NYU Prof. Nouriel Roubini and BitMEX CEO Arthur Hayes, as they appeared in a digital flyer (via BitMEX).
Cryptocurrencies,  United States

Report: CFTC investigating BitMEX for trading violations

Potential suit comes days after CEO Arthur Hayes tangled with NYU professor and cryptocurrency critic Nouriel Roubini

On Tuesday, NYU Professor and prominent cryptocurrency critic Nouriel Roubini penned a column titled “The Great Crypto Heist,” in which he savaged a frequent target, cryptocurrency derivatives platform BitMEX, as both corrupt and crooked.

It turns out the U.S. Commodity Trading Futures Commission (CFTC) may have been listening. 

According to a July 19 Bloomberg report citing anonymous sources, the CFTC has spent several months investigating the Seychelles-based exchange for reportedly doing business with U.S. residents, which is illegal. 

The agency regulates cryptocurrencies as commodities, and BitMEX is not registered in the U.S. The first firm to win a CFTC license for futures trading for U.S. investors was LedgerX, in late June.

While BitMEX bans U.S. customers all it takes to get around that is a virtual private network (VPN) to disguise your country of origin, Roubini said, adding that in terms of U.S. “know your customer” (KYC) rules are concerned, “[t]his lack of due diligence constitutes a brazen violation of securities laws and regulations.”

Roubini recently went head to head with BitMEX CEO Arthur Hayes during the Asia Blockchain Summit in Taipei on July 3. Roubini had to launch a nearly two-week Twitter campaign to push Hayes into release the full video of “The Tangle in Taipei.”

Both at that event and in his July 16 post, Roubini accused BitMEX of a litany of bad practices, starting with being a source of money laundering and “front running” customers using its internal trading desk. This is the illegal practice of a broker making bets based on knowledge of big, potentially market-moving client trade orders before they have been executed.

Roubini also slammed BitMEX’s policy of allowing cryptocurrency futures trades with a margin of 100 to 1, meaning you can bet $100 for every $1 you put up. This makes even small price fluctuations against your bet capable of triggering a margin call that can wipe out an investment. 

A day after Roubini’s post, Hayes told Bloomberg, that the company “provides safe, fast, professional and liquid ways for those who see the potential of crypto and to trade and hedge cryptocurrency risk.” 

As for the more serious accusations, “We continue to monitor all legal and regulatory developments around the world and will comply with all applicable laws and regulations,” Hayes added. “We reject any allegations of criminality, manipulation or unfair treatment of our customers, who are at the center of everything we do.”

BitMEX is currently the No. 2 exchange on CoinMarketCap by reported volume, but does not make the top 100 by adjusted volume, which seeks to filter out wash trades and artificially inflated trade volume.

In March, Bitwise Asset Management filed an in-depth study of the cryptocurrency market with the SEC in an attempt to win approval to create a bitcoin (BTC) exchange traded fund (ETF). In it, Bitwise claimed that 95% of bitcoin trades on CoinMarketCap are “fake and/or non-economic in nature,” citing wash trading as a prime abuse. It said it found 10 honest exchanges out of 81 studied. BitMEX was not one of those. 

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.