Evaluating BitMex's Response to the DOJ and the CFTC

BitMex Oct 02, 2020

Apparently, despite the federal charges along with the CFTC's punitive measures lingering directly overhead for BitMex, they've decided that they are going to openly defy the United States Department of Justice as well as the CFTC and continue to operate.

Their official press release announcing insubordination can be found here = https://blog.bitmex.com/united-states-cftc-doj-filing/

The official statement on their website is as follows:

Specifically, they state:

“We strongly disagree with the U.S. government’s heavy-handed decision to bring these charges, and intend to defend the allegations vigorously. From our early days as a start-up, we have always sought to comply with applicable U.S. laws, as those laws were understood at the time and based on available guidance.”

This statement, in itself, is entirely reasonable as the U.S. judicial system does state that one is technically innocent until proven guilty.

However, it is not that part - but the last one, that is a bit disconcerting.

In specific, BitMex states:

"In the meantime, the BitMEX platform is operating entirely as normal and all funds are safe. To allay any potential customer concerns, pending withdrawal requests were processed at 17:45 UTC, in line with our standard procedures. We will process another off-cycle withdrawal at 08:00 UTC, 02 Oct 2020, and then 13:00 UTC, as usual."

Why This is an Issue

To be clear, the CFTC and DOJ did not just put out strong words against BitMex, they brought federal charges to the table.

There was a press release on the sites of both federal agencies today (as well as an unsealed indictment) detailing the alleged nefarious activities of the exchange and its owners.

The CFTC's press release can be found here: https://www.cftc.gov/PressRoom/PressReleases/8270-20


The DOJ's Press Release Can Be Found Here: https://www.justice.gov/usao-sdny/pr/founders-and-executives-shore-cryptocurrency-derivatives-exchange-charged-violation#_ftn1

In particular, its worth noting the language of the DOJ press release, which characterizes the exchange owners as 'flouting' U.S. Anti-Money Laundering Rules.

This title alone seems to imply that not only does the United States feel that BitMex is guilty of violating its anti-money laundering statutes, but that its done so in a flagrant or disrespectful manner.

Charges and Potential Penalties

For this piece, we're going to spend most of our time focusing on the allegations made by the U.S. Southern District of New York, because the outcome of those legal proceedings pose a much greater existential threat to BitMex's existence than litigation with the CFTC (although both can have a crippling impact, especially if BitMex chooses to not cooperate, which - to be fair - they have not stated at this point).

Taking a Look at the 'Bank Secrecy Act'

According to the 'National Association of Federally-Insured Credit Unions' (nafcu.org), the penalties for violations of anti-money laundering statutes are as follows:

"A person convicted of money laundering can face up to 20 years in prison and a fine of up to $500,000. Any property involved in a transaction or traceable to the proceeds of the criminal activity, including property such as loan collateral, personal property, and, under certain conditions, entire bank accounts (even if some of the money in the account is legitimate), may be subject to forfeiture. ... the U.S. Department of Justice may bring criminal actions for money laundering that may include criminal fines, imprisonment, and forfeiture actions. In addition, banks risk losing their charters, and bank employees risk being removed and barred from banking."

So, in short, Arthur Hayes and co., are more than likely facing 20 or more years at the minimum.

Taking a Closer Look at the 'Bank Secrecy Act'

More information regarding the provisioning, enforcement, and guidance for the 'Bank Secrecy Act' and other AML-related guidelines were recently published by the 'Federal Financial Institutions Examination Council'


DOJ Has a History of Pursuing These Cases With Vigor

Unlike other cases where there may be a track record of defendants working out deals and/or mitigating the harshest measures they're threatened with - this is typically not the case when it comes to violations of AML / 'Bank Secrecy Act' laws.

One example can be seen below in an action by the DOJ (Department of Justice) in 2017, where they forced a financial institution (subsidiary of 'Citigroup Inc.' to cough up nearly $100 million as recompense for their violations):


Alexander Vinnik and BTC-e

In other instances (specifically as it pertains to blockchain / cryptocurrency-based entities), the DOJ has been extremely aggressive and successful in its prosecution of those accused of violating this state.

The best (and most recent) example of the DOJ doing so can be found in the unsealed indictment of Alexander Vinnik (despite the fact that he has had yet to stand trial in the United States due to extradition struggles between France, Greece, and Russia)


From the actual indictment itself, the following was written:

Forgive the quality of the screenshot, was the best that could be provided currently

In case anyone reading is struggling to read what is written above, it states:

"BTC-e relied on the use of shell companies and affiliate entities that were similarly unregistered with FinCEN and lacked basic anti-money laundering and 'Know Your Customer' policies. These entities catered to an online and worldwide customer base, and electronically 'muled' fiat currency in and out of BTC-e. BTC-e's own website stated it was located in Bulgaria, yet simultaneously stated it was subject to the laws of Cyprus. Meanwhile, BTC-e's managing shell company, CANTON BUSINESS CORPORATION, was based in the Seychelles but affiliated with a Russian phone number, and its web domains were registered to shell companies in countries including Singapore, the British Virgin Islands, France, and New Zealand."

Again, it is worth noting that the primary crux of the DOJ's indictment was not so much the laundering of funds from Gox (althought this did play a significant role), but rather the consistent disregard for KYC/AML statutes in the United States or in conducting business with U.S. citizens.

This exact sentiment was iterated in the actual DOJ press release for BTC-e as well:

Bank Secrecy Act in the Case of Reginald Fowler as Well

Remember the unsealed indictment that was announced by the Department of Justice on May 1st, 2020 for Reginald Fowler, Ravid Yosef and (later), her brother, Oz Yosef?

In case you can't remember, here's a refresher:


Specifically, Reginald Fowler and Ravid Yosef operated a company called, 'Crypto Capital Co.' (synonymous with Global Trade Solutions in many respects), a criminal enterprise responsible for managing funds for entities such as Binance, Bitfinex, Kraken, BitMex, CEX.io, Coinapult, QuadrigaCX, and many more questionable entities in the blockchain space.

As the federal indictment revealed, Crypto Capital Co. ran a 'front business' as payment processors on behalf of blockchain companies whom they misrepresented to banks as real estate companies.

In addition, according to the federal indictment, Tether (USDT) was used to facilitate this fraud, which the U.S. has accused Fowler, Ravid and others of being complicit in.

Another One Bites the Dust to Money Laundering

In that very indictment (referenced above), Fowler and Ravid were both, "Charged with one count of bank fraud and one count of conspiracy to commit bank fraud, each of which carries a maximum sentence of 30 years in prison. FOWLER is also charged with one count of operating an unlicensed money transmitting business and one count of conspiracy to do the same, each of which carries a maximum sentence of five years in prison."

Thus, in the Fowler and Ravid Yosef case we can see that, yet again, the U.S. government has taken a hardlined stance against what it perceives to be money laundering.

Why BitMex May is Making a Poor Choice

Making the decision to ultimately disregard the federal indictments that were handed down by the U.S. government today (October 1st, 2020), is a grave mistake and likely one that any attorney would advise strongly against.

This will essentially place BitMex in the position of operating the exchanges as quasi-fugitives.

Bad For "Business"

I put business in quotes above, because its questionable whether BitMex should still be considered the operators of a solvent, functioning business (given the impending litigious affair with the CFTC as well as the unsealed indictment from the DOJ) - but if this is still a viable concept, then BitMex must understand that, to a large extent, customers will more than likely rush to remove their funds from their platform.

BitMex's Chances Don't Look So Good

When considering the United States' track record in dealing with cases of this nature, it seems unwise for BitMex to publicly (and defiantly) declare their resistance to apprehension by the authorities.

Since this is a criminal matter (at a federal level to boot), BitMex is tempting fate by continuing to operate their platform.

It has hard to imagine that they have not yet received some sort of cease and desist notice from one of the involved federal agencies.

It is hard to imagine that the United States will simply accept BitMex's brazen defiance - especially when the wording of the DOJ press release made it clear one of their main intents in this prosecution is to show that reckless disregard for AML standards will not be tolerated.

Either way, we'll have to see how this one plays out folks!



Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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