To some who have just skimmed the headlines around the BitMEX exchange, the legal activity and allegations around the firm seem a bit overblown. It seems like just yesterday, people were happily trading on the platform. Then all of a sudden, some of the top players, Arthur Hayes and Benjamin Delo et. al., are in handcuffs. What happened?
An indictment filed by prosecutors in the Southern District of New York against BitMEX CEO Arthur Hayes and crew contains one count of violation of the Bank Secrecy Act. But that one count matters.
Regulators are asserting that since BitMEX has been involved in crypto futures trading as a futures commission merchant, it is legally bound to comply with the Bank Secrecy Act, which is made, in the language of the indictment, to “prevent, attack and prosecute international money laundering and the financing of terrorism.”
As part of this compliance, AML/KYC (anti-money-laundering and know-your-customer) rules need to be in place.
But hold on a minute – how can you be indicted for something you didn’t do?
Willful Non-Compliance
In the court indictment and related materials, US SDNY agents detail why the BitMEX operation was so egregiously culpable.
First and foremost, they have comments from Arthur Hayes himself talking about how easy it is to bribe regulators in foreign places.
“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.’” FBI Assistant Director William F. Sweeney Jr. stated in an October 1 press release announcing the indictment, before slipping this in for the cameras: “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.”
Problems with U.S. Jurisdiction on BitMEX Operations
Here’s another tidbit that you see in the formal indictment.
The prosecution spells out that BitMEX “purportedly withdrew” from the U.S. market in September 2015.
That means any service of American customers after that time is deceptive and liable to all of that non-compliance that regulators mention.
There’s also the strategic incorporation in the Seychelles, which Arthur Hayes was supposedly bragging about prior to the indictment. All of that remains fodder for prosecutors to tighten the snare.
Clear Violations
The law has pretty clear criteria for AML/KYC, and this stuff has been around for a while, so it would be hard for BitMEX people to argue that they had no idea they were supposed to be doing these things. There’s also a specific charge in the indictment that BitMEX failed to provide suspicious activity reports or SARs, which are pretty standard and vital to compliance in that sector.
In addition, there are specific descriptions of money laundering activities like this one
“In or about May 2018, Arthur Hayes, the defendant, was notified of claims that BitMEX was being used to launder the proceeds of a cryptocurrency hack. BitMEX did not implement a formal AML policy in response to this notification. Further internal BitMEX reports identify that customers located in Iran, who are subject to U.S. sanctions, traded on the platform from at least in or about November 2017 through at least in or about April 2018…”
All of this paints a pretty dire picture for the leaders of the BitMEX exchange and sends traders fleeing for safer waters.
But sometimes even when they do find another exchange, they may find their funds all locked up.
The case with OKEx
The case with OKEx maybe a little less clear-cut, but one of the major contentions they are facing is that the exchange shut down withdrawals suddenly in October. That basically amounts to holding traders’ assets and resources hostage. Top brass explained that it was because one of their key holders was in law enforcement custody, but that didn’t cut much ice with regulators and other observers who pointed out the platform’s shortcomings in both policy and compliance.
Finding A Safe Place
So with all of these investors pulling their money out of equities and even gold, and running to crypto, where can they go that’s safe from this kind of liability?
Various exchanges have set up compliant systems that are licensed and well regulated for engaging in crypto and crypto derivatives trading. Recent interviews with Jon Squires at Currency.com show how that platform has set up safe crypto transactions with many different asset pairs available and low fees. The exchange obtained a license from the Gibraltar Financial Services Commission earlier this year.
So the bottom line is that even though regulation can be tricky at times, this can be done. It’s a question of whether those who are facilitating these exchanges have the appetite, and the will to do it.
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