Crypto Conversation: Facing U.S. Probe, BitMEX Sees $818M Exit - TheStreet

Crypto Conversation: Facing U.S. Probe, BitMEX Sees $818M Evaporate

U.S. authorities last week brought charges against BitMEX, a Seychelles-based crypto exchange.
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What’s hot in crypto this week? 

BitMEX -- it's a peer-to-peer cryptocurrency exchange and derivatives trading website dealing in bitcoin. It was founded in 2014 in Hong Kong, but is currently based in the Seychelles. BitMEX offers a variety of trading services, including margin trading with up to 100-times leverage. That means a deposit of $1,000 will result in a trader having the ability to trade $100,000 worth of BTC and futures trading, allowing investors to bet on the future prices of BTC. 

The platform only handles prices in bitcoin, rather than fiat currencies, meaning that all gains and losses are in BTC. In 2016, BitMEX became the first Bitcoin denominated futures contract on a Chinese A Share index.

Why? 

On Oct. 1, the U.S. Attorney’s Office for the Southern District of New York unsealed a criminal indictment against several BitMEX executives, including the chief technology officers, alleging they failed to comply with the Bank Secrecy Act before allowing U.S. residents to trade funds on the platform. Specifically, the authorities said the exchange did not conduct know-your-customer checks, which opened the door for potential criminal activity. The U.S. Attorney even alleges that BitMEX failed to register with the Commodity Futures Trading Commission, or CFTC.

This is a big deal. BitMEX, which has objected to the charges, is one of the industry’s largest trading platforms. In 2016, it introduced a derivative known as perpetual swaps (futures that don’t expire) to the market, with up to 100-times leverage, and for many years it was the market leader by derivative volume and open interest. 

“BitMEX touts itself as the world’s largest cryptocurrency derivatives platform in the world with billions of dollars’ worth of trading each day. Much of this trading volume and its profitability derives from its extensive access to United States markets and customers,” the U.S. Attorney's filing reads. “Nevertheless, BitMEX has never been registered with the CFTC in any capacity and has not complied with the laws and regulations that are essential to the integrity and vitality of the U.S. markets.”

What’s Flipside Crypto’s take? 

Bribing regulators abroad “costs just a coconut”? Not quite.

BitMEX is based in the Seychelles, which you guessed it, is not just because of the weather. The Seychelles are known for being a tax haven, and more importantly a near free pass on crypto regulations. 

“One defendant went as far as to brag that the company incorporated in a jurisdiction outside the U.S. because bribing regulators in that jurisdiction cost just ‘a coconut,'” said Assistant FBI Director William Sweeney Jr. in a statement, threatening that the "price" of BitMEX's alleged crimes could be paid with fines, restitution, and federal prison time -- and not in "tropical fruit."

BitMEX defended itself in a brief statement posted on its website last week that reads: "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.”

The firm also says that the BitMEX platform will continue operating "entirely as normal and all funds are safe."

Since the charges were filed, 75,986 BTC -- or about $818 million -- have been retrieved from BitMEX.

Flipside Crypto - BitMEX flows 10-5

Traders rapidly worked to move their assets away from BitMEX, which could be in for a long, drawn-out battle with the U.S. regulators. Since the announcement happened midday on Oct. 1, most of the bitcoin was actually retrieved on Oct. 2. A breakdown of daily withdrawals from BitMEX shows that 5,026 BTC were withdrawn on the day, 57,571 BTC the next day, and 11,547 BTC on the third day, Oct. 3.

An Escalation in the U.S.'s Crackdown on Crypto

Many people were really shocked that charges were brought against BitMEX's CTO. This was not someone who was dealing with clients, and that a developer can get arrested represents an escalation in the crackdown on cryptocurrency operations in the U.S.  

It gave the people in this industry who have been playing fast and loose a good reason to worry. All of a sudden, it doesn't matter where you come from, or where this company is technically based -- if you are accused of money laundering by the U.S., you can get in trouble.

The Flipside Crypto Asset Score Tracker provides institutional and sophisticated retail investors the ability to track over 500 cryptocurrencies' fundamentals. FCAS Tracker is currently free to a select group of new users as it continues to develop the product. Visit Flipside here to gain access to Flipside Analytics.