We all have been following the rapid growth of cryptocurrency and the creation of lucrative trading platforms. Cryptocurrency has earned the scrutiny of regulators and criminal prosecutors not for run-of-the-mill fraud schemes, but for compliance with applicable anti-money laundering laws and regulations.

Late in 2020, the Justice Department and the Commodities Futures Trade Commission (CFTC) slammed BitMEx and its principals with a coordinated criminal and civil prosecution. As the cryptocurrency markets continue to expand and new trading platforms started, DOJ, the CFTC and the SEC can be expected to exercise increasing oversight and enforcement.

In the criminal case, the Southern District of New York returned an indictment of Arthur Hayes, Benjamin Delo, Samuel Reed and Greg Dwyer, charging them with violating the Bank Secrecy Act (BSA) and conspiracy to violate the BSA by failing to implement and maintain an adequate anti-money laundering program at the Bitcoin Mercantile Exchange (BitMEX).

BitMExs platform has received more than $11 billion in bitcoin deposits and collected more than $1 billion in fees, while servicing a large number of United States-based customers.

BitMEX touted itself as the worlds largest cryptocurrency derivatives platform with billions of dollars of trading volume each day. Much of this volume involved US customers trading activity.

The defendants created an entity that was a purported off-shore crypto exchange and ignored all applicable AML laws and regulations. BitMEX was established to trade in futures contracts and derivatives tied to the value of cryptocurrencies, including Bitcoin. BitMEX accepted Bitcoin to margin and leverage up to 100 times leverage on certain products.

Since its inception in 2014, BitMEX solicited and served customers in the United States, and even continued to do so after allegedly withdrawing in 2015 from the United States market. While continuing to operate in the United States, BitMEX did not maintain an AML compliance program and a customer identification program otherwise known as a Know Your Customer (KYC) program.

BitMEX organized under the Seychelles laws but did not maintain any physical presence on the islands. The BitMEX principals did so to circumvent and avoid BSA and AML regulations.

Hayes, Delo and Reed statrt5ed BitMEX in 2014 and Dwyer was hired as its first employee in 2015. Because BitMEX solicited and served United States customers, BitMEX was required to register with the CFTC and to establish and maintain an AML compliance program.

In 2015, BitMEX knew (or learned) that they were subject to US laws because they served US customers. Each of the defendants knew they served US customers who continued to access the trading platform until 2018. BitMEX had policies designed to prevent US customers from using the exchange but those policies were not enforced or easily circumvented. The defendants took steps to justify avoiding AML requirements by, for example, incorporating in the Seychelles under the belief that the regulatory requirements in the Seychelles would not impose any regulatory burdens.

In a parallel civil action, the CFTC filed a civil enforcement action in federal court in New York charging five entities and three individuals with operating an unregistered trading platform and a number of specific regulatory requirements, including failing to implement required AML procedures.

The CFTC charged the three company owners, Arthur Hayes, Ben Delo and Samuel Reed, who operate BitMEX through a complex set of corporate entities, five of which were included in the civil complaint.

BitMEX failed to register as required under CFTC rules and to maintain an appropriate BSA and AML compliance program. The CFTC is seeking disgorgement of ill-gotten gain, civil monetary penalties and restitution.

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BitMEX Trading Exchange Earns Criminal and Civil Prosecution for AML Violations - JD Supra