What We Can Learn from the Regulatory Actions | Arca

Phil Liu
Oct 12, 2020
On October 1, 2020, the DoJ and CFTC charged BitMEX, a major bitcoin and crypto derivatives exchange, and its founders with criminal and regulatory violations of both the Bank Secrecy Act and the Commodity Exchange Act.
For background, The Bank Secrecy Act (BSA) requires financial businesses and intermediaries to implement effective compliance procedures to identify customers, prevent money laundering, and report regulatory filings on suspicious activities. The DoJ alleged that BitMEX and its founders intentionally failed to implement these effective procedures.
The Commodity Exchange Act (CEA) regulates the conduct of participants who deal in “commodities”, which are broadly defined and can include just about any financial product. The CEA determines who can participate in leveraged financial products such as swaps, options, and other margin-enabled products. There are two types of participants:
  • “Eligible Contract Participants” (ECPs) are entities or individuals that are allowed to engage in certain financial transactions that are not open to the average investor. ECPs are often corporations, partnerships, organizations, trusts, brokerage firms, or investors that have total assets in the millions (generally $10m and up)
  • “Futures Commission Merchants” (FCMs) are regulated entities that meet certain reserve and reporting requirements in order to solicit and/or accept orders to buy or sell futures contracts, options on futures contracts, retail foreign exchange contracts or swaps and accepts money or other assets from customers to support such orders. 
The CFTC alleges that BitMEX sold these margin-enabled products to retail investors on an unregulated exchange and that BitMEX, itself, is not an FCM.
What are some key takeaways for other participants in digital assets?
Takeaway #1: Non-U.S. Entities May Be Subject to U.S. Laws
Although BitMEX was incorporated in Seychelles, this didn’t stop the U.S. authorities from asserting that U.S. laws apply to non-U.S. entities. In particular, the complaints alleged that BitMEX and its founders:
  • Marketed to U.S. non-ECP persons
  • Had substantial U.S. operations and management personnel
  • Implemented insufficient or trivial barriers to prevent U.S. persons from accessing its website 
Moreover, the complaints assert that U.S. persons did actually use the platform for trading complex financial products involving significant leverage/margin.
Takeaway #2: Willful Ignorance or Violation of U.S. Anti-Money Laundering Laws is Serious
The CFTC administers enforcement of the CEA as a civil matter, but when the DoJ gets involved in a matter, it invariably pursues enforcement as a criminal matter. Criminal penalties are much more serious and introduce the possibility of incarceration for the defendants. In addition to the BSA, digital assets may be governed by similar rules and regulations by other regulatory agencies including OFAC, FinCEN, state MSB laws, the Treasury and the SEC.
Takeaway #3: Law Enforcement and the Regulators Are Paying Attention to What You Do
In the aftermath of the charges being made public, an attorney for BitMEX complained that his client was never invited to participate in discussions with the DoJ before being charged. BitMEX also complained about the “heavy-handed” regulatory response. While regulators and law enforcement were probably caught off guard by the sudden growth of digital assets as an industry in 2017-2018, they have since methodically sanctioned or taken down non-compliant and criminal enterprises.
Gone are the days that innovators (and scammers) can take a lackadaisical approach to regulatory and legal compliance. It’s clear that regulators and law enforcement agencies share intelligence and coordinate their actions. Oftentimes, these efforts result in headline-grabbing actions that can shake confidence in this emerging industry, but cleaning up the ecosystem and aligning the participants with current regulatory standards will help continue to mature and validate the space.
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.




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