BitMEX is in a world of trouble right now. The company has operated as the world’s largest crypto derivatives exchange for years, providing obscene amounts of leverage to its traders and profiting off their ability to make money – or inability to do so, for that matter.
Criticism aside, everything has been going on well for the company. However, it all changed this month, after two federal agencies hit the company with severe charges that have threatened its operations.
Charges Roll In
First was a charge from the Department of Justice, which claimed that four of the company’s executives – Arthur Hayes, Ben Delo, Gregory Dwyer, and Samuel Reed – had deliberately targeted traders in the United States to trade in an unregulated exchange. The charge also faulted the exchange for continually operating even though it didn’t even have any of the basic anti-money laundering (AML) and know-your-customer (KYC) security policies.
The Justice Department explained that this operation essentially meant that the company, as well as its top executives, were complicit in helping fraudsters and other criminals launder their month.
Pretty much the same day, the Commodity Futures Trading Commission (CFTC) hit BitMEX with another charge. According to a complaint with the Southern District of New York, the financial watchdog alleged that BitMEX had offered illegal leverage trading to customers.
As the CFTC’s estimates show, BitMEX’s total leverage offering since t launched in 2014 is in excess of $1 trillion. Along with the company’s executives, the CFTC also named HDR Global Services (Bermuda) Limited (BitMEX), ABS Global Trading Limited, HRD Global Trading Limited, Shine Effort Inc., and 100x Holding Limited in its complaint.
The financial watchdog confirmed that it seeking civil penalties, disgorgement, injunctions against future violations, and even permanent trading bans.
Along with the charges, the District Court additionally indicted all of BitMEX’s aforementioned executives of violating the Bank Secrecy Act. A conviction could see them all pay up to $250,000 in fines and serve up to five years behind bars.
FBI Assistant Director William Sweeney claimed that one of the men had openly bragged about their ability to incorporate the firm in a jurisdiction away from the United States. The executive in question reportedly bragged that it was easy to bribe foreign regulators to allow the company continue its shady dealings.
It’s obvious that BitMEX is in significant trouble. The company has come under scrutiny for its past dealing sin the past, but it always managed to avoid most government oversight and land on its feet. However, there’s a sense that the firm won’t survive this one.
For its part, the company already denied all allegations. In a blog post published to that effect, the firm disputed all claims from the federal institutions as spurious and malicious. In part, the blog post read:
“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.”
However, cracks are beginning to show as several of its business aspects have taken a hit.
In the wake of the lawsuits, BitMEX’s business suffered on several fronts. According to data from Glassnode, traders withdrew 45,000 BTC tokens (worth about $420 million at the time) from the exchange since the legal issues began. Glassnode had pointed out that BitMEX lost 23,200 BTC (about $243 million) in a single hour, with the number making the largest single-hour outflow the exchange ever witnessed.
Glassnode also added that BitMEX wallets held about 170,00 BBTC (worth about $1.8 billion).
Joining the outflows, open positions for the company’s Bitcoin futures contracts also decreased. As data from market analytics firm Skew showed, the drop was about 20 percent, with more set to possibly come. As it was with the drop in total number of assets in its custody, it is most likely that the government indictment case caused this hit to open positions.
It’s worth asking what happens to the top exchange now that it seems to be in a federal net that no one ever wants to find themselves. First off, there’s a slim chance that it would be back to business as usual in the first place. In the best-case scenario for BitMEX right now, the company wins its case against the Justice Department and CFTC. Even at that, it will continue to live down this stigma for a long time.
In the worst-case scenario, both federal agents win the case and begin to clamp down on the company. Some of their demands have already bene damaging enough, and they could quite literally spell the end for BitMEX.
The company itself knows this. Over the past week, it has spent considerable time dissociating itself from some of its executives.
Earlier this week, 100x Group, one of BitMEX’s operators, announced the firing of three founders. Arthur Hayes, who served as BitMEX’s CEO, has now been let go. Samuel Reed and Ben Delo were fired as well. 100x Group also confirmed that it had sent Dreg Dwyer, its Head of Business Development, on an indefinite leave of absence.
It’s unclear when Dwyer will return to the firm. Al in all, the future looks pretty bleak for BitMEX. With crypto crime on the rise, authorities will be looking for a pound of flesh, and the exchange could very well take the brunt of the blame.