The near-infinite reach of US finance laws into every area of cryptocurrencies (among other categories) is pretty staggering. The promises that cryptocurrencies want to gift to their users are continually sacrificed in the name of draconian regulatory compliance, regardless of the national borders (or lack-thereof) involved. It's particularly interesting to watch various cryptocurrency platforms slowly transform into that which they originally detested, not of their own will, but via the strong guiding hands of US agencies.
In this case Bitmex was not incorporated in the US, informed US residents that they were not allowed to use the platform, and even blocked all US IP addresses from accessing their services as well. As the article mentions, yes, some people got around this with VPN blocks, lying about their location, and more. Apparently the US views the solution to this loophole as arresting the founders of Bitmex, regardless of their country of residence, for not complying with US laws. As another commenter reminded me to mention, Bitmex also did not touch USD: they didn't allow withdrawals, deposits, nor transactions in USD, ever. The discrepancy between this treatment and that which established US megabanks receive is made perfectly clear by the latter section of this article, in which billions in fines are often paid in exchange for having purposefully committed blatantly illegal activity for profits on a massive scale.
Perhaps there is more to this story that we do not know (I see accusations of a lack of solvency, front-running, and other more serious activities), but if there is no true bombshell awaiting explosion here, I certainly hope his legal defense is sufficient for a solution in his favor.
An extra point to add to this: Bitmex isn't an exchange and never touched USD or any other fiat currency, you couldn't obviously use it to launder money (at least not in any way that you couldn't use any other custodial wallet to do so).
Essentially it is just a platform that lets non-US bitcoin users deposit bitcoin and place side bets on price of Bitcoin (and several altcoins, note that you couldn't deposit and withdraw those altcoins AFAIK, just place sidebets on their exchange rates).
It is easily (ab?)used as a gambling platform.
From a consumer protection perspective it's probably a disaster-- the vast majority of users lose their shirts. But I'm not aware of any accusation that there was widespread use by US persons. And CFD gambling houses are common in many places outside of the US.
These are both good points, I added to my comment that Bitmex didn't touch USD since it's relevant.
The gambling problem is absolutely true, but it's difficult to know how to approach it properly, since it's obvious that there's people gambling just as badly on brokerages in the US right now, primarily with options (especially Robinhood).
Actually I think it might be rather good for laundering money. Say you sell your shipment of cocaine for bitcoins - you put that in a tainted bitcoin wallet and send that to Bitmex and claim they are nothing to do with you. But actually you withdraw from Bitmex to a clean wallet where you claim the money came from your brilliant trading on that one.
It falls apart if bitmex share all their records with the revenue services but I don't think they do.
In a very non KYC way they don't ask for any proof of who you are. You can open an account for Mickey Mouse and if you send in bitcoin you are good to go.
That said there are probably less regulated exchanges out there for that kind of stuff. If you really wanted to launder large sums you might be better off setting up your own one.
> The promises that cryptocurrencies want to gift to their users are continually sacrificed in the name of draconian regulatory compliance
The law isn't optional. Crypto doesn't change that.
> It's particularly interesting to watch various cryptocurrency platforms slowly transform into that which they originally detested, not of their own will, but via the strong guiding hands of US agencies.
The reality is that cryptocurrency exchanges aren't actually operated with ideological purity as a goal. They're profit-driven enterprises. They just want to be in the middle of the action and collect a percentage fee of all the money moving back and forth. They're not going to sacrifice profits in the name of arbitrarily resisting governments.
The law applies to juridictions. Parent comment reiterates that USA should have no jurisdiction over bitmex... But they do.
It's sort of like dragging Somali pirates to court in NYC. If it affects Americans, even indirectly, it matters.
You could argue that money laundering in any part of the world is connected to the drug trade in USA which harms citizens. This makes you automatically the target of us law enforcement.
> Apparently the US views the solution to this loophole as arresting the founders of Bitmex, regardless of their country of residence
The only person who's been arrested (Sam Reed) was arrested at his home in the United States.
Arthur Hayes, the main focus of this story, is a US citizen and spent most of his life in the US, though seemingly has lived in various countries of late. By virtue of being a billionaire, he can most likely reside whereever he likes. I cant see why that should make him immune from prosecution in the US (a Grand Jury found there was enough evidence to indict him, though this does not mean hes been found guilty of anything).
I don't think he should be immune to prosecution or above laws in any extraordinary way, to clarify. It seems from the article that due to covid there have been delays, but I assume he will face trial or settlement from the US sooner or later. I just think this particular set of charges seems to be lacking the level of evidence and merit we would want for something of their magnitude.
The derivative contract that drove the success of Bitmex, called a Perpetual Future, was quite the innovation. It behaved like a futures contract that never expired. It then led to copycat products across their major competitors.
Is there any product like this in traditional financial markets?
Regarding the authorities' pursuit of Hayes, it does strike me as odd that they're not going after their major competitors (mostly China-based) who also don't have KYC and are therefore serving US customers through VPN too.
This isn’t true. The Bitmex “perpetual swap” isn’t any different from what spread betting and CFD dealers have been doing for years. They are basically just very short term futures that automatically roll forward.
The real genius was to invert the trading process. People often talk about Bitmex being a Bitcoin derivatives platform, but it isn’t. It’s a USD derivatives platform. When you trade on Bitmex you’re trading USD derivatives funded in Bitcoin. This is what in theory allowed them to sidestep all that pesky KYC.
Isn't it rather different to CFDs because of the interest mechanism that it uses to keep the price aligned with spot? Where else have we seen that before Bitmex?
The inversion was another big innovation of the perp contract, yes.
yeah except retail for the life of them can't figure out how to price quantos and the exchange is dying. They had such a headstart and squandered it. ftx is now positioning itself as the leading exchange.
Are the China based competitors owned by Americans? I figured they went after this one because it is owned by an American, and they therefore have the authority to go after him.
> It behaved like a futures contract that never expired.
What does that mean? A futures contract says "on [date], we will exchange [X amount of goods] for [Y amount of money]". If there's no date, nothing ever happens.
Correct. I'm saying it behaves like a futures contract in the sense it is delta one. It serves the same purpose as a futures contract but achieves that through a different mechanism.
EDIT: My apologies, you are right. I called it a "Perpetual Future" in my OP, which was a typo. It should've read "Perpetual Swap".
It's funny and sad: the US govt thinks it can regulate a foreign exchange based in an independent country.
And now the govt wants its pound of flesh for having been shown to be clowns, because (OMG!) foreign businesses may not respect the laws of other countries!
TBH I think Hayes only mistake was to incorporate in the Seychelles instead of HK or Russia: BitMex would then be in a place that can't be trampled on with impunity.
Some people in the West lament that most mining is done is China. I think it's clearly in crypto best interest to be in bed with the underdog, as the incumbent may not willingly give up its position as the world currency.
Some people say "eat the rich"? Their appetite for justice would be better satiated by taking a bite of politicians and their lackey prosecutors.
America has a long and storied history of extraterritorial application of its laws.
Americans (well, US Persons, which includes residents, LPRs, and citizens) are not allowed to open bank accounts in much of the world because of FATCA. They're not allowed to open a brokerage account anywhere that isn't SEC regulated (hit: those only exist in America). They're required to file taxes with the IRS for life, and if they open a business outside of America, they own a controlled foreign corporation. If they have more than $10K USD in a foreign bank account they have to file FBARs with FinCEN.
The US government gets away with this because of the size of the market, level of influence and military. It's been happening forever.
What do you mean "thinks" it can? It is clearly doing so here.
Not that there's a short supply of examples, but just look at the current meddling in oil pipeline agreement Nordstream 2 between Russia and Germany; the US financial empire regulates whichever foreign nation's affairs they can get away with.
I mean that the government can claim whatever it wants, the validity of the claims still have to be demonstrated in court - since we are not yet in a dictatorship the executive and the judicial branch remain separate.
> the US financial empire regulates whichever foreign nation's affairs they can get away with.
Germany is a lapdog, but Russia less so. I get the feeling it won't be allowed to fly: if Germany really wants its Sputnik vaccines, it will have to show some spine.
And let's talk again when the "US financial empire" thinks it can do the same with China :)
I’m totally out of the loop on this but curious to know Hayes’ views on racism, especially considering how likely it is that he holds libertarian views. It piques my interest because I’ve recently been hearing heterodox views from commentators like Kmele Foster and seeing split reactions from the left.
Amazing article and crazy story. Arthur was one of the most entertaining speakers in cryptocurrency; not an easy feat in a gallery of magicians, rogues, and exotic financiers. I have to wonder what the court case will ultimately shake out to be about. The most interesting part of this case is how the indictment differs from BTC-E and other organizations labeled as antithetical to the free world.
I think there's two reads to it: either the fraud at BitMEX was so rampant and pervasive that taking the time to indict a particular instance of villainy was not in the interest of justice, or this was something else entirely more complicated. In either case the whole thing is fascinating.
I, for one, cannot wait to see the court documents as they come out. I can only imagine that there will be a great many fireworks.
I think the indictment is straightforward: BitMEX provided banking services to US customers without implementing Know Your Customer and other required anti-money-laundering safeguards.
Being a "fintech" product doesn't exempt an operator from the law: KYC is the law on the US.
I'm surprised there haven't been more indictments, since I'm sure other exchanges have operated fast+loose w.r.t. AML and KYC
*Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, ING, Lloyds Banking Group, Royal Bank of Scotland, and Standard Chartered have all paid fines for conduct that has included money laundering, sanctions violations, and massive tax fraud. In the world of high finance, charging corporate officers in their individual capacity is rare.*
Yeah, we've all heard of these. They only get fined.
*"I can push back on that—big time,” replied former CFTC chairman Giancarlo. “The CFTC has been no slouch in making referrals for criminal action.” He cited Refco and Peregrine Financial as examples where, at the commission’s urging, the Justice Department charged CEOs who later received lengthy prison terms.*
Readit News
In this case Bitmex was not incorporated in the US, informed US residents that they were not allowed to use the platform, and even blocked all US IP addresses from accessing their services as well. As the article mentions, yes, some people got around this with VPN blocks, lying about their location, and more. Apparently the US views the solution to this loophole as arresting the founders of Bitmex, regardless of their country of residence, for not complying with US laws. As another commenter reminded me to mention, Bitmex also did not touch USD: they didn't allow withdrawals, deposits, nor transactions in USD, ever. The discrepancy between this treatment and that which established US megabanks receive is made perfectly clear by the latter section of this article, in which billions in fines are often paid in exchange for having purposefully committed blatantly illegal activity for profits on a massive scale.
Perhaps there is more to this story that we do not know (I see accusations of a lack of solvency, front-running, and other more serious activities), but if there is no true bombshell awaiting explosion here, I certainly hope his legal defense is sufficient for a solution in his favor.
Essentially it is just a platform that lets non-US bitcoin users deposit bitcoin and place side bets on price of Bitcoin (and several altcoins, note that you couldn't deposit and withdraw those altcoins AFAIK, just place sidebets on their exchange rates).
It is easily (ab?)used as a gambling platform.
From a consumer protection perspective it's probably a disaster-- the vast majority of users lose their shirts. But I'm not aware of any accusation that there was widespread use by US persons. And CFD gambling houses are common in many places outside of the US.
The gambling problem is absolutely true, but it's difficult to know how to approach it properly, since it's obvious that there's people gambling just as badly on brokerages in the US right now, primarily with options (especially Robinhood).
Actually I think it might be rather good for laundering money. Say you sell your shipment of cocaine for bitcoins - you put that in a tainted bitcoin wallet and send that to Bitmex and claim they are nothing to do with you. But actually you withdraw from Bitmex to a clean wallet where you claim the money came from your brilliant trading on that one.
It falls apart if bitmex share all their records with the revenue services but I don't think they do.
In a very non KYC way they don't ask for any proof of who you are. You can open an account for Mickey Mouse and if you send in bitcoin you are good to go.
That said there are probably less regulated exchanges out there for that kind of stuff. If you really wanted to launder large sums you might be better off setting up your own one.
The law isn't optional. Crypto doesn't change that.
> It's particularly interesting to watch various cryptocurrency platforms slowly transform into that which they originally detested, not of their own will, but via the strong guiding hands of US agencies.
The reality is that cryptocurrency exchanges aren't actually operated with ideological purity as a goal. They're profit-driven enterprises. They just want to be in the middle of the action and collect a percentage fee of all the money moving back and forth. They're not going to sacrifice profits in the name of arbitrarily resisting governments.
It's sort of like dragging Somali pirates to court in NYC. If it affects Americans, even indirectly, it matters.
You could argue that money laundering in any part of the world is connected to the drug trade in USA which harms citizens. This makes you automatically the target of us law enforcement.
The only person who's been arrested (Sam Reed) was arrested at his home in the United States.
Arthur Hayes, the main focus of this story, is a US citizen and spent most of his life in the US, though seemingly has lived in various countries of late. By virtue of being a billionaire, he can most likely reside whereever he likes. I cant see why that should make him immune from prosecution in the US (a Grand Jury found there was enough evidence to indict him, though this does not mean hes been found guilty of anything).
Is there any product like this in traditional financial markets?
Regarding the authorities' pursuit of Hayes, it does strike me as odd that they're not going after their major competitors (mostly China-based) who also don't have KYC and are therefore serving US customers through VPN too.
The real genius was to invert the trading process. People often talk about Bitmex being a Bitcoin derivatives platform, but it isn’t. It’s a USD derivatives platform. When you trade on Bitmex you’re trading USD derivatives funded in Bitcoin. This is what in theory allowed them to sidestep all that pesky KYC.
The inversion was another big innovation of the perp contract, yes.
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What does that mean? A futures contract says "on [date], we will exchange [X amount of goods] for [Y amount of money]". If there's no date, nothing ever happens.
Products like USO or some vix etns are examples
EDIT: My apologies, you are right. I called it a "Perpetual Future" in my OP, which was a typo. It should've read "Perpetual Swap".
Without one or something substantially similar why would you ever exit a losing position? :)
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And now the govt wants its pound of flesh for having been shown to be clowns, because (OMG!) foreign businesses may not respect the laws of other countries!
TBH I think Hayes only mistake was to incorporate in the Seychelles instead of HK or Russia: BitMex would then be in a place that can't be trampled on with impunity.
Some people in the West lament that most mining is done is China. I think it's clearly in crypto best interest to be in bed with the underdog, as the incumbent may not willingly give up its position as the world currency.
Some people say "eat the rich"? Their appetite for justice would be better satiated by taking a bite of politicians and their lackey prosecutors.
Americans (well, US Persons, which includes residents, LPRs, and citizens) are not allowed to open bank accounts in much of the world because of FATCA. They're not allowed to open a brokerage account anywhere that isn't SEC regulated (hit: those only exist in America). They're required to file taxes with the IRS for life, and if they open a business outside of America, they own a controlled foreign corporation. If they have more than $10K USD in a foreign bank account they have to file FBARs with FinCEN.
The US government gets away with this because of the size of the market, level of influence and military. It's been happening forever.
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Not that there's a short supply of examples, but just look at the current meddling in oil pipeline agreement Nordstream 2 between Russia and Germany; the US financial empire regulates whichever foreign nation's affairs they can get away with.
I mean that the government can claim whatever it wants, the validity of the claims still have to be demonstrated in court - since we are not yet in a dictatorship the executive and the judicial branch remain separate.
> the US financial empire regulates whichever foreign nation's affairs they can get away with.
Germany is a lapdog, but Russia less so. I get the feeling it won't be allowed to fly: if Germany really wants its Sputnik vaccines, it will have to show some spine.
And let's talk again when the "US financial empire" thinks it can do the same with China :)
where is his deferred prosecution agreement? why wasnt it even offered here, was it offered here?
all they try to pin on him is two bank secrecy act violations and don’t offer a “pay us to go away” route
this state has zero credibility
Dead Comment
I think there's two reads to it: either the fraud at BitMEX was so rampant and pervasive that taking the time to indict a particular instance of villainy was not in the interest of justice, or this was something else entirely more complicated. In either case the whole thing is fascinating.
I, for one, cannot wait to see the court documents as they come out. I can only imagine that there will be a great many fireworks.
Being a "fintech" product doesn't exempt an operator from the law: KYC is the law on the US.
I'm surprised there haven't been more indictments, since I'm sure other exchanges have operated fast+loose w.r.t. AML and KYC
Yeah, we've all heard of these. They only get fined.
*"I can push back on that—big time,” replied former CFTC chairman Giancarlo. “The CFTC has been no slouch in making referrals for criminal action.” He cited Refco and Peregrine Financial as examples where, at the commission’s urging, the Justice Department charged CEOs who later received lengthy prison terms.*
Nope, never heard of these. They go to jail.