitMEX today is undoubtedly a major step in the right direction of receiving approval for a Bitcoin ETF,” he tweeted. “The SEC pushed back against an ETF specifically for price manipulation on unregulated exchanges. BitMEX was the poster child for this. So to the extent that BitMEX goes away or its role is diminished, an ETF is more likely.”

Ari Paul, the founder of BlockTower Capital said, “The charges are serious and a half dozen other large exchanges are probably at risk of similar action. DeFi doesn’t win this short-term, but is very unlikely to face regulatory action in the next 6 months. Consider how long it took for these indictments. Defi projects probably need to worry in 6-12+ months. Derivatives traders were roughly flat, so relatively small effects from unwinding leverage. This will likely be the start of an ongoing string of negative regulatory headlines that scare new investors at the margin. But lots of value buyers are ready.”

The ramifications of the charges will be closely watched by the industry, but they are especially relevant to any crypto exchanges operating in legal grey areas. It will also have ramifications for the many DeFi protocols that have launched this year. Most DeFi protocols intend to move towards being decentralized enough that no entity or group of persons is solely responsible for the protocol and at risk of criminal charges. However, getting to that point is easier said than done.