Author: investment research agency
Original title: BitMEX’s allegations highlight the risks of DeFi
In October this year, the US Commodity Futures Trading Commission (CFTC) and the US Department of Justice (DOJ) initiated enforcement actions against entities and individuals of the cryptocurrency derivatives trading platform BitMEX.
The U.S. Commodity Futures Trading Commission alleges that since 2014, BitMEX has been operating an unregistered trading platform and has violated the regulations of the Commodity Futures Trading Commission (CFTC), including failure to implement the required anti-money laundering (“AML”) )program. The US Department of Justice accused the three founders of BitMEX and their first employee of violating the Bank Secrecy Act (BSA), and accused them of deliberately failing to establish, implement, and maintain an appropriate anti-money laundering program.
The action against BitMEX marks an expansion of regulatory review. These actions also emphasized that U.S. regulatory agencies will work together to hold individuals accountable for violations of registration regulations and non-compliance agreements.
Although BitMEX is a centralized trading platform, this action on BitMEX also has an impact on Decentralized Finance (DeFi). If the DeFi platform provides financial products (such as derivatives) to U.S. residents, which will trigger the registration or AML obligations of centralized entities, what happened to BitMEX indicates that the platform and its founders may still face review by U.S. regulators .
Event background
After registering in Seychelles, BitMEX users can trade cryptocurrency derivatives. According to regulators, from 2014 to last year, BitMEX’s user transaction fee income has exceeded $1 billion. The Commodity Futures Trading Commission (CFTC) claimed that BitMEX violated the Commodity Trading Act because it was not registered as a futures commission merchant. The CFTC and DOJ also accused BitMEX of failing to implement compliance procedures required by financial institutions active in the US market, such as the AML agreement. Allegedly, users can register on BitMEX by providing a verified email address without providing any documents to verify their identity or location.
Offshore registration and offshore residence are insufficient to avoid being subject to the jurisdiction of US law enforcement agencies.
The Ministry of Justice accused BitMEX of deliberately violating the Bank Secrecy Act BSA. The CFTC and DOJ respectively claim jurisdiction over BitMEX based on the accusations against the US defendant’s business and the request and acceptance of orders and funds from US users. The government alleged that BitMEX’s “offshore entity maze” was intended to cover up its important links with the United States. Although BitMEX is registered in Seychelles, it is said to have no physical presence in the country, and there are indeed many subsidiaries and branches in the United States. The CFTC also pointed out:
· About half of BitMEX’s employees are from the United States;
· Develop and operate its website in the United States;
· A founder allegedly lives in the United States;
· While the other founder was living abroad, he owned his own equity through a Delaware LLC and had a U.S. bank account;
· By participating in industry activities and developing bounty programs for American users, BitMEX actively consults and markets to American residents.
The government alleged that BitMEX’s withdrawal from the United States in 2015 was a ruse. It is an “open secret” for US residents to continue using BitMEX because BitMEX only requires IP verification when creating an account and allows users to log in through the Tor network and VPN.
The government also alleged that the defendant attempted to evade U.S. law by joining the Seychelles, allegedly prohibiting but deliberately allowing U.S. users to participate, and deleting evidence from U.S. users. The Justice Department accused these steps of bypassing U.S. law, indicating that the defendant deliberately violated the BSA.
Key lessons
Blockchain-based platforms involving centralized finance (CeFi) and decentralized finance (DeFi) can learn the following from BitMEX operations:
1. Offshore registration and offshore residence are not enough to avoid being subject to the jurisdiction of US law enforcement agencies. When assessing whether U.S. law applies to exchanges or platforms, regulators will go beyond formality to determine whether the substance of individual or entity behavior provides a sufficient basis for jurisdiction.
2. Avoiding the US market is only effective when you actually avoid the US market. Despite the tautology, companies can only avoid US regulation by truly leaving the US market. According to the US government, it is not enough to deny contact with the US and take half of the measures to achieve this goal. It is worth noting that the government focused on BitMEX’s ongoing marketing efforts in the United States in this case.
3. If measures are not taken to comply with applicable laws, the founders and employees may be exposed to platform activities. If the platform has connections within the United States or fails to take active and reasonable steps to exclude Americans from the platform, US regulators may seek to establish jurisdiction. Even if there is no centralized ownership or founder’s control, if compliance obligations are not considered when designing and releasing digital assets, agreements or platforms, regulators may also lock targets within the company, including those that develop or create digital assets, agreements or Platform personnel.
4. The absence of immediate legal consequences does not mean that there is no liability. This time, the US Department of Justice and the CFTC cited actions more than five years ago. Law enforcement agencies do not need (and rarely do) to accuse the defendant at the first sign of a potential violation. Therefore, regardless of whether the company faces immediate regulatory review, compliance with applicable laws should be an ongoing priority.
