Crypto Exchange BitMEX Under Investigation by CFTC: Bloomberg (#GotBitcoin?)
Seychelles-based cryptocurrency exchange BitMEX is reportedly being probed by the U.S. Commodity Futures Trading Commission (CFTC). Crypto Exchange BitMEX Under Investigation by CFTC: Bloomberg (#GotBitcoin?)
The news appeared in brief on Bloomberg Terminal soon before press time on Friday. That was soon followed by a report from Bloomberg citing sources who said the regulator is investigating whether the exchange has allowed U.S. traders to use its platform.
The CFTC considers cryptocurrencies like bitcoin commodities and has jurisdiction over derivatives such as futures based on cryptos. As such, BitMEX would need to be registered with the agency to allow Americans to trade such products in the U.S.
According to its website, BitMEX offers trading of cryptocurrencies with up to 100-times leverage and other products such as futures and swaps.
Bloomberg said the CFTC investigation is “ongoing” and may not lead to misconduct allegations.
The report adds that the CFTC declined to comment when contacted.
Just days ago, noted economist and crypto skeptic Nouriel Roubini attacked BitMEX, saying it “may be openly involved in systematic illegality,” again according to Bloomberg.
Roubini argued that, in providing such high leverage, the platform is exposing traders to too much risk.
Reportedly citing an anonymous blog, he also allaged that the exchange trades against its own clients and “skirts” anti-money laundering regulations.
BitMEX CEO Arthur Hayes has previously said it never trades against clients.
Hayes Also Told Bloomberg This Week:
“We continue to monitor all legal and regulatory developments around the world and will comply with all applicable laws and regulations; we reject any allegations of criminality, manipulation or unfair treatment of our customers, who are at the center of everything we do.”
Hackers Take Over BitMEX Twitter, But Customer Funds Reportedly Safe
Hackers took over the Twitter account of cryptocurrency exchange BitMEX after the previously reported leak of customer email details on Nov. 1. The exchange claims that, although its Twitter account was hacked, all user funds are safe.
“Hackers” tease individual IDs and take over BitMEX Twitter
Since the update was published, hackers briefly gained control of the BitMEX Twitter account, posting two messages which were swiftly deleted.
The first message read “Take your BTC and run. Last day for withdrawals,” followed by another reading simply, “Hacked.”
Following this a Twitter account named “Bitmexdatabaseleak” sprang up, leaking individual user IDs and emails.
It also posted messages such as “Did you pay tax on your bitmex gains” and “So many obvious US customers on the BitMEX database hack.”
30K Email Dump Selling On Darknet, And Passwords Found From Previous Hacks
An email dump of 30,000 addresses is for sale on the dark web, with about 50% of these “trivially easy to doxx,” according to The Block’s director of research Larry Cermak.
In addition, Twitter user TheCryp0Mask, has been running database searches on the email addresses, allegedly finding nearly 200 passwords from previous hacks of other companies.
BitMEX withdrawals have currently been disabled, but only for customers who have changed their password or security details since the email address leak.
BitMEX has since tweeted that: “while the trolls may target our Twitter account, you may rest assured that all funds are safe.”
BitMEX Investigating ‘Extent of Impact’ After Mass Email Leak
Crypto derivatives exchange BitMEX has accidentally leaked user emails by forgetting to use blind copy (bcc) on a mass email.
The incident was acknowledged by BitMEX in an official statement published today, Nov. 1. Cointelegraph’s editorial team in Japan have independently revealed that a staff member was the recipient of the BitMEx newsletter in question.
In a tweet posted on Nov. 1, crypto-focused lawyer Jake Chervinsky characterized BitMEX’s accidental public sharing of user email data as a simple error committed in the “outrageously incompetent way imaginable.”
Concerned community members have pointed out that the leak makes BitMEX account holders vulnerable targets to potential hackers, with the data serving as a “puzzle piece” for attackers.
Some voiced their concern that the nature of the error could mean that each email includes just a section of the total leaked data: “while most people received about 1,000 [other user emails] per email — they dumped their *entire* user database.”
On Twitter, user “kevin mcsheehan” outlined the risks, including the potential for:
“all email addresses x-referenced w/ public breaches to associate universal passwords. from there attackers will use xx,xxx proxies to try to break into email inboxes, exchange accounts, github, dropbox, etc.”
“The privacy of our users is a top priority”
In its statement, BitMEX has written:
“Our team have acted immediately to contain the issue and we are taking steps to understand the extent of the impact. Rest assured that we are doing everything we can to identify the root cause of the fault and we will be in touch with any users affected by the issue.”
“The privacy of our users is a top priority,” the exchange added.
Following news of the leak, Binance crypto exchange advised all affected BitMEX users who also hold an account on Binance to change their Binane account email immediately.
Earlier today, BitMEX revealed plans to implement major changes to the weights of its cryptocurrency price indices later this month.
BitMEX Says Quality Check ‘Failure’ Led to Email Privacy Breach
BitMEX says its internal processes “failed” last week, subsequently exposing thousands of the exchange’s clients to privacy risks.
In a company blog posting on Monday, the crypto-derivatives exchange said its mass emailing operation failed causing “most BitMEX users” to have their email addresses publicly exposed via carbon copy (CC) on Nov. 1.
Data provider Skew says BitMEX has some 22,000 daily users, though the number of email addresses exposed is likely significantly higher.
With Major Email Servers Imposing Restrictions On Bulk Emailing, The Firm Said:
“To remedy this, we built an in-house system to handle the necessary rendering, translation, staging, and piecemeal (as not to trigger rate limits) sending of important email.”
The exchange said it sends emails to all users very rarely, the last one of this size shipping in 2017. To expedite the process, the exchange’s email systems API was changed at the last minute, but did not undergo the typical checking process.
“BitMEX is a global business that sends emails to many different email providers,” said deputy chief operating officer Vivien Khoo in the blog posting. “Unfortunately, this makes the job of large services such as BitMEX difficult at times.”
The exchange says it stopped further batches of emails being sent out upon recognition of the issue.
In response to the leak, BitMEX says they employed password resets and human review on endangered accounts. All users lacking two-factor authentication (2FA) and also holding account balances had passwords reset after the exchange noted hostile attempts to access accounts.
In an email to CoinDesk last Friday, Khoo reiterated that no other personal information was divulged.
“Beyond email addresses, at no point during this issue has any personal data or account information been disclosed.”
BitMEX Ends Year With Additional 13K BTC in Its Insurance Fund, Up 61%
The BitMEX Insurance Fund has added nearly 13,000 BTC in 2019, reaching a total of just over 33,491 BTC as of Dec. 30. This is equivalent to 0.19% of the total Bitcoin in circulation, based on the data available at Blockchain.com.
The fund, which the cryptocurrency exchange set up to ensure that liquidation orders related to leveraged positions are filled, ended 2018 with almost 20,800 BTC. This means that the fund has seen a 61% increase since the start of 2019.
How Does The Bitmex Insurance Fund Work?
Crypto derivatives exchange BitMEX set up the fund to give margin traders more certainty that they will receive their winnings. Here’s the logic behind the fund.
In leveraged trading, market participants are allowed to make bets that the price of an asset will either rise or fall in multiples (that could be as high as 100x) of the amount they deposited. The idea is to amplify the potential profit for making the correct bet.
In the oversimplified example above, Trader A, who has made the winning trade expects to make a profit of $5,000 based on the $500 rise in Bitcoin price multiplied by the 10 times leverage. However, since the losing trader’s actual position is worth only $4,000, there’s a $1,000 deficit for the winning trader.
As pointed out in a previous Cointelegraph article about a flash crash event on Poloniex, traders in the traditional leveraged market are required to pay for the loss or risk facing legal actions from the brokerage firm that offered access to the derivatives trading exchange.
For trading activities involving large financial institutions, in which the event of a default would significantly jeopardize the financial system, there are several layers of security. Traditional derivatives exchanges have large insurance funds that run into the billions.
CME, the world’s largest derivatives exchange, has roughly $22 billion in its safeguard system. And in cases where the safeguard fund isn’t sufficient to cover the defaulted amount, the exchange can exert its power to ask participating clearing members to help finance the defaulting members. And in extreme situations, the government could issue a bailout to the defaulting institutions, especially when the event threatens economic stability.
Various financial experts and commentators have claimed that derivatives played a major role is the 2008 financial crisis, a period in which there were government bailouts to large financial institutions.
The detachment of the crypto market from the traditional financial space means that such robust security is unavailable to crypto margin traders. Therefore, different crypto exchanges have developed different mechanisms to offer some level of security. For BitMEX, this is the insurance fund.
Why Has The Fund Been Growing?
BitMEX has developed a system whereby the insurance fund grows in a liquid market, signaled by a narrow bid/ask spread. Crypto derivatives analytics platform Skew found BitMEX to be the most liquid among the top crypto exchanges offering derivatives trading.
Skew has been tracking the main perpetual swap bid/ask spread for $1 million, $5 million and $10 million. The other exchanges being tracked include Binance, bitFlyer, Deribit, FTX, Huobi, Kraken and OKEx.
Major Events Around The Fund In 2019
The high liquidity enjoyed by BitMEX, per Skew’s research, presents a plausible explanation for why the fund has been growing. According to BitMEX:
“The Insurance Fund grows from liquidations that were able to be executed in the market at a price better than the bankruptcy price of that particular position.”
Still, there have been a few small day-to-day declines in the balance of the fund. The largest drawdown since the fund began over three years ago happened on April 12, 2018, involving about $5.1 million worth of Bitcoin.
BitMEX has been widely criticized for the lack of transparency of its insurance fund. Criticism has ranged from how the exchange doesn’t fully disclose all the trade variables, such as bankruptcy price, to traders.
Crypto publication The Block also noted that the BitMEX Insurance Fund lacks a known breakdown of how drawdowns are made per contract. This all has led some to suggest that BitMEX considers the fund an asset on its balance sheet.
Competitor Deribit mentioned in a blog post that large insurance funds like that of BitMEX could indicate an overly aggressive liquidation mechanism, which may reduce the incentive to pursue other market security innovations.
Other Derivative Insurance Funds
At least three other top derivative exchanges have an insurance fund as well: Deribit, Huobi and OKEx. Unlike BitMEX, which uses auto deleveraging to account for losses that its insurance fund can’t cover, these other exchanges use socialized loss mechanisms to account for losses higher than their insurance fund balances.
The BitMEX Insurance Fund, however, dwarfs the fund balances of these three other exchanges.
As of Dec. 24, the OKEx Insurance Fund is worth nearly $46.3 million, much lower than the $100 million increase seen by the BitMEX fund in 2019. Deribit said in June that its insurance fund had increased to 150 BTC, while Huobi’s fund details are inaccessible.
BitMEX Takes A Hit — Community Cries ‘Foul Play’ Following Market Crash
On March 13, trading giant BitMEX was thrust into the middle of a controversy that saw the premier exchange face an operational outage that lasted for about 25 minutes. During the downtime, rumors spread throughout the cryptoverse that some foul play had been going on behind the scenes, especially since Bitcoin’s (BTC) price fell to around the $3,700 mark.
To help allay some of the suspicions that arose due to the aforementioned outage, BitMEX’s PR team issued a tweet that read that the company “became aware of a hardware issue with our cloud service provider causing BitMEX requests to be delayed.”
While the given explanation seems quite legitimate, it is worth highlighting that on the day, BitMEX saw more liquidations than during any other 24-hour period over the course of the past year. Additionally, following the event, the trading platform’s BTC futures transaction volumes were surpassed by those of OKEx’s — a niche that has long been seen as BitMEX’s core area of dominance.
Against a backdrop of heavy losses, BitMEX has faced a barrage of criticism, with people like Sam Bankman-Fried, CEO of research outfit Alameda, posting a series of tweets claiming that it was BitMEX’s unwillingness to address market conditions that caused Bitcoin’s value to plummet so rapidly. Moreover, when the platform went offline, the value of the top cryptocurrency started to rise once again, thereby prompting Bankman-Fried to post the following message online:
“BTC rallied without the gigantic sell wall of the BitMEX liq. And even more than that — BTC rallied, so fewer people *had* to be liquidated… Creating a self-fulfilling prophecy. If we could will BTC up above $5K, maybe then it would no longer *need* to go down.”
To get a more detailed understanding of the matter, Cointelegraph reached out to BitMEX. A spokesperson for BitMEX, reiterated some of the facts that had previously been highlighted by the exchange via Twitter and stated that at 12:56 p.m. UTC on March 13, 2020, BitMEX came under an aggressive DDoS attack, which delayed and prevented requests coming into the platform, adding:
“Our security team regained control to prevent further delays and resumed full service within 25 minutes. We have confirmed that the issue earlier in the day on 3/13 was caused by the same attack. We fixed the underlying issue and we will be issuing a post mortem in due course. Our engineers are working around the clock to monitor and mitigate any further issues.”
When asked about some of the theories that allude to a possibility of BitMEX having pulled the plug on its trading services out of fear that its liquidation engine could collapse the XBTUSD order book all the way down to zero, the spokesperson stated:
“That is absolutely not true. We have, and will always, operate a fair and efficient platform. BitMEX is fully prepared for such liquidation events through our insurance fund, which is the largest in the industry by an order of magnitude and remains healthy.”
Lastly, earlier on Mar. 16, Arthur Hayes, CEO of BitMEX, took to Twitter to assure the exchnage’s clients that he and the team will shortly be fielding a number of queries that users seem to have in regard to the recent outage. In his statement, Hayes said:
“We have been listening, and my team has been gathering the facts. We will be addressing these questions and concerns transparently and comprehensively over the coming days.”
Some In The Crypto Community Are Still Not Convinced
While BitMEX has remained true to its version of the story, Alireza Beikverdi, CEO and founder of bitHolla blockchain platform, told Cointelegraph that the events of March 13 saw a major liquidation cascade take place on XBTM20 — an XBTUSD futures contract on the BXBT30M Index. In this regard, XBTM20 went way below its present prices by approximately 15%, and for some time, it appeared as though the drop was not going to stop. Beikverdi added:
“You can chalk this up to way too many overextended longs trying to predict the Bitcoin halving and couple that with the coronavirus panic and you got one gigantic trap. The timing was rather spot on when the market was panicking. Prices recovered soon after BitMEX shutdown. I don’t think the XBTUSD perpetual swap would have gone to zero but watching XBTM20 market that really did look like it would never stop tanking.”
Offering his views on the matter, Jeffery Liu Xun, CEO of XanPool, a peer-to-peer fiat gateway, told Cointelegraph that the liquidations that took place on BitMEX created an increasing spread between the prices being offered by the platform and the spot prices at the time.
In his view, people wanted to make use of this arbitrage opportunity, but as the spread kept increasing due to automatic liquidations, people got scared of BitMEX’s potential liquidity problems. Xun then went on to add:
“I guess BitMEX had to shut their circuit breakers because otherwise, the short whales could have pushed the price to zero through BitMEX’s automatic liquidation system. I think they shut it down too late because they probably had already lost a lot of credibility by then.”
Additionally, Xun also believes that if BitMEX hadn’t shut down its systems, prices may have swooped down to zero, and they would have lost most of their customers.
BitMEX Was Not The Only Exchange To Go Down Last Week
While allegations of foul play by BitMEX are still being given some amount of credence by experts, Inal Kardanov, developer advocate for the Waves Platform, an open-source blockchain platform, told Cointelegraph that BitMEX was not the only big-name cryptocurrency exchange that has experienced such an outage during the crazy week. In fact, other platforms like Gemini, Huobi, Deribit and Bithumb also experienced similar issues:
“Stock exchanges suspend trading during massive drops, and it looks like we saw the same for BitMEX as well. Why should we expect different approaches from CENTRALIZED crypto exchanges?”
Kardanov also pointed out that BitMEX did not have any real reason to stop its liquidation engine if the firm thought that the market could collapse the XBTUSD order book. In this regard, he pointed to the performance of BitMEX’s insurance fund that lost 1,627 BTC — which is only 4.6% of its total value — amid the intense sell-off that happened on March 13.
A somewhat similar opinion was also shared by Jeroen Van Lange, host of the Youtube channel “The Blockchain Today.” As he told Cointelegraph, such outages happen quite often, especially since certain exchanges can’t handle a lot of the activity that takes place during a huge crash or a pump.
In his view, even premier trading platforms can process only a certain amount of trades per second, and if there is a lot of real-time activity combined with conditional orders, there will always be the possibility of a lapse occurring.
Van Lange also pointed out that BitMEX is well known for its “order submission errors,” which in layman’s terms means that the exchange is routinely faced with data overloads that cause its system to fail and thus don’t execute client orders. He believes that the platform is making use of depreciated technology and is thus unable to function properly under certain circumstances.
Additionally, while he does not believe that the exchange might have indulged in any sort of foul play, Van Lange added that there was an incentive available for the firm in regard to this entire scenario — since individual client sell-offs are executed through a market order and therefore, BitMEX stands to earn more fees from them.
Lastly, Beikverdi, too, is convinced that it’s highly unlikely that BitMEX did anything malicious during the price crash. However, he pointed out that a poor explanation and transparency are not something that one would come to expect from a trading giant such as BitMEX — especially since a lot of people in the global crypto community rely heavily on the platform for price discovery. Beikverdi added:
“We have seen excuses like DDoS attacks used many times in the past by other tech companies to dodge questions. It’s fair to expect a detailed official explanation from BitMEX on this matter.”
Traders Have To Be Careful When Dealing With Certain Exchanges
It is interesting to note that during the market turmoil that occurred between March 11–13, it was mostly centralized exchanges that experienced the most downtime. For example, trading platforms like Uniswap did not experience any outages, however, its Ether (ETH) gas prices skyrocketed around that period.
Also, even though traders on centralized exchanges, such as BitMEX, are required to understand the risks associated with using such systems, the amount of transparency and trust most crypto enthusiasts are looking for these days can ideally only be provided by decentralized platforms. In this regard, Kardanov told Cointelegraph:
“If traders expect transparency and want to trade without trust, they have to use decentralized exchanges. BitMEX uses other spot exchanges for its mark (index) price which is used for triggering liquidations. This is only the case for its perpetual markets like XBTUSD. Quarterly future markets like XBTH20 follow different rules, so messing up on calculations due to such an incident is possible.”
Van Lange, too, agrees with such an assessment and believes that people have to be extra careful with leverage trading when dealing with certain exchanges. He said that if an exchange has been embroiled in murky situations in the past, it would be best to stay away from it.
BitMEX Faces Lawsuit For Alleged Racketeering And Extensive Illicit Activities
BitMEX and its executives have been accused of engaging in or abetting crimes that include racketeering, money laundering, wire fraud and unlicensed money transmission.
BitMEX, one of the world’s largest crypto derivatives exchanges, has been accused in court of being “deliberately designed, from the ground up” to facilitate “a myriad of illegal activities.”
The allegations were made in a major new lawsuit filed by BMA LLC in the United States District Court for the Northern District of California on May 16.
The plaintiff accuses BitMEX’s parent company, HDR Global Trading, and the exchange’s top executives — Arthur Hayes, Ben Delo and Samuel Reed — of engaging in or abetting multiple crimes that include racketeering, money laundering, wire fraud and operating an unlicensed money transmitting business.
The lawsuit claims the defendants have, in a “brazenly, lawless manner,” engaged in these illegal activities and a host of others whose magnitude is purported to be “truly staggering.”
Why Is The Case Being Pursued In California?
BMA LLC claims that, despite their rebuttals, BitMEX’s executives maintain close connections to the U.S. and the Northern District of California. The plaintiff cites several sources allegedly close to the company who have previously disclosed to the media that almost 15% of BitMEX’s 2019 trading volume, worth roughly $138 billion, is attributable to U.S. traders.
This means that the exchange’s own data allegedly indicates that it has processed an average of $3 billion in money transfers daily without being licensed as a money transmission business in the U.S.
This represents “the record volume for such unlawful activity in the entire history of the monetary regulation in the United States,” the plaintiff claims.
Parent firm HDR Global Trading — whose name is ostensibly an acronym for Hayes, Delo and Reed — is purportedly listed in Seychelles. The plaintiff notes that when asked why the business was incorporated in the country, Hayes publicly claimed:
“‘Seychelles is cheaper to bribe than [the United States]’ and when asked how much he had to pay Seychelles to register BitMEX there, he said ‘a coconut.’”
Other Allegations — Space Permitting
BMA LLC accuses the defendants of conspiring to conduct the business through a “pattern of racketeering activity” and engaging in cryptocurrency market manipulation, wire frauds, fraudulent business dealings and numerous other illicit schemes.
The lawsuit notes that BitMEX provides traders with extremely high trading leverage (100x) for highly liquid derivatives, which are purportedly calculated based on prices of “two or three illiquid spot exchanges.”
The exchange allegedly enables manipulators and money launderers to operate illicitly by allowing them to open an unlimited number of anonymous and unverified accounts, without trading or withdrawal limits.
The document claims that BitMEX weaponizes deliberate server freezes and uses fraudulent “system overload” events to accept or reject specific trading orders during volatile market conditions in order to exacerbate price fluctuations and trigger maximum liquidations.
All this allegedly makes BitMEX “an exquisite ‘designer’ tool for unsavory actors to manipulate cryptocurrency markets.”
The lawsuit further points to the defendants’ own admission, after multiple denials, that the exchange operates its own for-profit trading desk, which purportedly trades against BitMEX’s own customers on the platform and uses inside information about its customers’ existing trading positions.
The full details of the extensive allegations run to over 100 pages.
In An Email To Cointelegraph, A Spokesperson For HDR Global Trading Said:
“We’re aware of a complaint filed by “BMA LLC”, formerly known as ‘Bitcoin Manipulation Abatement, LLC’, in the US District Court for the Northern District of California. Having reviewed a draft version of their complaint, which is clearly rehashed from information culled from the internet, we confirm we will be defending ourselves vigorously against this spurious claim.
BMA has recently emerged as a serial filer of claims against companies operating in the cryptocurrency space, and is widely recognised for operating just like a patent troll.”
As recently reported, BitMEX has continued to lose in both open interest and volume for Bitcoin (BTC) futures since the historic market crash this March and has struggled to defend its market share against competitors such as Binance Futures.
Following the so-called Black Thursday crash, BitMEX witnessed an almost 40% decline in BTC holdings on the platform between March 13 and April 9.
Controversies have surrounded two distributed denial-of-service attacks that triggered downtime on the exchange and have even prompted some industry actors to accuse the exchange of being responsible for Bitcoin hitting multimonth lows in March.
BitMEX was also one of the seven crypto firms implicated in a series of new lawsuits alleging violations of U.S. securities laws.
BitMEX Rejects Bold Lawsuit Claims As ‘Clearly Rehashed’ Internet Bunk
Bitcoin price manipulation, money laundering and racketeering are just some of the complaints against BitMEX, but is there any merit to them?
BitMEX, one of the most popular derivatives exchanges in the cryptocurrency market, has come under fire with accusations of being purposefully designed to facilitate “a myriad of illegal activities.” The accusations were made in a lawsuit filed by BMA LLC in the United States District Court for the Northern District of California on May 16.
In the lawsuit, both HDR Global Trading — BitMEX’s parent company — and Arthur Hayes, Ben Delo and Samuel Reed — the exchange’s top executives —— stand accused of either engaging in or facilitating multiple criminal activities including racketeering, money laundering, wire fraud and operating an unlicensed money transmitting business.
Both BitMEX and the plaintiff, BMA LLC, have been or are currently involved in other noticeable lawsuits in the cryptocurrency space. BitMEX, for one, is facing another suit filed by multiple initial investors of the exchange seeking $540 million in damages for violation of their contracts. BMA LLC, a Puerto Rican company whose name stands for “Bitcoin Manipulation Abatement,” has previously sued other noticeable companies in the cryptosphere such as FTX and Ripple.
Despite the multiple accusations, BitMEX has dismissed them, citing the plaintiff’s previous actions as a serial filer of lawsuits. A spokesperson for HDR Global Trading told Cointelegraph that the complaint is “clearly rehashed from information culled from the internet,” adding that the intention is to defend “ourselves vigorously against this spurious claim.”
What’s In The Lawsuit?
The filing states that the defender, BitMEX, and its top-level executives have engaged in and hosted illegal activities of a “truly staggering” magnitude. They are accused of “engaging in or abetting multiple crimes” including racketeering, money laundering, wire fraud, operating without a money transmitting license and market manipulation, along with a few other associated claims.
The 106-page document goes through great lengths to show multiple ways in which HDR Global Trading and the individual defendants have a presence in the U.S., especially in California where the suit was filed. The emphasis in highlighting its U.S. presence aims to back the accusations that it is operating in the country without a money transmitting license.
The suit cites unnamed sources “close to the company” when revealing that around 15% of BitMEX’s trading volume in 2019 — roughly $138 billion — came from U.S. citizens. However, it does not show any way in which BitMEX actively marketed to a U.S. user base besides inviting customers in the country to try out the BitMEX testnet version.
While the document doesn’t provide any evidence for active marketing to a U.S. audience, it does make a case for BitMEX’s willfulness to turn a blind eye to its American customers, given the revenue generated by that portion of its user base. The document also recalls that Hayes, BitMEX’s CEO, himself conceded that it is possible to trade on the platform using a virtual private network. The lawsuit reads:
“Defendants knowingly and willfully permitted United States citizens and residents of this District as well as United States based companies to freely trade on the BitMEX exchange because of the lucrative business relationships between Defendants and the aforesaid individuals and companies, which financially benefited Defendants.”
Many of these allegations seem to be substantiated by general perceptions rather than concrete facts. In order to justify accusations of money laundering, for example, BMA LLC claims that BitMEX has allowed illicit funds to pass through the exchange. However, the same can be said for other exchanges and even banks.
BitMEX enforces Know Your Customer protocols and seems to comply with all required Anti-Money Laundering laws, which is where the company’s liability ends. The virtually unknown firm’s recent history in targeting cryptocurrency companies suggests the lawsuit may not hold up in court, such as was the case with its previous action against FTX.
While some accusations may not be backed by hard evidence at first sight, others seem to be fairly substantiated and also highlight well-known issues within BitMEX’s platform, including its frequent downtimes that have reportedly caused traders to lose funds and its high leverages which go up to 100 times. According to BMA LLC, these downtimes are used by BitMEX as market manipulation. When asked about this, a spokesperson for HDR Global Trading told Cointelegraph:
“Trading downtime degrades the experience for all customers and it would be against our own interests to fabricate downtime. We have always communicated openly and transparently regarding unscheduled downtime events, as reflected in our live status updates and postmortem blog posts. We’re working hard to further improve the resiliency of our platform and to achieve our ambition of near-zero downtime.”
According to BMA LLC, BitMEX also enables manipulators and money launderers to operate illicitly by allowing them to open an unlimited number of anonymous and unverified accounts, without trading or withdrawal limits, and by cooperating with various manipulation activities such as organized price “pump-and-dumps” and “stop loss hunting.”
BMA LLC: A Serial Lawsuit Filer?
BMA LLC is a fairly unknown entity, but it has been involved in a few lawsuits within the cryptosphere. A spokesperson for HDR Global Trading referenced this very fact, telling Cointelegraph:
“We’re aware of two ‘copy and paste’ complaints filed by Pavel Pogodin of ‘Consensus Law’, the law firm behind ‘Bitcoin Manipulation Abatement, LLC’ which has also filed complaints against FTX and Ripple Labs.”
The small law firm first made the rounds in crypto-centric news outlets in November 2019, when it filed a lawsuit against FTX, another cryptocurrency derivatives exchange incubated by Alameda Research. The claims were similar to the ones BitMEX is now facing: racketeering, market manipulation and unlicensed securities sales, among others.
In that case, BMA LLC asked for a payment of $150 million in punitive and exemplary damages. The lawsuit surfaced after, and in possible relation to, Binance CEO Changpeng Zhao’s tweet in September 2019 about an attack attempt on its platform and his belief that it came from a “smaller futures exchange.”
No names were given at the time, but the general belief was that Zhao was talking about FTX. The whole situation was cleared up shortly after in a follow-up tweet stating that everything turned out to be an accident and things were “all good now.” Alameda Research promptly presented a motion to dismiss the lawsuit, which was granted by a judge who dismissed the complaint in its entirety with prejudice.
Before the case was dismissed, Alameda made a public statement responding to the accusations through a post on Medium, sparing no harsh words for BMA LLC and the lawyer behind it.
It stated that the whole suit was a “nuisance […] riddled with laughable inaccuracies” and referred to the plaintiff as a “troll [that] has no evidence of any wrongdoing.” In a since-deleted tweet, Binance’s CEO also commented on the lawsuit claims at the time, describing them as “very far fetched.”
Striking once more on May 1, BMA LLC took legal action against yet another crypto giant: Ripple. The Puerto Rican law firm alleged that Ripple and its CEO violated federal and California laws with the company’s $1.1 billion XRP sale.
BMA LLC now seeks to have Ripple return all the money from the sale as well as to receive compensatory damage due to its accusation that Ripple promoted the sale to investors in a misleading manner to drive up demand and maximize profits without registering the sale with the relevant regulator. This is not the only lawsuit Ripple is facing, as another class-action lawsuit claims the company has violated securities rules.
BitMEX And The Law
While BitMEX and other companies accused by BMA LLC state that the company is somewhat of a serial lawsuit filer hoping to take advantage of the cryptocurrency industry, this is not the first time that BitMEX has faced legal complaints. There is another ongoing lawsuit filed by plaintiffs Frank Amato, RGB Coin Ltd. and Elfio Guido Capone suing the exchange for $540 million.
The plaintiffs claim to be early investors of the platform and allege their initial collective investment should have been converted into equity at over $90 million. They are now seeking to receive compensation that includes the equity and $450 million in punitive damages.
But there’s more: On April 3, 11 class action lawsuits alleging unlicensed cryptocurrency sales were presented against 42 defendants in 16 different countries, and BitMEX was one of them. Binance, Tron and Block.one were also mentioned along with BitMEX in the lawsuit filed by the firm Roche Cyrulnik Freedman LLP in a Manhattan federal court.
BitMEX’s Bumpy History
Only hours after the lawsuit was reported on by Cointelegraph, BitMEX suffered yet another outage, which has become somewhat of a usual occurrence. In fact, the lawsuit at hand actually accuses BitMEX of “weaponizing deliberate server freezes, using fraudulent ‘system overload’ events to accept some trading orders and reject others” — a market manipulation practice.
A 2019 YouTube video of BitMEX’s CEO, Arthur Hayes, that was shot during the Asia Blockchain Summit has also resurfaced. In the video, when asked about the location chosen to file the company, Hayes stated that “it just costs more to bribe” authorities in the U.S. than it does in Seychelles where the exchange is located.
He then jokingly added that the cost of a bribe in Seychelles was “a coconut,” setting the tone for a heated argument with Nouriel Roubini, an American economist and a professor at New York University. It’s clear that the aforementioned statement was made in a playful tone, but the video has not aged well at all given BitMEX’s current legal disputes.
Along with the various accusations and allegations presented in court, BitMEX was also at the center of some controversy in March due to its server issues and liquidation system. At the time, XBT/USD perpetual contracts fell more than 50% in value over a 12-day span even though the price of BTC was rallying, which led to suspicions in the crypto community of market manipulation by the exchange.
What To Make Of All This?
While BMA LLC seems to bring up a few valid points in its lawsuit, most of the accusations can be quickly dismissed. It’s not clear if the goal of this lawsuit is to “attack” BitMEX’s reputation or to receive actual compensation, but judging by the contents of the lawsuit and BMA LLC’s history, the suit will most likely be dismissed or dropped.
Nevertheless, BMA LLC still raises a few important issues when addressing some of BitMEX’s flaws, especially when it comes to the high leverage trading allowed, which is extremely dangerous to inexperienced traders, and its frequent downtimes. When asked about its high leverage, however, a spokesperson for HDR Global Trading told Cointelegraph:
“We operate a sophisticated trading platform which offers up to 100x leverage on some contracts. This is the upper limit and by no means the norm, with the average effective leverage typically around 8x. On our website and blog, we provide users with a wealth of information on how the platform works.”
If the cryptocurrency industry continues its current trend, however, it is likely that exchanges and other infrastructure players will continue to work on these types of issues, a factor that is crucial for the long-term success of Bitcoin and other cryptocurrencies.
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