CFTC, USAO, FBI vs. BitMEX

By: John Peurifoy, Merav Shor, Kevin March. Updated: 12:30 PM ET, Fri October 2, 2020

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Introduction

On October 1st, 2020, the CFTC charged BitMEX owners with illegally operating a cryptocurrency derivatives trading platform. Further, the U.S. attorney for the district of New York and the FBI indicted the owners for violating the Bank Secrecy Act.

This is a timeline of the history of BitMEX outlining the relevant issues in the recent charge brought by the CFTC as well as the generally increased focus on regulation in the space. The entire CFTC report can be found on the CFTC website here and the USAO and FBI indictment can be found here. This visual is only meant to summarize the key developments in chronological fashion. Each item in the timeline is hyperlinked to the page in the report it comes from or the relevant outside news article.

Some Key Findings

• The regulators base all action on the Relevant Period — defined as starting when BitMEX formed to its current operating date.
• The initial probe of BitMEX was announced mid-2019, and in the wake several things happened quickly: customers withdrew funds from BitMEX, BitMEX announced a new holding structure, and BitMEX parted ways with its then COO, Angelina Kwan.
• BitMEX announced in August 2020 that it would require all customers to undergo KYC, nearly a year after the announcement of the probe.
• The most flagrant issues were likely two things: lack of KYC in violation of the BSA (punctuated by open remarks by the founders chastising others for following KYC), and willful neglect (in some cases encouragement) to evade restrictions against U.S. users signing up on the platform — most notably in the form of encouraging the use of VPNs.

An interactive version of this timeline can be found here.

Takeways

1. US regulators care about anti money laundering. Not only FinCEN but also the CFTC, the USAO and the FBI will not hesitate to go after those who blatantly violate the rules. Cryptocurrency firms who disregard their anti-money laundering obligations under the US Bank Secrecy Act, including Know Your customer (“KYC”) rules are hurting themselves, their customers, as well as tainting the reputation of the crypto industry as a whole. As the CFTC noted: “Effective anti-money laundering procedures are among the fundamental requirements of intermediaries in the derivatives markets”.
2. Executives of cryptocurrency firms who flagrantly violate their BSA obligations may face criminal charges and serve up to 5 years in prison.
3. The CFTC will go after those operating an unlicensed cryptocurrency derivatives exchange while allowing US customers on their platform. It is not sufficient for your User Agreement to state that the US is a “restricted jurisdiction”. You must actively prevent US persons from transacting on your platform by establishing proper policies and controls. Deleting US accounts after the fact will not suffice either.
4. After numerous enforcement actions over the past years against cryptocurrency firms by the CFTC, SEC, FinCEN, the DOJ, and other regulators the message should be read clear. Compliance must be the crypto industry standard as it will ensure the maturation and sustainability of the space by promoting trust among all users, participants, and regulators.