US authorities on Thursday charged the founders of BitMEX, a major cryptocurrency exchange, with wilfully failing to prevent money laundering and operating an unregistered trading platform.
The charges are the latest in a years-long effort by the US to crackdown on a cryptocurrency market that was once largely unregulated but has moved more and more under the purview of governments.
BitMEX, which is owned by a parent entity in the Seychelles, was founded in 2014 by Arthur Hayes, Ben Delo and Samuel Reed. The exchange promises customers the opportunity to trade with up to 100 times leverage.
The Department of Justice brought criminal charges against the trio for violating rules under the Bank Secrecy Act that require financial institutions to maintain anti-money laundering controls. Prosecutors also charged Gregory Dwyer, who was BitMEX’s first employee.
Audrey Strauss, the acting Manhattan US attorney, said the four men “undertook to operate a purportedly ‘offshore’ crypto exchange while wilfully failing to implement and maintain even basic anti-money laundering policies”.
“In so doing, they allegedly allowed BitMEX to operate as a platform in the shadows of the financial markets,” she added.
The Commodity Futures Trading Commission also brought civil charges against Mr Hayes, Mr Delo and Mr Reed, as well as five entities behind BitMEX, for failing to register with the agency and not implementing AML procedures.
The CFTC said BitMEX had taken in $11bn worth of bitcoin in deposits and earned $1bn in fees since its founding. It alleged the exchange had operated in part from the US and solicited American customers.
“New and innovative financial products can flourish only if there is market integrity,” said Heath Tarbert, the CFTC chairman. “We can’t allow bad actors that break the law to gain an advantage over exchanges that are doing the right thing by complying with our rules.”
Attorneys for Mr Dwyer said he had “always worked in good faith to comply with all applicable regulations and requirements, and helped BitMEX establish an international business that operated with the highest integrity”, adding he would contest the charges. Lawyers for the other defendants could not immediately be reached.
A spokesperson for HDR Global Trading Limited, one of the corporate entities that controls BitMEX, said it disagreed with the US government’s “heavy-handed decision to bring these charges” and that it would vigorously defend them.
Prosecutors said Mr Reed was arrested in Massachusetts on Thursday but that Mr Hayes, Mr Delo and Mr Dwyer remained at large.
Prosecutors claimed that the restrictions BitMEX used to block US customers were only “nominally in place” and were “toothless or easily overridden”.
In September 2015 BitMEX had said it was withdrawing from the US, but three years later, the indictment claimed, internal BitMEX records showed thousands of trading accounts with US location information.
Before August this year customers could register and trade with BitMEX with only an email address, according to the indictment, which claimed the company’s Seychelles registration had been specifically chosen to avoid US anti-money laundering rules.
Prosecutors alleged that in July last year Mr Hayes had bragged that the Seychelles was a more friendly jurisdiction because it cost just “a coconut” to bribe authorities there and far less than other countries.
William Sweeney, assistant director in charge of the FBI’s New York field office, said on Thursday: “Thanks to the diligent work of our agents, analysts and partners with the CFTC, they will soon learn the price of their alleged crimes will not be paid with tropical fruit, but rather could result in fines, restitution and federal prison time.”