Current years have seen the crypto business mature throughout the worldwide financial panorama, nevertheless it nonetheless runs into high-profile snags. On Oct. 1, the USA Division of Justice filed felony fees in opposition to 4 executives of the BitMEX buying and selling platform — together with its founder, Arthur Hayes — for violating the Financial institution Secrecy Act. One of many executives in query has been arrested, in response to a DOJ assertion.

Moreover, the Commodity Futures Buying and selling Fee additionally filed a civil enforcement motion in opposition to BitMEX and three of its executives for violating Anti-Cash Laundering laws.

The regulatory physique claimed that BitMEX and its high brass have been partaking in shady actions for years, similar to utilizing weak Anti-Cash Laundering and Know Your Buyer insurance policies that dangerous actors can exploit utilizing varied strategies similar to VPNs to masks their digital identities, amongst others.

Moreover, BitMEX makes use of a fancy worldwide company construction that features various separate particular person entities, and consequently, it’s not completely clear the place precisely the agency relies. Additionally, it’s value noting that BitMEX overtly promotes on its web site that it’s registered within the Seychelles and has places of work in premier locations similar to Hong Kong and New York.

BitMEX prospects seem to haven’t any limits on their Bitcoin (BTC) withdrawals however must go through an ID verify, though the checks will solely turn into obligatory for merchants in February 2021. All through 2019, a number of studies claimed that the CFTC was investigating the change as a result of U.S. residents had been capable of commerce crypto derivatives on the platform regardless that it was neither registered as a derivatives change with the CFTC nor as a cash companies supplier with any state within the U.S — which is prohibited.

John Jefferies, chief monetary analyst at CipherTrace — a blockchain intelligence agency — informed Cointelegraph that between November 2014 and September 2020, BitMEX didn’t file even a single suspicious exercise report, a way of reporting presumably illicit transactions to the U.S. authorities, including:

“BitMEX has been underneath investigation by the CFTC since early 2019 for permitting People to commerce on the platform, and so they got time to enhance their Buyer Identification Program to successfully exclude US individuals. It’s not that regulation enforcement hasn’t been following and warning BitMEX, however that BitMEX’s ongoing negligence and lack of compliance led to the hammer lastly coming down on them.”

BitMEX executives underneath fireplace

The purple flags had been there for everybody to see. For starters, BitMEX’s web site expressly advertised the truth that “No real-name or different superior verification is required” to utilize the platform.

As a part of its grievance, the CFTC has claimed that Hayes, Ben Delo and Sam Reed — BitMEX’s government workforce — had been in touch with a number of compliance consultants, one in all them even telling Reed that the corporate wanted to implement stricter KYC requirements to adjust to worldwide sanctions.

In different phrases, studies level to the truth that BitMEX had ample warnings to make corrections however selected to not heed them, ensuing within the executives now dealing with extreme fees. The Division of Justice’s indictment has every of the defendants dealing with as much as 10 years in jail. Not solely that, however in response to Jefferies, the CFTC’s motion might probably end in the costliest AML penalty ever paid out by a monetary establishment.

Nevertheless, it’s value noting that the CFTC’s grievance isn’t solely centered on BitMEX’s AML procedures however fairly on its failure to register with the related authorities. In actual fact, it’s the DOJ’s indictment that appears extra carefully on the AML aspect. Maddie Kennedy, senior director of communications at Chainalysis — a cryptocurrency analytics agency — informed Cointelegraph:

“Transaction monitoring is a core element of a compliance program, as is KYC. Among the felony exercise cited within the indictment is from a number of years in the past, which demonstrates the necessity for correct compliance procedures to be in place from day one. For cryptocurrency exchanges and monetary establishments in jurisdictions that haven’t but put laws in place, immediately’s information illustrates the significance of getting forward of the compliance curve.”

No silver lining?

Regardless of the CFTC’s takedown of BitMEX, authorized specialists similar to John Wagster, co-chair of Frost Brown Todd’s blockchain and digital foreign money unit, consider that regardless of American regulators alleging that BitMEX was being operated by means of a “maze of company entities,” there are a lot of legit causes as to why an organization could select to make use of such a enterprise mannequin that spans throughout a number of jurisdictions:

“We might want to see the small print of the CFTC’s case earlier than we are able to decide if the construction was meant to attain nefarious functions. It is not uncommon for enforcement businesses to pursue each attainable treatment to extend their negotiating leverage, so I might not learn an excessive amount of into that portion of the allegations.”

That being mentioned, choices for BitMEX and its government workforce stay comparatively restricted as a result of along with the civil fees, the U.S. lawyer for the Southern District of New York has additionally indicted Hayes, Delo, Reed and Gregory Dwyer — BitMEX’s head of enterprise improvement — on felony fees of violating and conspiring to violate the Financial institution Secrecy Act, or BSA.

The BSA is the first regulation governing America’s AML/KYC laws that banks and monetary corporations are required to comply with. The BSA additionally incorporates guidelines as as to whether or not entities should register as cash companies companies. The rules put forth by the BSA function the American authorities’s major methodology of stopping cash laundering and actions associated to terrorist financing.

What’s subsequent for BitMEX?

Increasing on BitMEX’s future, Dean Steinbeck, chief working officer of Horizen Labs — a privacy-oriented blockchain agency — informed Cointelegraph that U.S. regulators usually take a very long time earlier than implementing any main actions, particularly in relation to companies that depend on novel applied sciences, including:

“If BitMEX is discovered to have been working unlawfully, along with the fines and penalties, the CTFC will even search to ‘disgorge’ or recoup all the income generated by the change. That is in keeping with the overall concept that ‘wrongdoers’ mustn’t revenue from their illegal exercise.”

He additional added that regardless that BitMEX’s web site clearly states it can’t be utilized by U.S. individuals, regulators require that companies take lively steps to make sure that residents do not really use the location. He added: “Even for playing web sites and ICOs, it’s not sufficient for the enterprise to easily state ‘No US Individuals Allowed.’”

Regulatory motion may very well be a game-changer for crypto business

The allegations in opposition to BitMEX are critical and make a compelling case for decentralization. For its proponents, one of many extra favorable attributes of decentralization is that no single entity or particular person is in control of the protocol as a result of it’s run by its customers by means of decentralized governance.

If governance is decentralized, there isn’t a controlling authority that regulators can goal for enforcement. Any regulatory motion in opposition to BitMEX will doubtless trigger current protocols to decentralize extra shortly — and future protocols to decentralize instantly.

That being mentioned, regardless that decentralized exchanges are identified for his or her minimal AML and KYC checks, this newest improvement has raised the query of whether or not or not DEXs are additionally obliged to adjust to the BSA. In the event that they do, many crypto exchanges should rethink their current purchase/promote frameworks.