CFTC Charges BitMex With Illegally Operating Derivatives Exchange
Not being incorporated in the U.S. did not help the popular platform. CFTC Charges BitMex With Illegally Operating Derivatives Exchange
The United States Commodity Futures Trading Commission, or CFTC, has charged derivatives exchange BitMEX with operating an unregistered trading platform and violating Anti-Money Laundering regulations.
According to a statement released Thursday, the CFTC filed a civil enforcement action in the Southern District of New York against five entities and three individuals who allegedly own and operate the exchange.
The individuals charged include Arthur Hayes, publicly known as the CEO of BitMEX, as well as Ben Delo and Samuel Reed. The CFTC alleges that these individuals are owners and operators of BitMEX through a “maze of corporate entities.”
The aforementioned corporate entities, which are also cited as defendants in the case, are HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited (BitMEX).
The CFTC seeks disgorgement, or restitution of all “ill-gotten gains,” civil monetary penalties, permanent trading bans and injunctions against future violations.
The commission believes that BitMEX has illegally offered leveraged trading services to retail traders to the tune of $1 trillion in notional value since its inception in 2014. Despite its success, the CFTC believes that the exchange failed to take “the most basic compliance procedures.” These include failure to register with the commission and the lack of Know Your Customer and Anti-Money Laundering procedures.
In addition to civil charges, the U.S. attorney for the District of New York indicted Hayes, Delo, Reed and Gregory Dwyer, BitMEX’s head of business development, for violating and conspiring to violate the Bank Secrecy Act. If convicted, the executives could face a maximum of five years in prison and a $250,000 fine.
According to FBI Assistant Director William Sweeney, “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.’ Thanks to the diligent work of our agents, analysts, and partners with the CFTC, [the defendants] 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.”
A statement from the Department of Justice reveals that Reed, BitMEX’s chief technology officer, was arrested on Thursday morning in Massachusetts. Hayes, Delo and Dwyer “remain at large.”
Reports surfaced as early as July 2019 that the CFTC was investigating the exchange, in large part due to speculation that U.S. residents were able to use the platform despite a formal ban. BitMEX’s terms of service explicitly prohibit residents of the U.S., certain provinces in Canada, China and a host of other countries from using the exchange.
BitMex Denies CFTC And DoJ Allegations, Says Trading Will Continue
Despite criminal charges from the DOJ and at least one arrest of its leadership, Bitmex promises to continue operating as usual.
In a blog post published Thursday afternoon, Bitmex lashed out at charges that the Commodity Futures Trading Commission and Department of Justice filed against the exchange and its management earlier today.
Bitmex’s statement claimed that “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.”
What exactly “applicable U.S. laws” are will likely be central to the case. Bitmex has long maintained that it does not serve customers in the U.S., though others before the CFTC and DOJ have argued that this a lie. The CFTC’s case rests on Bitmex’s failure to register with the commission as a derivatives exchange in the U.S.
The DOJ, on the other hand, argues that Bitmex deliberately failed to implement effective know-your-customer and anti-money laundering programs, in violation of the Bank Secrecy Act. Both agencies assert that Bitmex had years of warning that their operations were illegal.
In its post denying the charges, Bitmex also assured users that trading will continue as usual. This is despite the fact that the DOJ arrested at least one of Bitmex’s founders, Samuel Reed, earlier today.
Tune in for Cointelegraph’s livestream on the Bitmex case starting tonight at 5:00 PM EST/21:00 UTC.
3 Reasons Why The CFTC Action Against BitMEX Will Not Crash Bitcoin Price
Bitcoin price declined by 4% after the CFTC revealed charges against BitMEX but BTC remains bullish in the long term.
Within the last few hours Bitcoin (BTC) price plummeted as the U.S. Commodities and Futures Trading Commission (CFTC) charged BitMEX with facilitating money laundering and operating an illegal cryptocurrency derivatives exchange. An even larger shock occurred as authorities announced the arrest of Samuel Reed, one of the co-founders of BitMEX.
BitMEX has been the most dominant Bitcoin futures exchange for a long time, at least until March 2020 when the massive $1 billion Black Thursday liquidation pulled the price below $3,750. In recent months, new competitors like Binance Futures and ByBit have significantly increased their market share.
Although the industry expected that charges against BitMEX would come one day, the arrest of Reed is an unexpected surprise.
Immediately after the news broke, BTC price plunged from $10,883 to $10,437, a 4.11% drop.
Fortunately, there are several factors that could aid the recovery of Bitcoin in the short term. The catalysts are the short duration of the current correction, Bitcoin’s previous reactions to regulatory threats, and the $10,500 support holding for the moment.
Bitcoin sees a rapid and intense fall in a short period
The price of Bitcoin declined by more than 4% in two hours, a level of volatility it does not typically see.
Usually, when Bitcoin falls with such intensity, it causes a cascade of liquidations. Since many trades in the futures market are highly leveraged, it leads to a loop of long contract liquidations, resulting in a larger fall.
This time around, open interest and the volume in the futures market is significantly lower. There are fewer overleveraged trades actively open in the market and this reduces the probability of a massive correction.
History Shows Regulation-Induced Downturns Are Points Of Recovery
Over the years the cryptocurrency market has endured many negative regulatory actions enacted by governments across the world, but, as Bitcoin researcher Vijay Boyapati says, BTC strongly recovered from each one.
While the charge against BitMEX could have a short-term bearish implication, in the longer term, Boyapati said a recovery is likely. He said:
“The Bitcoin market has always reacted negatively to major exchange issues or government confiscations. Historically this has always presented a great buying opportunity for Bitcoin. The Department of Justice action against BitMEX will be no different.”
$10,500 Remains A Key Defense Area
For most of August and September, the $10,500 level has acted as a strong level of support. Bitcoin dropped below it briefly at times but quickly rebounded above it and this shows traders are confident that Bitcoin price will be higher in the future.
Currently, traders are suggesting that the short-term trend of Bitcoin remains cautious but neutral in the medium term. Cryptocurrency trader Cantering Clark wrote:
“In the near term, I think this presents some great two-way trade opportunities. Ultimately, a week from now, it’s water under the bridge. This place has a short-term attention span and is quick to react.”
Michael van de Poppe, a full-time trader at the Amsterdam Stock Exchange, echoed a similar point of view. He stated:
“People are responding: ‘Don’t you know about the Bitmex news?’ Yeah, I do know. I also know about the tons of hacks that occurred on cryptocurrency exchanges, which became ‘the’ reason for a drop. I trade levels. News is 99% after due to inside info.”
At the time of writing, Bitcoin price continues to trade within a symmetrical triangle and the $10,500 level is holding as support. For traders who focus on support / resistance levels, $10,200 is an important price to watch.
If the price were to break below this level, many traders still expect the $10,000-$9,800 range to hold as support as buyers excitedly purchased dips to this level all throughout September.
BitMEX Hit By CFTC Enforcement Action for Illegal Crypto Derivatives Trading, AML Violations; Criminal Action Unsealed Simultaneously
BitMEX, a top cryptocurrency exchange that is big in the crypto derivatives sector, is the target of an enforcement action filed by the Commodity Futures Trading Commission (CFTC).
According to the CFTC, a civil enforcement action has been filed in the U.S. District Court for the Southern District of New York charging five entities and three individuals that own and operate the BitMEX with operating an unregistered trading platform and violating multiple CFTC regulations, including failing to implement required anti-money laundering (AML) procedures.
The CFTC says the case is brought in connection with the Division of Enforcement’s Digital Asset and Bank Secrecy Act Task Forces.
Named in the lawsuit include owners Arthur Hayes, Ben Delo, and Samuel Reed. The CFTC says these individuals operate BitMEX’s platform through a maze of corporate entities.
Also named as defendants in the complaint, are HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited (BitMEX).
The CFTC alleges 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.
Simultaneously, a criminal case was unsealed that targets BitMEX related to federal charges of violating the Bank Secrecy Act.
CFTC Chairman Heath P. Tarbert commented on the action:
“Digital assets hold great promise for our derivatives markets and for our economy. For 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.
Division of Enforcement Director James McDonald added:
“As the CFTC has made clear, registration requirements are a cornerstone of the regulatory framework that protects Americans and U.S. financial markets. 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. This action shows the CFTC will continue to work vigilantly to protect the integrity of these markets.”
CFTC Commissioner Brian D. Quintenz issued the following statement on the news:
“I commend the Division of Enforcement for their tireless efforts to ensure that market participants, especially exchanges and intermediaries, comply with the Commodity Exchange Act and CFTC Regulations and don’t skirt those rules to the disadvantage of U.S. customers and law-abiding market participants.
As a derivatives market regulator that supports innovation and ingenuity, it is imperative that we actively police trading platform activity and remove the bad apples so that legitimate, law-abiding marketplaces can flourish.
We will not stand for any participant brazenly flouting our rules. I look forward to the successful resolution of this matter and the beneficial impact it will have in this market by holding those who deliberately ignore the law accountable.”
The CFTC seeks 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 criminal action alleges that since 2014, BitMEX has illegally offered leveraged retail commodity transactions, futures, options, and swaps on cryptocurrencies including Bitcoin, Ether, and Litecoin, allowing traders to use leverage of up to 100 to 1 when entering into transactions on its platform.
Allegedly, BitMEX has facilitated cryptocurrency derivatives transactions with an aggregate notional value of trillions of dollars, and has earned fees of more than over $1 billion since beginning operations in 2014.
The complaint alleges that BitMEX has failed to implement the most basic compliance procedures required of financial institutions that impact U.S. markets. Much of the trading volume, and related transaction fees, derives from the operation of the platform from the U.S. and its extensive solicitation of and access to U.S. customers, the complaint alleges.
BitMEX Exchange Operator Shuffles Leadership In Wake Of Criminal Charges
BitMEX’s operator has allocated new leadership roles with immediate effect.
The operator of crypto derivatives exchange BitMEX has announced a sweep of its top leadership, after United States authorities charged its founders with failing to prevent money laundering and operating an unregistered trading platform illegally.
On Oct. 8, BitMEX’s operator, 100x Group, announced that the exchange’s three co-founders, all of whom were charged in the case, will no longer hold executive roles at 100x: Arthur Hayes, Samuel Reed and Ben Delo. Greg Dwyer, the fourth executive to be charged, will take a leave of absence from his role as head of business development.
To replace Hayes, 100x Group has announced a new interim CEO , Vivien Khoo. Khoo was until now 100x Group’s chief operating operator. She first joined the company in 2019, after serving as managing director, Asia-Pacific compliance, at Goldman Sachs, and has a background at the Hong Kong Securities and Futures Commission.
100x Group commercial director Ben Raddclyffe will take on expanded responsibilities for client relationship handling and oversight of financial products. Radclyffe has 20 years’ experience in finance and trading at Deutsche Bank, UBS and Tower Research Capital.
In an official comment, 100x Group chair David Wong has said the leadership “are well-placed to continue the growth and development of the 100x Group, including completion of the BitMEX User Verification Programme,” adding:
“It is business as usual for us and we thank all clients for their continued support.”
For more insight into the significant challenges that BitMEX’s “business as usual” could face, and its intersection with wider regulatory developments in crypto, you can catch up on Cointelegraph’s coverage of the case as it unfolded earlier this week.
BitMEX Founder And Ex-CTO Out On $5M Bail Bond Until Court Appearance
October has been a dramatic month for the top brass of BitMEX crypto derivatives exchange, whose founders face multiple charges from U.S. authorities.
BitMEX’s co-founder and former chief technical officer, Samuel Reed, has signed a $5 million unsecured appearance bond for his release from custody pending court proceedings.
Reed had been arrested by the United States Department of Justice in Massachusetts on Oct. 1 for flouting money laundering rules in violation of the Bank Secrecy Act, as well as illegally offering derivatives trading to U.S. retail customers.
Reed’s fellow co-founders and colleagues, Arthur Hayes, Ben Delo, and Gregory Dwyer, all indicted with the same charges, remain “at large,” according to the DoJ.
According to the court documents, which were approved on Oct. 1, Reed’s $5 million bond will be forfeited if he fails to appear in court, or does not surrender to serve any sentence the court may impose. Under the terms of the defendant’s agreement, Reed has deposited $500,000 in cash with the court.
In the DoJ charges, Reed, Hayes, Delo, and Dwyer were accused of operating 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.”
Alongside the DoJ’s charges, the U.S. Commodity Futures Trading Commission filed a civil enforcement action in the Southern District of New York against Reed, Hayes, Delo, and several BitMEX-affiliated corporate entities.
Yesterday, one of these entities, BitMEX operator 100x Group, announced that the three co-founders would no longer hold executive roles and reshuffled staff to replace them with immediate effect. Dwyer, who was implicated in the DoJ’s action, but not the CFTC’s, will be taking a leave of absence from his role as head of business development.
Following news of the charges, some crypto commentators have criticized BitMEX for hurting the industry’s reputation as a whole and potentially hardening regulators’ stance towards the sector.
BitMEX Operator Hires Chief Compliance Officer Amid US Criminal Charges
The hire comes after BitMEX’s founders were charged with failing to prevent money laundering and operating an unregistered trading platform illegally in the United States.
The operator of crypto derivatives exchange BitMEX, 100x Group, has hired a seasoned Anti-Money Laundering (AML) specialist, Malcolm Wright, as its chief compliance officer.
In an announcement on Oct. 12, the 100x emphasized Wright’s profile as the current chairman of the Advisory Council and AML Working Group at Global Digital Finance, and as a speaker covering key topics that include the Financial Action Task Force’s Recommendations for Virtual Asset Service Providers.
100X Group had last week reshuffled its top leadership, removing BitMEX’s co-founders Arthur Hayes, Samuel Reed and Ben Delo from executive roles. Hayes, Reed and Delo were all charged in a civil enforcement action from the United States Commodity Futures Trading Commission for operating an unregistered trading platform in the U.S. and violating AML regulations.
The Department of Justice has, in parallel, pressed criminal charges against the co-founders, as well as their colleague, Geoff Dwyer, who has subsequently taken a leave of absence from his role as head of business development.
Without explicit reference to the recent charges, 100x Group has officially said that “Malcolm’s appointment is a noteworthy milestone for us as we move towards completion of our User Verification Programme and further enhance our compliance function.”
Wright’s LinkedIn profile indicates he has spent almost two and a half years at Global Finance, in parallel to his roles as an advisory board member for London-based Commercial Passport KYC and as associate fellow at the Royal United Services Institute, which contributes to policy debates on financial crimes. He is also the founder of the Financial Crime Compliance advisory and a former chief compliance officer at Diginex and EQUOS.
100x Group faces a steep challenge in rehabilitating the exchange’s image. Commentators claim the charges against the BitMEX team have cast their shadow on the wider industry and could trigger a regulatory backlash against the crypto space.
BitMEX Charges Send ‘A Message’ To Global Exchanges: Crypto Mom
The SEC Commissioner said the recent legal action taken against BitMEX shows the need for the international industry to take AML regulations seriously.
United States Securities and Exchange Commissioner Hester Peirce — better known as “Crypto Mom” — believes the recent action against BitMEX may be a wake up call for crypto firms.
In an interview with “Unchained Podcast” on Oct. 13, Peirce told host Laura Shin that the recent charges laid against BitMEX by the U.S. Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) has put the international crypto industry on notice about U.S. anti-money laundering (AML) and know your customer (KYC) regulations.
“I think that the message has been coming to the industry fairly loud and clear on the AML/KYC front, and I’m sure it will continue,” said Pierce.
“It’s definitely sending a message to the crypto world that when there are U.S. users of a product or a service, there’s going to be enforcement of U.S. laws.”
On Oct.1, the CFTC filed a civil enforcement action against BitMEX and three of its executives for violating AML regulations. In addition, the DOJ filed criminal charges against four executives, including founder Arthur Hayes, for violating the Bank Secrecy Act. Hayes and two of his colleagues remain at large as of this writing, while BitMEX’s former chief technical officer, Samuel Reed, is out on bail.
Pierce also discussed the SEC’s apparent resistance to a Bitcoin exchange-traded fund (ETF). Such a product would offer a regulated means for institutional investors to access crypto without the risk of holding the underlying assets.
Though the Bermuda Stock Exchange announced it has approved a Bitcoin ETF in September, that’s outside the SEC’s jurisdiction. The Winklevoss twins, Wilshire Phoenix, and NYSE broker Arca have submitted proposals for Bitcoin ETFs with the SEC, and the commission has consistently rejected all of them over fears of market manipulation.
However, Crypto Mom believes an ETF should be “judged on its own merits” by the regulatory body. Bitcoin ETFs, she said, hold a lot of interest among investors and could be an easy way for people to get exposure to the cryptocurrency.
She Criticized The Commission’s Resistance To A Bitcoin ETF As Unfair To Investors:
“In the past I think [the SEC has] taken an approach that is a merit regulation approach and is saying ‘we don’t think that investors can make wise decisions for themselves so we’re just going to cut this product off from them altogether.’ It just doesn’t make any sense to me.”
Peirce started her second term at the SEC in August and will remain at the commission until 2025.
BitMEX Crypto Exchange Steps Up AML And Trade Surveillance Measures
New technology will help screen out bad actors, BitMEX says.
BitMEX, one of the world’s biggest Bitcoin (BTC) trading platforms, continues to strengthen its Anti-Money Laundering measures in the aftermath of its criminal charges in the United States.
According to a Nov. 12 blog post, BitMEX has partnered with software and compliance firm Eventus Systems to improve its trade surveillance and AML transaction capabilities.
Per the announcement, Eventus Validus‘ technology will be integrated into BitMEX’s existing trade surveillance and AML processes in order to provide a “safe and secure trading environment” for its users. “We will be able to more efficiently screen out bad actors and increase proactive monitoring for unauthorized trading activity on the BitMEX platform,” the blog post reads.
Malcolm Wright, BitMEX’s newly hired chief compliance officer, noted that the selection of Eventus is an important part of the company’s plans to further develop their compliance capabilities:
“Choosing Eventus is part of our ongoing commitment to achieve this vision as we execute signature initiatives like our User Verification Programme.”
BitMEX’s latest AML move is another effort to step up its compliance processes as it faces criminal charges by the U.S. Commodity Futures Trading Commission.
On Oct. 1, the CFTC charged derivatives exchange BitMEX with operating an unregistered trading platform and violating AML regulations. Alongside the CFTC’s charges, the Department of Justice also argued that BitMEX failed to implement Know Your Customer and AML programs, violating the Bank Secrecy Act.
BitMEX’s executives subsequently denied the allegations, claiming that it will continue operating as usual, but the exchange has hired a new chief compliance officer and pushed a new KYC verification program. Users that do not complete the KYC program will not be able to withdraw funds from BitMEX after Dec. 4, 2020.
Holding Group Behind Crypto Exchange BitMEX Names Höptner CEO
The holding group behind BitMEX has appointed Alexander Höptner as chief executive officer, two months after the founders of the cryptocurrency exchange were charged with skirting U.S. laws that prevent money laundering.
Höptner, 50, will lead 100x Group, the holding group for BitMEX owner HDR Global Trading Ltd., according to a statement from the company. He joins from Boerse Stuttgart GmbH and Euwax AG, where he was CEO.
“Crypto is a very quickly developing market,” Höptner said in an interview, adding growing adoption and institutional interest as well as the prospect of regulatory change make the sector interesting for “a classical exchange guy like me.”
Höptner’s appointment comes at a time when the cryptocurrency market is enjoying a bull run. The Bitcoin price has just set a fresh record, and the broader Bloomberg Galaxy Crypto Index is up more than 200% year-to-date.
Höptner, who earlier worked at Deutsche Boerse AG for about 15 years, is likely going to be based in Singapore.
After Know Your Customer Debacle, BitMEX Reports 100% Of Users Are Verified
Controversial crypto derivatives trading platform BitMEX says its entire user base has completed the obligatory Know Your Customer process.
BitMEX has announced the completion of its user verification program, becoming one of the largest crypto trading platforms with a fully certified customer base.
As part of the process to verify its entire use base, BitMEX says open positions held by unverified accounts have been closed.
Back in Aug. 2020, the platform revealed plans to undertake a comprehensive user identity verification exercise. The move came amid increasing regulatory scrutiny over the platform’s notoriously lax Know Your Customer, or KYC, policies.
As previously reported by Cointelegraph, the United States Commodity Futures Trading Commission charged BitMEX for illegally operating a derivatives trading desk. The New York District Attorney also brought up criminal charges against some of the company’s principal actors including former CEO Arthur Hayes.
In response, BitMEX announced plans to revamp its Anti-Money Laundering and trade surveillance protocols in November 2020. According to Thursday’s announcement, user verification has been mandatory for deposit, trading and withdrawal functions since early December 2020.
As part of the announcement, BitMEX also noted that $100 billion has been traded on the platform since achieving full user verification status.
BitMEX CEO Alexander Höptner said that the move was a major step in becoming a high-performance platform:
“It places us in an advantageous position to capitalise on the surge of users – both retail and institutional – who are seeking a platform on which to trade crypto derivatives confidently without sacrificing security, liquidity, or performance. It marks a bright start for BitMEX in 2021.”
Höptner, the former CEO of German stock exchange Borse Stuttgart GmbH replaced Hayes as BitMEX CEO back in Dec. 2020.
BitMEX transitioning to full user KYC status offers a glimpse of government regulators’ increasing level of scrutiny for crypto exchanges. Indeed, gone are the days of the cryptocurrency “Wild West” where platforms operated with little to no oversight.
With regulators demanding stricter compliance measures, attention appears to be shifting to decentralized exchanges, or DEXs, which saw a 1,000% spike in trading volumes back in Q3 2020.
Some of these decentralized platforms are now offering margin trading with the added advantage of zero KYC steps to ensure anonymity. Noncustodial crypto exchange ShapeShift has even transitioned to becoming a DEX onramp, ditching KYC for its users in the process.
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