BitMEX lawsuits cast shadow on digital currency trading platform

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Digital currency exchange and trading platform BitMEX has been on the receiving end of two lawsuits within the last six or so months, and they cast a long shadow over one of the largest operators in the sector.

The first came in December 2019, when BitMEX was sued by early investors Frank Amato and RGB Coin over equity that was allegedly promised to them by BitMEX in the early stages of investment. The equity was never granted.

A new, separate suit was filed this month, accusing BitMEX of deliberate digital currency manipulation, among allegations of racketeering, wire fraud, money laundering and more in relation to the construction and operation of their BitMEX trading platform.

BMA LLC VS HDR Global Trading (BitMEX) et al

The suit was brought by BMA LLC, apparently a one-man band based out of Puerto Rico and which has filed similar suits against other companies over the past six months, including against blockchain company Ripple.

According to the complaint, BitMEX not only facilitated manipulation of digital currency markets, but was built in a way to specifically benefit from such manipulation. A core offering of BitMEX has been their highly leveraged trades (up to 100x). In other words, users can effectively trade in a hundred times as many bitcoins as they actually need to put up as collateral, allowing traders the chance to profit at a high level from minor fluctuations in digital currency prices in exchange for the much higher chance that they would lose everything based on even smaller price fluctuations.

It accuses BitMEX of deliberately basing the index price of its futures offerings on smaller, illiquid exchanges that it could easily manipulate, giving it increased ability to gear leveraged trades in their favour.

The suit also alleges that BitMEX surreptitiously trades against its clients, citing their only-recently updated terms of service which now disclose that BitMEX engages in a for-profit trading business, and uses the products on BitMEX to do so—unbeknownst to other traders on the platform.

The suit characterizes the behaviour as unlawful, often criminal, and giving rise to 13 causes of action:

• Racketeering by way of money laundering, unlicensed money transmitting, wire fraud and interstate transportation of stolen property, with the intention of defrauding BMA and other cryptocurrency traders
• Conspiracy to commit racketeering with the profits of the defendants illegal enterprise
• Use of a manipulative or deceptive device in the sale of any commodity in interstate commerce
• Price manipulation of Bitcoin futures and cash Bitcoin
• Responsibility for the manipulative acts of their employees
• Aiding and abetting the manipulation of Bitcoin futures and cash Bitcoin
• Negligence in its duty to prevent purely economic loss to traders, by failing to maintain a functional cryptocurrency derivatives marketplace
• Fraud arising from the market manipulation
• Civil conspiracy to defraud traders on their platform
• Unfair business practices in contravention of California’s competition law (Business and Professions Code)
• Unjust enrichment at the expense of BMA
• Constructive trust, alleging that the defendants have no legal claim to the money collected, instead that it is being held in trust for BMA
• Count 13 demands a full accounting of the defendants’ receipts and disbursements in connection with the market manipulation alleged in the suit

On all of these counts, BMA is asking the Court for compensatory damages, treble damages, attorneys fees and exemplary and punitive damages (punitive damages to the tune of $50,000,000).

It will now be down to BitMEX to respond to the allegations. From their perspective, they are operating a legal trading platform, legally unregistered in the United States because it officially does not offer its derivative products to American customers. It will dismiss the accusations of insider trading by pointing to their admission in their terms of service that it does engage in for-profit trading on the platform, but the uncomfortable fact remains that this was only added at a late stage, in 2018.

Lawsuit exposes BitMEX grey area

The suit will further test the apparent grey area that BitMEX has been operating in since its founding in 2014. BitMEX does not hold a licence to provide its services to U.S.-based citizens, and officially, U.S. citizens cannot use the platform.

The suit alleges that this isn’t the way BitMEX operates in practice, pointing to the lack of any real controls on who can use the platform and citing figures which suggest that American traders account for 15% of the site’s trading traffic—not to mention the fact that virtually all of BitMEX’s operations are based in and around California.

While undoubtedly good for BitMEX, operating (or purporting to operate) outside the reach of U.S. regulators leaves U.S. traders without protection. This grey area has already drawn the ire of U.S. regulators: it was reported by Bloomberg in July of 2019 that the Commodity Futures Trading Commission (CFTC) was investigating BitMEX, particularly whether they were in breach of CFTC rules by allowing Americans to trade on the platform. The CFTC has yet to announce any resolution to the investigation.

Whether the Court ultimately accepts BMA’s long list of allegations remains to be seen.

Digital currency’s detractors often cite particular vulnerability to market manipulation of the sort BitMEX is currently being accused, and if accepted by the Court, the allegations expose an ugly side of crypto trading that is in desperate need of regulation. Whether or not BMA gets the result they want, however, it will be an opportunity for the U.S. courts to comment on the general status of businesses like BitMEX, and perhaps cut back on the grey area in which they are operating.