What We Can Learn from the Regulatory Actions | Arca

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.

Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, legal advice, tax advice, a research report, or a recommendation. Any decision to invest or take any other action with respect to any investments discussed in this commentary may involve risks not discussed, and therefore, such decisions should not be based solely on the information contained in this document. Please consult your own financial/legal/tax professional.

Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed are those of the author, and are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca disclaims any obligation to update or revise any statements or views expressed herein. Past performance is not a guarantee of future results and there can be no assurance that any future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which is believed to be accurate, but has not been independently verified. Arca and/or certain of its affiliates and/or clients may now, or in the future, hold a financial interest in investments that are the same as or substantially similar to the investments discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities, or a solicitation to provide investment advisory services.