Bitcoin exchange owners charged by CFTC and US DoJ with various federal violations

By Christine Duhaime | October 2nd, 2020

The Commodities Futures Trading Commission (“CFTC“) today filed a civil enforcement action in the SDNY against the owners – operators of a digital currency exchange called BitMEX, for alleged violations of the Commodity Exchange Act. BitMEX processed trillions of dollars in transactions, received over US$11 billion in Bitcoin and made more than US$1 billion in fees. The CRTC says that BitMEX has customers that are US residents and that it transacted using the US financial system.

In a parallel proceeding, the US Attorney for the Southern District of New York unsealed an indictment against the three owners of BitMEX, namely Arthur Hayes, Ben Delo and Samuel Reed, for alleged violations of the Bank Secrecy Act.

With respect to the CFTC, it says BitMEX solicited and sold swaps, futures options and futures contracts and derivatives in digital currencies through their online platform, without being registered to sell such financial products, and further, that it did not have anti-money laundering procedures in place to protect the financial system.

The CFTC alleges, for example, that BitMEX altered on-boarding records of a US resident to “Canada” in order to have records that did not reflect the on-boarding of US residents, and that it was searching for a “favourable jurisdiction” to operate from (Isle of Man, Jersey and Gibraltar (typically used by illegal online gambling websites)).

BitMEX corporate entities HDR Global Trading Limited, 100x Holdings Limited, ABS Global Trading Limited, Shine Effort Inc, Limited, and HDR Global Services (Bermuda) Limited, were named as defendants in the CFTC filing. The CFTC says that as opposed to having the entities operate distinctly with different functions, all the corporate entities operated as one digital currency platform, sharing the same resources, personnel and one email address. The CFTC pleadings set out in length, the ways in which BitMEX attorned to the jurisdiction of the US, perhaps anticipating a defence argument of a lack of jurisdiction.

With respect to the indictment in the SDNY, Hayes, Delo and Reed, as well as Gregory Dwyer, were indicted for a failure to implement and maintain an adequate anti-money laundering program, and conspiracy to evade anti-money laundering legislation.

The indictment states that BitMEX set up a paper company in the Seychelles in part because they said that it costs “just a coconut” to bribe regulators in that country.

From its inception in 2014 to the date of the indictment, BitMEX did not file one SAR with an FIU anywhere in the world, and accepted financial transactions from Iran irrespective of sanctions. Further, BitMEX implemented TOR access to allow users to trade on BitMEX anonymously using the darknet.

The indictment states that one of the executives lied to US federal investigators, and in order to attract attention to the exchange in the US for client growth, rented three Lamborghinis for the 2018 Consensus Conference in New York and left them parked on the street for media attention – a move that BitMEX referred to as a “stunt”.

Hayes discusses selling Bitcoin derivatives on CNBC (Source: YouTube).

BitMEX’s CEO’s last point of reference was Vietnam.

It is expected that the US government will file to forfeit assets at BitMEX, currently at US$2 billion, otherwise there is a risk of liquidation.

In announcing the indictment today, the FBI Assistant Director William F. Sweeney Jr. said that the defendants will soon learn that the price of their alleged crimes will not be paid with tropical fruit but rather could result in prison time.

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