US charges bitcoin exchange founders for skirting money-laundering laws

New York — Founders of the pioneering crypto-derivatives exchange BITMEX were charged with skirting US laws preventing money laundering and hit with civil sanctions as well, abruptly sending the price of bitcoin down.

Arthur Hayes, Benjamin Delo and Samuel Reed were indicted in New York, where federal prosecutors claim the digital-asset exchange served American customers while flouting US banking laws. Hayes had said the exchange was incorporated in the Seychelles because they could bribe authorities there for the cost of “just a coconut”, according to the indictment, unsealed on Thursday.

“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,”  Federal Bureau of Investigation (FBI) assistant director William F Sweeney Jr said in a statement. The Commodity Futures Trading Commission (CFTC) brought a parallel civil action.

It is a black eye for the second-largest cryptocurrency-derivatives exchange, which invented perpetual Bitcoin futures that were easy for retail investors to understand. BITMEX grew popular for letting investors leverage their bets by a factor of 100. Bitcoin, the largest cryptocurrency, erased gains made earlier on Thursday and fell as much as 2.4% to $10,450 following the announcement of the charges.

“We strongly disagree with the US government’s heavy-handed decision to bring these charges, and intend to defend the allegations vigorously,” a spokesperson for the company said in a statement.

“From our early days as a start-up, we have always sought to comply with applicable US laws, as those laws were understood at the time and based on available guidance.”

Hayes set up BITMEX in January 2014 with Delo, an Oxford-educated computer scientist who created high-frequency trading systems for JPMorgan Chase, and Reed, a programmer who specialised in designing superfast web applications. By matching buyers and sellers of futures, BITMEX makes money no matter which way cryptocurrencies move.

For that reason, Hayes had learnt as an equities trader for Citigroup in Hong Kong, trading derivatives was much more profitable than playing the spot markets. Bitcoin has climbed about 50% since December, continuing the volatility of recent years that saw it surge 95% in 2019 after tumbling 73% in 2018.

Hayes was a tireless marketer, repeatedly promoting BITMEX on US television shows, according to the indictment. In 2018, BITMEX rented three Lamborghinis to park outside a Bitcoin conference in Manhattan. Hayes “declared this ‘stunt’ a success”, based on the coverage he got, prosecutors said.

The three founders were charged with violating the Bank Secrecy Act and conspiring to violate the act, both of which carry a maximum prison term of five years.

Facing the same charges is Gregory Dwyer, the exchange’s first employee and later its head of business development. Reed was arrested in Massachusetts on Thursday morning, while the rest remain at large, prosecutors said.

Sean Hecker and Jenna Dabbs, attorneys for Dwyer, said in a statement they were “surprised and dismayed” by the indictment.

“Our client, Greg Dwyer, who complied fully with the CFTC investigation and was never so much as invited to speak with prosecutors in the US Attorney’s Office in Manhattan, 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,” they said. “We will strongly contest these charges.”

For months BITMEX was the world’s largest crypto-derivatives exchange and is now the second-largest, behind Binance. To serve US customers, it was required to register with the CFTC and establish adequate programs to ensure that its platform was not used for illegal purposes such as money laundering, according to the government.

Prosecutors said the executives instead chose to ignore those requirements, knowing that US residents were still using the exchange and that its controls were ineffective.

Bloomberg reported in July of 2019 that the CFTC was investigating BITMEX with a focus on whether it had broken those rules.

Bloomberg