Comment: BitMEX and its legal troubles with the US authorities

Our Correspondent

In an op-ed titled “The Great Crypto Heist” published in July 2019, economist Nouriel Roubini accused one of the world’s most successful crypto exchanges BitMEX for engaging in “systematic illegal activities.”

His accusation followed a heated debate between Roubini and Arthur Hayes, the co-founder and chief executive of the Seychelles islands-based BitMEX, the previous month at Asia Blockchain Summit in Taipei.

Hong Kong-based crypto derivatives exchange allows clients to trade cryptocurrencies such as Bitcoin up to 100X leverage.

In the article, the economist popularly known as Dr. Doom wrote that “crooks, criminals, and grifters are a fact of life, and no financial system can serve its proper purpose unless investors are protected from them.” He even went so far as to call Hayes a “thug.”

Despite all the scam in the industry, he said, financial watchdogs and law enforcement agencies “remain asleep at the wheel.”

Not anymore. The US law enforcement agencies said on Friday that they have filed criminal charges against BitMEX for evading anti-money laundering rules, for violating the Bank Secrecy Act and allowing US customers to trade crypto derivatives.

Besides the chief executive Hayes, 34, three others named in the filing are chief operating officer Ben Delo, 36, and chief technology officer Samuel Reed, 31, as well as its first employee Gregory Dwyer, 37. Reed has already been arrested in the US.

They have been charged with violating the federal Bank Secrecy Act and conspiracy to violate the act by “willfully failing to establish, implement, and maintain an adequate anti-money laundering (“AML”) program.”

The Commodities and Futures Trading Commission (CFTC) filed a separate lawsuit to halt BitMEX’s US commodity derivative business, alleging that “BitMEX’s platform has received more than US$11 billion in bitcoin deposits and made more than US$1 billion in fees, while conducting significant aspects of its business from the U.S. and accepting orders and funds from US customers.”

In response to the charges, BitMEX’’s parent company HDR Global Trading Ltd said it “disagrees with the US government’s heavy-handed decision to bring these charges, and intend to defend the allegations vigorously.”

BitMEX is not alone in benefiting from the crypto boom. Many thirty-somethings in the crypto space have made tons of money with the growing popularity of Bitcoin and other cryptocurrencies, which still remain largely unregulated.

Not all of them are thugs and criminals as alleged by the economist Roubini.

For instance, Chief Operating Officer Ben Delo, who has become the UK’s youngest billionaire, is giving away part of his fortune, including £5 million Sterling to his former college at Oxford. He also signed The Giving Pledge, a program led by Bill Gates and Warren Buffet, which entails giving away at least half of his wealth.

While it has offices in Hong Kong and the US, the company’s base in Seychelles might have something do with the fact that Hayes was allegedly captured on video as saying it only takes just a coconut to bribe officials there.

Success breeds ego but then again BitMEX is no longer a startup in a co-sharing office. It earned much local press coverage in Hong Kong when it moved into probably one of the city’s most expensive offices, paying US$600,000 in monthly rent in the glitzy Cheung Kong Center owned by Hong Kong tycoon Lee Ka-shing.

BitMEX and its confreres have benefitted not just from the boom in the crypto markets but from the general skepticism and disenchantment towards mainstream finance following the 2008 global financial crisis.

Like any new innovation, it has also benefitted from the lack of regulation. The combination of factors spawned the Wild West-like, alternative financial system that existed outside the conventional banking system, often known as “decentralized finance” or DeFi.  In other words, old rules do not apply to them but the new rules are yet to be written.

Existing financial regulations are not designed to regulate crypto exchanges due to the novelty of the cryptocurrencies – often called virtual assets or crypto assets – that defy definition.

What the regulators must do now is to at least force them to comply with the regulations governing money laundering and terrorist financing as well as know-your-customer (KYC) rules.

That’s precisely the Achilles Heel of Bitcoin brokers like BitMEX with regulators hitting where it hurts them most.

Some jurisdictions including Hong Kong over the past two years have tweaked the securities laws to give crypto exchanges an opt-in clause whereby they can be licensed like any other financial institution. The Hong Kong Securities and Futures Commission, for instance, has given approval in principle to an exchange known as OSL for “virtual asset automated trading and brokerage licenses.”

The question is how many of the crypto exchanges will play it safe and submit to regulations or prepare to pay millions of dollars in legal fees when the regulators start knocking at their doors.

Some skeptics believe that the US authorities are simply extending their long-arm jurisdiction.

But the actions by the US authorities should serve as a wake-up call to the crypto industry, which is that the regulators are watching and won’t shy away from punishing them if the need be.

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