CFTC targets BitMEX

28 August 2019

BitMEX: U.S. watchdogs willing to step up the game with crypto oversight

by Mattias Cerini

News broke out recently regarding a probe launched by the U.S. Commodities Futures Exchange Commission (CFTC) into alleged trades executed by American citizens on Seychelles based crypto margin trading BitMEX.

The investigation has not been made public as of the time of writing. However, people familiar with the matter indicated that the CFTC suspects BitMEX of having facilitated U.S. traders to transact on their platform during the years, even though the crypto exchange is not registered with the agency. Moreover, the regulator is also exploring traders’ ability to surpass the firewalls put in place by the platform by utilizing Virtual Private Networks (VPN) that masks their IP addresses.

Following the news, volumes on the exchange dropped by a staggering 33% and apparently over $70 million have flown out of the exchange.

The CFTC detains regulatory oversight over commodities and future contracts, hence since it considers Bitcoin a commodity, and BitMEX utilizes future contracts on such commodity, it claims it should have jurisdiction over the intermediary if dealing with American customers.

Arthur Hays, CEO of BitMEX, has not commented on any allegations regarding the investigation, as per company policy.

This is not the first time the exchange enters regulators crossfire, over the years much concern has been raised on the platform business model, allowing users to leverage massively (up to 100 %) their investments into the already highly volatile digital assets. Several allegations have also been made that the crypto platform is also facilitating illicit transactions on its exchange since it does not impose Know Your Customer (KYC) and Anti Money Laundering (AML) procedures on its customers.

Nourel Roubini, aka “Doctor Doom”, an economics professor from NYU Stern, has been one of the strongest advocates of BitMEX supposedly fraudulent activities over the past, and given the news of the report, it has launched another social media attack to the crypto exchange.

Roubini and Hays have been adversaries for quite some time, and even had a debate at the latest Asia Blockchain Summit in Taiwan, where the professor has stated that he believes that BitMEX is just leveraging on inexperienced retail investors inability to understand the risk of such investments, exploiting their ignorance to produce hefty profits, ruining people’s lives in the process.

What does this mean for crypto?

This is the latest report of increased attention and following action from U.S. regulators against crypto-related business, a clear step up in the process of imposing existing regulations and scrutiny over the unregulated industry.

With the recent disclosure to the public of the Libra project promoted by Facebook and the subsequent negative comments arising from U.S. senators at the two hearings held in July, more and more regulators are starting to grasp the magnitude and scale of the potential disruption of cryptos, shifting their attention and moving to intensify their efforts on this front.

U.S. Treasury Secretary Stephen Munchin stated that with the establishment of the Financial Stability Oversight Council’s Working Group on Digital Assets, comprising of many government bodies among which the CFTC, the efforts to enforce standard regulation on the crypto industry will vamp up significantly.

Reporting directly from Munchin speech:

The United States has been at the forefront of regulating entities that provide cryptocurrency. We will not allow digital asset service providers to operate in the shadows and will not tolerate the use of the cryptocurrencies in support of illicit activities. Treasury has been obvious to Facebook, to bitcoin users and other providers of digital financial services that they must implement the same anti-money laundering and countering financing of terrorism, known AMLCFT safeguards as traditional financial institutions.

The underpinnings of Munchin point are clear. Regulators want to ensure consumer’s protection, impose compliance measure on crypto companies and avoid facilitation of terrorist financing and fraudulent activities.

These are just the most “advertised” reasons behind regulatory actions; of course, in the shadows, there are more profound issues and fears that are unspoken but might be even more compelling for authorities.

Think of the implications of the introduction of a global currency such as Libra for monetary policy and the dollar hegemony over the current financial system or the complete disruption of the banking systems and its inherent fee reliant structure. I believe these are the actual problems that drive regulatory action in the crypto space. Of course, there are those that are advocates of innovation and don’t want to hinder growth in the industry, but as the disruption continues, and more and more “legacy” jobs are at risk and their previously firm held power fades, more and more authorities will step up their game in trying to control or stop the change.

Key takeaways

Actors such as BitMEX are not the best advocates of the crypto industry, given their lack of transparency and their tendency to exploit retail investors for their personal gain. But I believe this isn’t much different from behaviours we have witnessed by regulated entities in the financial markets over the years. The difference is that by being borderless and utterly reliant on the internet, these entities are much harder to control and enforce upon. The underpinning issue here is the lack of education of retail investors in utilizing instruments and assets that are outside their realm of understanding.

In a world that is striving toward more openness to financial systems and asset classes for the “uneducated” people, I believe that stopping their access to such platforms will be nearly impossible, given the increased number of workarounds available in today’s markets such as VPNs. The only solution I see is raising awareness of these different technologies and step up efforts in increasing the competence of consumers, encouraging and facilitating knowledge acquisition and retention.

We’ll follow closely regulatory action and keep you posted on further developments.

This article was originally published in “Blockchain Compliance Bulletin”, number 8

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