On May 5, 2022, the Commodities Futures Trading Commission (CFTC) announced that the U.S. District Court for the Southern District of New York (SDNY) has issued a consent order against the co-founders of BitMEX, a crypto derivatives trading platform, Arthur Hayes, Benjamin Delo, and Samuel Reed.
Under the consent order, the three co-founders are required to pay a total of $30 million in civil monetary penalties for willfully violating the federal commodities regulations. The co-founders will pay $10 million apiece and are prevented from further violating Commodity Exchange Act (CEA) and other CFTC regulations.
The recent $30 Million fine was concurrent with the filing of a CFTC complaint, which alleged that the co-founders failed to detect or prevent BitMEX’s unlawful conduct. The complaint charged BitMEX entities — HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited — and its co-founders for “unlawfully accepting orders and funds from U.S. customers to trade cryptocurrencies, including derivatives on bitcoin, ether, and litecoin.”
In addition to the civil allegations, the co-founders have faced a parallel criminal prosecution. Hayes, Delo, and Reed were indicted by the US Attorney’s Office for the SDNY for willfully violating the Bank Secrecy Act by failing to establish, implement, and maintain an anti-money laundering program at BitMEX. Reportedly, all three have entered guilty pleas, and Hayes has requested probation with the ability to travel abroad ahead of his sentencing hearing.
“As digital asset markets grow globally, The Commission continues to actively use its existing enforcement authority in the digital asset commodity space to protect customers and ensure these emerging markets are free from fraud and manipulation,” said Chairman Rostin Behnam. “This is another example of the Commission taking decisive action where appropriate to ensure that digital asset derivatives trading platforms comply with the Commodity Exchange Act (CEA) and Commission regulations.”
In August 2021, the SDNY entered a consent order with BitMEX asking it to pay $100 million in civil penalties. The order stemmed from a CFTC civil enforcement action filed against BitMEX and its three co-founders, in October 2020. The 2020 action charged them with operating an unregistered trading platform and violations of several CFTC regulations, including failing to implement required AML procedures.
According to the August 2021 consent order, BitMEX conducted the following unlawful acts:
- Violation of the CEA by operating a facility to trade or process swaps without being approved as a Designated Contract Market (DCM) or a Swap Execution Facility (SEF).
- Violation of the CEA by operating as a Futures Commission Merchant (FCM) without getting requisite CFTC registration, as well as, by “accepting bitcoin to margin digital asset derivative transactions and acting as a counterparty to leveraged retail commodity transactions.”
- Failing to implement customer information and KYC programs that would enable the identification of U.S. persons using the platform,
- Not putting in place an adequate AML program.
Moving forward, crypto businesses must prioritize compliance
The CFTC and U.S. District Court for SDNY’s actions once again showcase the well-publicized and increasing regulatory scrutiny of digital assets businesses, especially foreign entities that transact with U.S. persons without complying with U.S. registration and other regulatory requirements. Therefore, crypto businesses should anticipate increased CFTC enforcement actions and ensure compliance with relevant CFTC rules. It is worth noting that in a growing number of cases, such as this one, fines are being imposed on not only the corporate entities but also owners and operators.
The CFTC commissioner Carline D. Pham in a separate statement explained that “allowing unregistered companies to operate in violation of the law provides wrongdoers with an unfair advantage over those who are doing the right thing by following CFTC rules. By enforcing individual accountability for registration, market conduct, and anti-money laundering rules - fundamental aspects of the U.S. regulatory framework - the CFTC is ensuring that BitMEX’s management is held responsible after last year’s $100 million dollar settlement with corporate defendants.
Going forward, the enforcement of commodities regulations may extend beyond U.S.-based crypto businesses to those entities that have incorporated in jurisdictions outside the U.S. If among other factors, they are soliciting or marketing their products to U.S. persons, or if they are conducting significant aspects of their business operations from the U.S., like in the case with BitMEX. More importantly, crypto businesses should also examine and fulfill their obligations under Bank Secrecy Act, including AML/KYC requirements.
How can Merkle Science help?
The CFTC and other U.S. regulators are increasing their oversight over the crypto industry and are strictly enforcing registration, customer due diligence, and KYC requirements. Therefore, in the future, crypto-enabled swap trading facilities and other crypto businesses will need to put compliance first and proactively engage with the CFTC and other regulatory authorities to understand how they can remain compliant and function within the regulatory bounds.
Crypto platforms that are able to implement robust compliance frameworks will be able to mitigate regulatory risks — giving them a clear competitive advantage. Merkle Science’s highly customizable and easy-to-use platform provides businesses with end-to-end crypto compliance support. Our predictive cryptocurrency risk and intelligence platform sets the standard for the next generation of financial safeguards and criminal detection. Merkle Science's proprietary Behavioral Rule Engine allows users to tailor the tool according to businesses’ own risk policies —based on the requirements set by each jurisdiction.