U.S. Government Drops Hammer on BitMEX

Posted on 10/01/2020

U.S. regulators are cracking down on off-shore cryptocurrency exchanges. The U.S. Department of Justice disclosed the indictments of Arthur Hayes, Benjamin Delo, Samuel Reed, and Gregory Dwyer, charging the four with 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 is assigned to United States District Judge John G. Koeltl. Samuel Reed was arrested in Massachusetts this morning, and will be presented in federal court there. Arthur Hayes (age 34 of Buffalo, New York), Benjamin Delo (age 36 from United Kingdom), and Gregory Dwyer (age 37 of Australia and Bermuda) remain at large. The FBI claims that BitMEX crypto-currency trading platform, willfully violated the Bank Secrecy Act by evading U.S. anti-money laundering requirements. Each of the four are charged with one count of violating the Bank Secrecy Act, and one count of conspiring to violate the Bank Secrecy Act, each of which carries a maximum penalty of five years in prison.

BitMEX touts itself as the world’s largest cryptocurrency derivatives platform. BitMEX’s platform has received more than US$ 11 billion in bitcoin deposits and made more than US$ 1 billion in fees, while conducting significant aspects of its business from the U.S. and accepting orders and funds from U.S. customers. BitMEX had at least 85,000 user accounts.

According to the allegations in the Indictment[1] from the DOJ: “HAYES, DELO, and REED founded BitMEX in or about 2014, and DWYER became BitMEX’s first employee in 2015 and later its head of business development. BitMEX, which has long serviced and solicited business from U.S. traders, was required to register with the Commodity Futures Trading Commission (“CFTC”) and to establish and maintain an adequate AML program. AML programs ensure that financial institutions, such as BitMEX, are not used for illicit purposes, including money laundering.

Despite those obligations, HAYES, DELO, REED, and DWYER knew by no later than in or about September 2015 that, because BitMEX served U.S. customers, it was required to implement an AML program that included a “know your customer” or “KYC” component, but chose to flout those requirements. Indeed, each of the defendants knew of customers residing in the United States who continued to access BitMEX’s trading platform through at least in or about 2018, and that BitMEX policies nominally in place to prevent such trading were toothless or easily overridden to serve BitMEX’s bottom line goal of obtaining revenue through the U.S. market without regard to U.S. regulation. While knowing of BitMEX’s obligation to implement AML and KYC programs because BitMEX was serving U.S. customers, HAYES, DELO, REED, and DWYER took affirmative steps purportedly designed to exempt BitMEX from the application of U.S. laws such as AML and KYC requirements. For example, the defendants caused BitMEX and its parent corporations formally to incorporate in the Seychelles, a jurisdiction they believed had less stringent regulation and from which they could still serve U.S. customers without performing AML and KYC. Indeed, in or about July 2019, HAYES bragged that the Seychelles was a more friendly jurisdiction for BitMEX because it cost less to bribe Seychellois authorities – just “a coconut” – than it would cost to bribe regulators in the United States and elsewhere.”

CFTC Complaint

At the same time, the Commodity Futures Trading Commission (CFTC) 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. This case is brought in connection with the Division of Enforcement’s Digital Asset and Bank Secrecy Act Task Forces. These entities, also named as defendants in the complaint, are HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited (BitMEX). In its continuing litigation against the defendants, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, restitution for the benefit of customers, permanent registration and trading bans, and a permanent injunction from future violations of the Commodity Exchange Act (CEA).

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