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Giant cryptocurrency exchange BitMEX hit with criminal and civil money laundering charges

October 1, 2020, 7:04 PM UTC

The federal government filed civil and criminal charges on Thursday against one of the world’s largest cryptocurrency exchanges, BitMEX, and four of its top executives.

The charges, which may disrupt a key component of the global cryptocurrency market, sent most cryptocurrencies into an immediate selloff. Within two hours of the charges becoming public, the price of Bitcoin dropped more than 3%.

The civil charges against BitMEX and affiliated entities, filed by the Commodity Futures Trading Commission, allege that the company operated an unregistered trading platform and that it failed to implement anti–money laundering controls, such as checking the identities of people trading on the service.

New York federal prosecutors filed parallel criminal charges against BitMEX CEO Arthur Hayes, cofounder Benjamin Delo, chief technology officer Samuel Reed, and Gregory Dwyer, head of business development. The government similarly alleged that the executives had failed to establish anti-money laundering practices, such as collecting user identity information and reporting suspicious transactions, required under the Bank Secrecy Act. The charges are punishable by up to five years in prison, according to prosecutors.

Prosecutors said that Reed was arrested in Massachusetts on Thursday, while Hayes, Dwyer, and Delo remain at large.

“Registration requirements are a cornerstone of the regulatory framework that protects Americans and U.S. financial markets,” James McDonald, division of enforcement director for the Commodity Futures Trading Commission, or CFTC, said in a statement. “Effective anti–money laundering procedures are among the fundamental requirements of intermediaries in the derivatives markets, whether in traditional products or in the growing digital asset market.”

BitMEX, which is legally headquartered in the Indian Ocean archipelago Seychelles and primarily operates out of Hong Kong, is among the world’s largest cryptocurrency trading platforms by volume, processing close to $2 billion in trades per day. It’s best known for offering cryptocurrency derivatives, including futures, for digital tokens such as Bitcoin and Ether.

In its complaint, the CFTC said that since its founding in 2013, BitMEX has collected more than $1 billion in trading fees.

The CFTC alleges that much of BitMEX’s trading volume and profits are from U.S. customers, despite the fact that, like many other international cryptocurrency exchanges, Americans cannot legally use it. Visitors to the exchange’s website from American IP addresses receive a warning to that effect and are blocked from registering.

But prosecutors in the criminal case allege that the four defendants “knew of customers residing in the United States who continued to access BitMEX’s trading platform” despite that nominal prohibition. U.S. users are often able to access offshore cryptocurrency exchanges using VPN software, which masks a user’s location. Many overseas exchanges take no additional action to stop this behavior.

Further, as described in the 40-page civil complaint from the CFTC, BitMEX actively courted U.S. users despite being legally barred from serving them. That continued even after the platform reached a smaller settlement with U.S. regulators in 2016 over commodities trading violations. For example, according to the CFTC complaint, BitMEX hired marketing and customer service staff who worked in New York and New Jersey.

“We strongly disagree with the U.S. government’s heavy-handed decision to bring these charges,” BitMEX parent company HDR Global Trading Limited said in a statement, “and intend to defend the allegations vigorously. From our early days as a start-up, we have always sought to comply with applicable U.S. laws, as those laws were understood at the time and based on available guidance.”

In a separate statement, lawyers for Greg Dwyer said they were “surprised and dismayed” by the charges, and that Dwyer had “complied fully with the CFTC investigation and was never so much as invited to speak with prosecutors in the United States Attorney’s Office in Manhattan, always worked in good faith to comply with all applicable regulations and requirements, and helped BitMEX establish an international business that operated with the highest integrity. We will strongly contest these charges.”

Other global cryptocurrency exchanges have previously been targeted for money laundering violations. That includes at least one, Russia-based BTC-e, which was shut down by U.S. authorities after criminal and civil actions in 2017.

Nic Carter, a cryptocurrency analyst and venture investor, speculated following the announcement of charges that BitMEX’s operations and funds could be similarly frozen. That could create a huge disruption in global cryptocurrency markets: BitMEX holds roughly $2 billion worth of Bitcoin, or just over 1% of the total supply.