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BitMEX Cryptocurrency Exchange Founders Slapped with Money Laundering Charges

BitMEX Cryptocurrency Exchange Founders Slapped with Money Laundering Charges

Published: October 10th, 2020

 U.S. prosecutors have charged the founders and a top executive of the cryptocurrency exchange BitMEX, accusing them of evading regulations set to stop money laundering. The exchange’s three founders and their first employee face charges of violating the federal Bank Secrecy Act and a conspiracy to break the same law.

Prosecutors in the United States have brought criminal charges against three founders and a top executive of the cryptocurrency exchange BitMEX. The four, who sit atop one of the very large cryptocurrency derivatives exchanges have been accused of evading the regulation set to stop money laundering.

Arthur Hayes, Benjamin Delo, and Samuel Reed, who co-founded the exchange in 2014, and Gregory Dwyer, who was the exchange’s first employee and later its head of business development, allegedly violated the federal Bank Secrecy Act. They have also been accused of conspiring to violate the bank secrecy regulation.

The 34-year-old Hayes is the exchange’s CEO while Reed is the company’s chief technical officer. Elsewhere, the Commodity Futures Trading Commission (CFTC) has filed a separate suit to shut down BitMEX’s commodity derivatives business in the U.S.

In response, the exchange, through the spokesman of HDR Global Trading Ltd, BitMEX’s parent company, has refuted the charges. In a statement, the spokesman said his company strongly disagrees with the U.S. administration’s heavy-handed commitment to prefer the mentioned charges.

Sean Hecker, the lawyer representing Gregory Dwyer, has said that his client will contest the U.S. government’s charges. Meanwhile, the lawyers of Dwyer’s co-accused are yet to comment on the case.

According to the court papers of the indictment filed in the Manhattan federal court, the defendants went against their duty to institute an anti-money laundering program in the exchange. According to the papers, BitMEX did not enforce a “know your customer” requirement among the operating procedures of the exchange despite knowing that this process is necessary for an exchange that serves U.S. customers.

Improper Incorporations and Bribery Allegations

The steps that the exchange’s executives took allegedly included improper incorporation and flouting of regulations.

The court papers seen by this writer allege that BitMEX was incorporated in Seychelles because of the less stringent regulations in the Indian Ocean archipelago. The papers add that the choice of Seychelles was informed by Hayes’s knowledge of the country’s lax regulations.

According to the prosecutors, Hayes bragged that it is easier to bribe Seychellois officials than their U.S. counterparts. According to him, BitMEX only needed a coconut if they wanted incorporation papers in Seychelles.

The prosecutors further allege that after BitMEX commenced its operations in the U.S., it became a conduit for money laundering and a raft of other crimes such as violating sanctions. The U.S. prosecutors claim that BitMEX laundered proceeds of a cryptocurrency hack on behalf of its Iranian customers.

While the Hong Kong-based exchange is not the first to face charges of facilitating criminal activities, it is by far the largest and most established crypto bourse to come under the scrutiny of the authorities.

The relevant agencies arrested Mr. Reed in Massachusetts on Thursday, October 1. His co-accused remain at large.

Clear and Present Danger

In a statement to the press, the FBI Assistant Director, William Sweeney, said the defendants will soon know that the price of their alleged transgressions will not be covered by the price of tropical fruit. Each of the counts highlighted in the court papers carries a jail term of five years.

Prosecutors allege that BitMEX did not do much to restrain customers even after it became aware that the exchange was facilitating hackers to clean stolen money. Besides, the exchange continued to conduct business with individuals from countries under sanctions such as Iran.

The exchange has grown to handle trades as large as $1.5 billion every day making it among the five biggest by trading volume. And, the exchange and Hayes have been known to enable crime and surpass limits in the crypto industry, much as the sector is grossly unregulated.

However, the charges listed on the court cases are only cursory. Cal Evans, a staffer with Cointelegraph, said that the U.S. often lists lenient charges on arrest warrants only because they want to obtain international extradition. He adds that once the agencies get the accused individuals in the country, the previous charges often are lifted and replaced with harsher accusations.

Evans said that the reason for this approach is because most countries do not appreciate America’s complex laws especially about money laundering and other financial crimes.

Market Response to the BitMEX Indictment

In the hours following the news, the price of Bitcoin slumped. Besides, many users started making withdrawals from BitMEX. The futures trading contracts fell by more than half. By Tuesday, October 6, the Ether futures contracts totaling about $63 million were open on the exchange, the lowest since May 15.

Besides, the open interest on derivatives dropped nearly 50% from the $125 million recorded on October 1. Notably, the open positions of Bitcoin futures on the exchange dropped by more than 20% to $456 million from almost $600 million.

Despite the evident exodus, a group of experts, most of them pro-BitMEX, we busy calming the markets, reassuring users to stay put. They argued that the exchange is not winding up based on the fact that it is too huge to fall.

Their campaigns notwithstanding, the allegations and the timing of BitMEX’s counter-statement indicate that the exchange might have been easing the market rather than taking a stand on the prevailing situation.

However, the future is now clear. If BitMEX is found culpable, its assets will likely be used to offer relief to the victims of money laundering.

Final Thoughts

U.S. prosecutors have brought money laundering charges against the three co-founders and a top executive of BitMEX, a leading cryptocurrency exchange based in Hong Kong. The charges state that among other things, the exchange disregarded know your customer protocols and did business with individuals from countries sanctioned internationally. The instituted court procedures now turn the light on the cryptocurrency exchange.

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