In the beginning of October 2020, the United States, Commodity Futures Trading Commission filed a civil enforcements action against five entities and three individuals that own and operate the BitMex crypto trading platform. They were charged with operating an unregistered trading platform and violating a multiple CFTC regulations, including anti money laundering violations.
Among those charged were company owners Arthur Hayes, Ben Delo, and Samuel Reed, who operate BitMEX’s platform through a maze of corporate entities. These 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). In the press release by CFTC, they stated 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.
According to a statement made by Chairman Heath P Tarbert of CFTC, “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.”
With reference to the case background, the complaint alleges that from at least November 2014 through the present, and at the direction of Hayes, Delo, and Reed, 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. According to the complaint, 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. Yet, as alleged in the complaint, BitMEX has failed to implement the most basic compliance procedures required of financial institutions that impact U.S. markets.
BitMex has been touted as one of the world’s largest crypto exchanges, and since the allegations, many users have made withdrawals of Bitcoin from the exchange. Coinmetrics data shows that during the same period, a total of 37,000 BTC ($387M) was moved out of BitMEX as investors panicking sought to secure their funds. In a comment on Twitter, Coinmetrics adds that Binance and Gemini together captured over 1/3 of the BitMex withdrawals. The exchange which is registered in Seychelles with offices in Hong Kong and New York continues to be operational.
Some analysts believe that more severe charges might follow which include breaching of international sanctions. Some have stated that Federal authorities believe BitMEX may have most likely been a “jumping-off point” for countries like Iran and North Korea to move out of their crypto positions
A spokesperson from HDR Global Trading, one of BitMex companies quoted to New York times, “We strongly disagree with the U.S. government’s heavy-handed decision to bring these charges, and intend to defend the allegations vigorously.” Meanwhile, the Bitmex executives, who also face a violation of the Bank Secrecy Act, deny the charges against them and insist they will defend themselves. The executives add they “have always sought to comply with applicable U.S. laws, as those laws were understood at the time and based on available guidance.”
BitMex Ventures in 2019 invested in Bahrain based crypto asset exchange RAIN which is regulated by the central bank of Bahrain. When UNLOCK interviewed Co-founder of RAIN Yehia Al Badawy during that time, he explained, “The 2.5 million USD seed investment led by BitMex ventures was not only for investments but we were looking into companies that could either add regulatory or industry experience. With BitMex which is one of the well reputed crypto exchanges globally we look to benefit from their industry experience.”
During the interview Badawy added, “We cannot at the moment disclose the amount BitMex ventures invested in RAIN; however this is not an acquisition. The BitMex Ventures arm invested in RAIN as it has done in other ventures.” he further elaborated, “BitMex will be assisting RAIN exchange in expanding our product offering and growth.”
After the BitMex allegations, UNLOCK asked RAIN exchange whether the lawsuit against BitMex will have any effects on the RAIN exchange. The answer was short and straight to the point. Abdullah Al Mouaiqel, Co-Founder of RAIN stated, “No it doesn’t affect our operations in anyway.” He refrained from answering questions with regards to any legal implications this might have on RAIN in the future and towards their relationship with BitMex at the moment.
Until then, we can only wait to see what the outcome of the situation will be. If BitMex is found guilty most probably the assets of the exchange will be used to provide restitution to victims of money laundering and other crimes. This could mean the freezing of account, suspension of trading and even blacklisting of the company in general, as well as selling international assets to pay back victims.
Today one of the four indicted individuals, Samuel Reed, has been arrested by authorities in connection with the warrants. The other three remain unaccounted for.