BitMEX founders indicted on criminal charges, sued by US regulator

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Federal prosecutors in the United States have finally taken action against BitMEX after it was reported in July 2019 that the Commodity Futures Trading Commission (CFTC) was investigating cryptocurrency exchange for illegally offering its services to U.S. customers.

Prosecutors announced that they have indicted BitMEX’s founders for violating the Bank Secrecy Act in failing to implement required anti-money laundering (AML) measures. The CFTC also lodged a civil suit under the Commodity Exchange Act (CEA) for the same and further violations under the CEA.

Criminal indictments

BitMEX founders Arthur Hayes, Benjamin Delo and Samuel Reed were all indicted under the Bank Secrecy Act, which requires financial institutions to comply with and actively implement AML measures. The indictment says that not only did the founders not fulfil these obligations, but they actively evaded them. Specifically, the founders are accused of “wilfully failing to establish, implement, and maintain an adequate anti-money laundering program.”

The indictment points to numerous instances of the founders evading U.S. authorities, including by incorporating in the Seychelles. The indictment alleges that the founders had identified the Seychelles as a jurisdiction where bribing the authorities was cheap to do.

The indictment includes two counts, one of violating the Act and another of conspiracy to violate the Act. Both charges carry a potential penalty of up to five years in prison.

CFTC civil suit

Even if its founders are not convicted, this might still spell the end of the embattled BitMEX. In tandem with the criminal indictments, the CFTC also launched a civil action against the BitMEX network of companies and its founders.

The formal counts on which the CFTC seeks relief are:

1. Executing futures transactions without registering with the CFTC
2. Offering illegal off-exchange commodity options
3. Failure to register as a futures commission merchant
4. Failure to register as a designated contract market/swap execution facility
5. Failure to supervise in relation to its lack of KYC and AML procedures and failing to ensure that its partners and employees lawfully handled BitMEX accounts
6. Failure to implement KYC and AML procedures as required under the CEA

The CFTC is out for blood: it wants the court to issue an injunction against BitMEX to prevent them from continuing their illegal activities. They’re also asking for the imposition of a penalty under the CEA (which allows for up to triple the amount of money gained via each violation), a wide range of remedies including a ban on BitMEX and its cofounders from trading or dealing in commodity interests and restitution plus interest to every customer whose funds were used by BitMEX in violation of the CEA.

Given that the CFTC has framed BitMEX’s earnings in the relevant period as over $1 billion dollars, BitMEX could be forced to pay out a crippling amount of money which, according to the CFTC, it was never legally entitled to in the first place.

The suit also accuses BitMEX of failing to implement anti-money laundering and know-your-customer policies. It not only says that BitMEX failed to meet its regulatory obligations as a derivatives platform, it actively evaded them, pointing to statements which show, among other things, BitMEX executives discussing KYC and AML legal requirements and their need to be based outside of the U.S.

Though BitMEX are not officially based in the U.S.—an argument BitMEX is likely to lean on when it responds to the suit—CFTC argues that the platform both solicits U.S. customers and conducts a substantial amount of its business in the U.S., with over half of it workforce residing in either New York of San Francisco. Given that shady exchanges are often difficult to pin down and intentionally arrange their business in order to avoid the attention of local regulators, this is a common line of defence when the law finally catches up to them. In fact, it is this practice for which Bloomberg had initially reported the CFTC had begun investigating BitMEX.

BitMEX to face the consequences

The CFTC is an independent federal agency responsible for regulating derivatives markets in the U.S. The CEA provides the statutory framework for the CFTC’s operation and it is under this Act that they bring the action.

Recently, the CFTC have been open minded towards digital assets, but both the CFTC and the CEA are heavily focused on maintaining the integrity of the market and protect both the market and its participants from, among other things, fraud and price manipulation—allegations to which BitMEX is no stranger. It should be unsurprising, then, that the CFTC has added itself to the growing list of agencies and litigators accusing the exchange of impropriety.

BitMEX has been battling off litigation for years, and the CFTC’s is merely the latest in a string of civil actions aimed at the platform, but the indictments represent a new low in BitMEX’s controversial history.

CoinGeek will be tracking the progress of both the civil suit and the indictment as it happens.