BitMEX Lawsuit Overview: Is the "U.S. September Four" Finally Here?

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The U.S. Department of Justice and the U.S. Commodity Futures Trading Commission (CFTC) have jointly filed a lawsuit against the cryptocurrency exchange BitMEX.

Original Title: "Overview of the BitMEX Lawsuit by the Department of Justice and CFTC, Is the 'U.S. September 4th' Here?"

Original Source: Planet Daily

According to Reuters, this Thursday, the U.S. Department of Justice and the Commodity Futures Trading Commission (CFTC) joined forces to file a lawsuit against the crypto exchange BitMEX.

The Department of Justice believes that BitMEX has violated U.S. anti-money laundering laws and has brought criminal charges against the exchange's founders and executives, leading to the arrest of CTO Samuel Reed; the CFTC plans to bring civil charges, terminate BitMEX's commodity derivatives business in the U.S., and demand compensation for its customers.

The case is currently being heard in the U.S. District Court for the Southern District of New York.

As a result, the crypto market experienced a brief downturn early today. BTC briefly dropped to $10,450, a 3% drop in two hours, and has since rebounded above $10,600.

(1) Joint Lawsuit by the Department of Justice and CFTC

According to the Department of Justice's announcement, BitMEX co-founders Arthur Hayes and Benjamin Delo, as well as Samuel Reed and business development lead Gregory Dwyer, are all charged with conspiring to violate the Bank Secrecy Act and have thus been criminally indicted. Currently, Samuel Reed has been arrested in Massachusetts, while the other three individuals have not been arrested. Sources have revealed that they are currently not in the U.S.

Specifically, the four defendants allegedly ignored their obligations to implement an anti-money laundering program that complies with KYC requirements because BitMEX serves U.S. customers, and they should have been aware of these obligations, yet they failed to do so.

Prosecutor Audrey Strauss said BitMEX ultimately made itself a "tool" for money laundering and sanctions violations — swinging open the door for cryptocurrency hackers and customers from Iran.

(Note: In the eyes of the Department of Justice, Iran has already been sanctioned by the United States, so BitMEX's actions are seen as directly opposing the U.S.)

According to Reuters, BitMEX previously shifted its corporate entity to Seychelles, where regulation was not as strict, to avoid U.S. oversight; furthermore, Arthur Hayes once boasted that bribing Seychelles authorities cost nothing but a "coconut," far less than bribing U.S. officials.

Federal Bureau of Investigation (FBI) Assistant Director William Sweeney said in a statement, "The defendants will soon learn the price of their alleged crimes, and they will be in for a rude awakening, including but not limited to financial penalties, restitution, and federal prison time."

According to Reuters analysis, if convicted of criminal charges, each count carries a maximum sentence of 5 years in prison.

In addition to criminal charges, BitMEX will also face civil action by CFTC.

According to an accompanying legal document, the CFTC accuses BitMEX of engaging in unregistered futures trading, offering illegal options, failing to register as a futures commission merchant, failing to register as a designated contract market, and failing to implement proper KYC procedures.

Reportedly, BitMEX has been under CFTC investigation since at least July 2019. In April of this year, BitMEX implemented mandatory KYC.

In a press release, the CFTC stated that BitMEX operates key businesses in the United States, accepts orders and funds from U.S. customers, holds approximately $11 billion in bitcoin deposits, and has collected over $1 billion in fees.

"BitMEX touts itself as the world's largest cryptocurrency derivatives platform, with daily trading volume reaching into the billions of dollars. The company's trading volume and profitability largely stem from its extensive access to the U.S. market and customers. However, BitMEX has never been registered with the CFTC in any capacity and has not complied with the laws and regulations crucial to the integrity and vibrancy of the U.S. market."

The CFTC is seeking a permanent injunction to prohibit BitMEX from engaging in activities involving commodity interests or fundraising for the trading of commodity interests and to prevent it from applying for registration with the CFTC.

The CFTC also aims for BitMEX to achieve the following: disgorgement of profits; full restitution to customers; payment of civil monetary penalties; and the rescission of 'all contracts and agreements' with any customer if such contracts and agreements violate the law.

CFTC Commissioner Brian Quintenz stated in a release, "We will not tolerate participants showing open disdain for our rules. I look forward to a successful resolution of this matter and the beneficial impact it will have on the market by holding those who intentionally disregard the law accountable."

(2) BitMEX's Response

In response to the joint crackdown by the Department of Justice and the CFTC, BitMEX has expressed its intent to challenge the above allegations.

“We strongly oppose the U.S. government's foolish decision to bring these charges and intend to defend vigorously against the allegations. From the very day we launched, we have sought to comply with all applicable U.S. laws as we understood them at the time and based on available guidance.”

Gregory Dwyer's defense attorney told CoinDesk that BitMEX fully cooperated with the CFTC's investigation and "was never even invited to the U.S. Attorney's Office in Manhattan to speak with the prosecutors."

For ordinary users, the most pressing concern is whether BitMEX's funds will be frozen due to the litigation, potentially affecting withdrawals.

“BitMEX holds around $2 billion worth of Bitcoin in its insurance fund (about 193,000 BTC). We will know if the funds are frozen on October 2 at 9 a.m. ET (9 p.m. Beijing time).” tweeted Coin Metrics co-founder Nic Carter.

BitMEX released a statement confirming that the platform was operating as usual and all funds were secure. “To address any potential customer concerns, we have processed withdrawals at 17:45 UTC and will carry out another unscheduled withdrawal at 8:00 UTC on October 2, 2020, followed by the usual daily withdrawal at 13:00 UTC,” the statement said.

While the future of the case remains unclear, it has caused a brief shock in the cryptocurrency market.

This morning, Bitcoin experienced a brief 3% drop, falling to $10,450 at one point, before slowly recovering and is now back above $10,600.

Matt Hougan, Global Head of Research at Bitwise Investments, stated that the CFTC's action against BitMEX is the best news the cryptocurrency space has seen in months as it will help tame the Wild West of cryptocurrency. Economist Alex Kruger also suggested that government crackdowns on BitMEX could increase the likelihood of Bitcoin exchange-traded fund (ETF) approval. Bill Barhydt, CEO of Abra, believes that this move will not impact Bitcoin but should serve as a warning to DeFi.

However, overall, this issue is currently specific to BitMEX, and the impact on other U.S. exchanges and the industry as a whole remains to be seen. Odaily reminds investors not to panic excessively and not to blindly trust the impact of "news" on market prices.

（3）What Lies Ahead for BitMEX?

In fact, this is not BitMEX's first conflict with U.S. regulatory agencies.

As early as January 2019, U.S. authorities took action against cryptocurrency exchanges. The SEC warned that any exchange providing services to U.S. residents needed to enhance supervision through the platform and promptly close the accounts of U.S. traders operating in violation of U.S. regulations.

Under pressure from authorities, BitMEX had to close accounts of U.S. users, leading to a rapid more than 40% drop in trading volume for that month.

However, it still could not escape regulatory oversight. In July last year, sources revealed that the CFTC had been conducting an in-depth investigation into BitMEX for months, focusing on "whether BitMEX, by allowing U.S. users to trade without registering with the CFTC, violated regulations."

But neither the CFTC nor BitMEX commented on the matter at that time.

Many industry insiders speculated that BitMEX might eventually reach a settlement by agreeing to pay a fine. Previously, 1pool Ltd had settled a CFTC lawsuit by paying a fine of nearly $1 million.

However, no one expected that the ultimate outcome would be a joint lawsuit by the Department of Justice and the CFTC, which also included criminal charges.