BitMEX CEO Arthur Hayes is facing up to 10 years in jail.
Hayes, along with the Seychelles-based cryptocurrency derivatives exchange’s co-founders Benjamin Delo, Samuel Reed, and head of business development Gregory Dwyer have been charged with violating the Bank Secrecy Act and conspiring to violate the Bank Secrecy Act by failing to put sufficient anti-money-laundering safeguards in place.
Each charge carries a maximum penalty of five years in prison.
Reed was arrested in Massachusetts on Oct. 1, while warrants have been issued for Hayes, Delo, and Dwyer.
Simultaneously, the Commodity Futures Trading Commission (CFTC) filed a civil suit charging Hayes, Delo, and Reed with “operating an unregistered trading platform and violating multiple CFTC regulations, including failing to implement required anti-money laundering procedures.”
In that case, the CFTC said in a release that BitMEX’s platform “has received more than $11 billion in bitcoin deposits and made more than $1 billion in fees, while conducting significant aspects of its business from the U.S. and accepting orders and funds from U.S. customers.”
The agency is seeking “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).”
The big house
“As we allege here today, the four defendants, through their company’s BitMEX crypto-currency trading platform, willfully violated the Bank Secrecy Act by evading U.S. anti-money laundering requirements,” said FBI Assistant Director William F. Sweeney Jr. He added:
“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.’”
Praising the “diligent work of our agents, analysts, and partners with the CFTC,” Sweeny said of the four defendants:
[T]hey 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.”
Prominent crypto industry attorney Stephen Palley pointed out on Twitter that “each individual BSA violation carries a penalty of up to five years in prison, and it sounds like there [are] thousands of alleged violations here.”
He added, “so I would not rule out prison.”
His partner at the law firm Anderson Kill, Preston Byrne, agreed, tweeting “BitMex isn’t going to be able to settle this with a slap on the wrist and a fine.”
Palley put the civil damages at “potentially billions of dollars.”
Ominously, Byrne added, “’Decentralized’ MSBs should be bricking it today,” referring to money service businesses.
Offshore isn’t off law
The government took no notice at all of BitMEX’s status as an offshore exchange, or of its prominent notice that U.S. citizens are barred from depositing or trading on BitMEX.
Claiming that BitMEX “has long serviced and solicited business from U.S. traders,” the office of the U.S. Attorney for the Southern District of New York said in a statement that BitMEX knew it was required to implement a strong AML procedure, including know-your-customer tools. “Instead it chose to flout these requirements.”
All four 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,” it alleged. “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.”
Instead, the four “undertook to operate a purportedly ‘off-shore’ crypto exchange while willfully failing to implement and maintain even basic anti-money laundering policies. In so doing, they allegedly allowed BitMEX to operate as a platform in the shadows of the financial markets,” said Acting Manhattan U.S. Attorney Audrey Strauss.
Palley commented, “Now, maybe you think that because they are offshore the feds aren’t going to have any luck dragging these folks into the US.” He added:
“Good luck with that, seriously.”
One glimpse of a silver lining came from CFTC Chair Heath Tarbert, who said, “Digital assets hold great promise for our derivatives markets and for our economy.”
Pointing to the industry’s potential, he added, “[f]or the United States to be a global leader in this space, it is imperative that we root out illegal activity like that alleged in this case. New and innovative financial products can flourish only if there is market integrity. We can’t allow bad actors that break the law to gain an advantage over exchanges that are doing the right thing by complying with our rules.”
Along with Hayes and his fellow defendants, the CFTC is suing five companies through which it said BitMEX is controlled. These are HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited (BitMEX).