The co-founders of one of the world’s largest exchanges for trading cryptocurrency derivatives have been charged with violating U.S. anti-money-laundering rules as American authorities ramp up enforcement in one of the world’s least regulated markets.
BitMEX executives Arthur Hayes, Benjamin Delo, Samuel Reed and Gregory Dwyer were charged with one count of violating the Bank Secrecy Act and one count of conspiracy, according to an indictment made public Thursday. Mr. Hayes is known for feuding with bitcoin skeptics such as economist Nouriel Roubini and urging traders to gamble on the most esoteric digital assets.
BitMEX has received more than $11 billion in bitcoin deposits from accounts with U.S. connections since 2014 and has earned more than $1 billion in fees, the Commodity Futures Trading Commission alleged in its own civil lawsuit filed Thursday. The CFTC said BitMEX’s founders “failed to implement the most basic compliance procedures,” such as registering their activity with the CFTC.
Mr. Reed, BitMEX’s chief technology officer, was arrested in Massachusetts on Thursday, authorities said. Messrs. Hayes, Delo and Dwyer remain at large, they added. The defendants were charged in Manhattan federal court.
Attorneys for Mr. Hayes said he intends to fight the allegations. “Together with his colleagues, Arthur Hayes worked hard to build an innovative, market-leading business in a cutting-edge sector of the economy,” attorneys Peter Altman and Jim Benjamin of Akin Gump Strauss Hauer & Feld LLP said. “From its early days as a start-up, the company sought to comply with applicable U.S. laws, as those laws were understood at the time and based on available guidance.”
Attorneys for Mr. Dwyer said he would also contest the charges. Mr. Dwyer worked in good faith to follow all applicable laws at BitMEX and helped the company operate “with the highest integrity,” attorneys Sean Hecker and Jenna Dabbs said.
Messrs. Delo and Reed couldn’t immediately be reached for comment. Attorneys who have represented BitMEX in U.S. litigation didn’t immediately respond to requests for comment.
BitMEX is the second-largest cryptocurrency derivatives exchange by daily volume, according to research firm CoinMarketCap. The company’s website says one of its derivative contracts tied to bitcoin, known as the XBT-USD swap, is “the most traded cryptocurrency product of all time.”
Many cryptocurrency businesses have clashed with regulators that want them to follow rules originally written for banks and other companies dealing in traditional financial assets such as stocks and bonds. Digital assets like bitcoin were founded to enable anonymous online transactions, and many cryptocurrency developers and traders sympathize with the ideal that people should be able to swap value online without businesses and governments knowing who they are.
Incorporated in the Seychelles, BitMEX could have avoided U.S. rules by excluding Americans from trading on BitMEX. But as of September 2018, there were “thousands of BitMEX with United States location information that were enabled for trading,” according to the indictment. In a deposition with the CFTC in 2019, Mr. Reed denied knowing that BitMEX maintained records showing that U.S. customers used its platform, the indictment says.
BitMEX didn’t file any suspicious-activity reports from 2014 to this year, according to the indictment, which was returned Sept. 21 and made public Thursday. U.S. law requires financial companies serving Americans to report transactions that might be part of criminal activity.
Customers could sign up to use BitMEX with just a verified email address, according to the indictment. Mr. Hayes was notified in 2018 that BitMEX was being used to launder the proceeds of a cryptocurrency hack but didn’t create a formal anti-money-laundering policy in response, the indictment says. The company’s internal records showed that customers in Iran, who are subject to U.S. sanctions, traded on BitMEX from November 2017 to April 2018.
Mr. Hayes graduated from the University of Pennsylvania’s Wharton School in 2008, according to an interview he gave to the Milken Institute last year. He worked as a derivatives trader for Wall Street banks in Asia for several years before moving into cryptocurrency derivatives in 2013, he said.
Mr. Hayes has often used Twitter to promote cryptocurrencies and in July 2019 publicly debated Mr. Roubini, who said BitMEX took advantage of its Seychelles location to flout international regulatory norms and take positions against its customers. “You can front-run your clients, you can screw them financially and it doesn’t matter,” Mr. Roubini said.
Mr. Hayes responded that cryptocurrency risk isn’t much different than trading securities. “Human beings love to speculate, and we’re just going to give them an opportunity to do it in a very safe manner,” he said.
Brian Quintenz, a Republican CFTC commissioner, said the agency’s enforcement action shows that regulators “will not stand for any participant brazenly flouting our rules.”
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