The Commodity Futures Trading Commission (CFTC) today announced the filing of a civil enforcement action in the US District Court for the Southern District of New York charging five entities and three individuals that own and operate the BitMEX trading platform with operating an unregistered trading platform and violating multiple CFTC regulations, including allegedly failing to implement required anti-money laundering procedures.
Among those charged are company owners Arthur Hayes, Ben Delo and Samuel Reed, who operate BitMEX’s platform through what CFTC refers to as 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).
The case is brought in connection with the Division of Enforcement’s Digital Asset and Bank Secrecy Act Task Forces.
According to CFTC’s filing, it 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 US and accepting orders and funds from US customers.
“Digital assets hold great promise for our derivatives markets and for our economy,” CFTC chairman Heath Tarbert says in a statement. “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.”
“As the CFTC has made clear, registration requirements are a cornerstone of the regulatory framework that protects Americans and US financial markets,” adds Division of Enforcement director James McDonald. “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.”
In its continuing litigation against the defendants, 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).
Related criminal action
The US Attorney for the District of New York indicted Hayes, Delo, and Reed, along with Gregory Dwyer, on federal charges of violating the Bank Secrecy Act and conspiracy to violate the Bank Secrecy Act.
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 $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 US markets.
The complaint charges BitMEX with operating a facility for the trading or processing of swaps without having CFTC approval as a designated contract market or swap execution facility, and operating as a futures commission merchant by soliciting orders for and accepting bitcoin to margin digital asset derivatives transactions, and by acting as a counterparty to leveraged retail commodity transactions. The complaint further charges BitMEX with violating CFTC rules by allegedly failing to implement know-your-customer procedures, a customer information program, and anti-money laundering procedures.
As alleged in the complaint, BitMEX touts itself as the world’s largest cryptocurrency derivatives platform, with billions of dollars of trading volume each day. Much of this volume, and related transaction fees, derives from the operation of the platform from the US and its extensive solicitation of and access to US customers, the complaint alleges. Nevertheless, CFTC claims BitMEX has failed to register with the agency, and has failed to implement key safeguards required by the CEA and CFTC’s regulations designed to protect the US derivatives markets and market participants.