The allegations of the founder of BitMEX highlight the risks for DeFi

In October, the Commodity Futures Trading Commission (CFTC) and the United States Department of Justice (DOJ) filed law enforcement actions against entities and individuals who own and operate the Bitcoin Mercantile Exchange (BitMEX), a trading platform for cryptocurrency derivatives.

The CFTC claims that since 2014 BitMEX has operated an unregistered trading platform and has violated CFTC regulations, among other things, by failing to implement required anti-money laundering (“AML”) procedures. The DOJ, in turn, is accusing the three founders of BitMEX and its first employee of criminal violations of the Bank Secrecy Act (BSA) and conspiracy to intentionally fail to establish, implement and maintain an adequate AML program.

BitMEX shares signal an expansion of regulatory oversight. These actions also emphasize that U.S. regulators will work together to hold individuals accountable for violations of registration and inadequate compliance protocols.

While BitMEX is a highly centralized exchange platform where the founders allegedly still collectively exercise 90% ownership and control, BitMEX shares also have implications for decentralized finance (DeFi). If DeFi platforms offer financial products to US residents, such as derivatives, which would trigger registration or AML obligations for a centralized entity, what is happening to BitMEX suggests that the platform and its founders may still face scrutiny from of US regulators.

Being registered in the Seychelles allowed BitMEX users to trade cryptocurrency derivatives. As of last year, according to regulators, BitMEX has earned more than $ 1 billion in user transaction fees since 2014. The CFTC claims that BitMEX has violated the Commodities Exchange Act by not registering as a future commission trader. The CFTC and DOJ also say that BitMEX has failed to implement the required compliance procedures of financial institutions active in US markets, such as the AML protocols. Users could have signed up with BitMEX by providing a verified email address and were not required to provide any documents to verify their identity or location.

The DOJ argues that BitMEX’s conduct constitutes an intentional breach of the BSA. The CFTC and DOJ each assert jurisdiction over BitMEX based on allegations of defendants’ activity in the United States and on the request and acceptance of orders and funds from US users. The government claims that BitMEX’s “maze” of offshore entities was intended to obscure its significant contacts with the US Despite being registered in the Seychelles, BitMEX allegedly has no physical presence there, but has many subsidiaries and affiliates in the US. The CFTC also points out:

The government claims that the withdrawal of BitMEX from the US in 2015 was a ruse and that continued access to BitMEX by US residents was an “open secret” because BitMEX only required IP verification at the time of creation. an account and allowed users to log in via Tor Network and VPN.

The government also claims that the defendants attempted to avoid US law by incorporating it into the Seychelles, allegedly banning – but knowingly allowing – the participation of users residing in the United States and deleting evidence of users residing in the United States. The DOJ argues that these steps to circumvent US law reveal the intentional violation of the BSA by the defendants.

Blockchain-based platforms involved in both centralized finance (CeFi) and DeFi can learn the following from BitMEX stocks:

Offshore registration and offshore living are not enough to avoid US law enforcement jurisdiction. In assessing whether US law applies to an exchange or platform, regulators will look beyond form and determine whether the substance of an individual or entity’s conduct provides a sufficient judicial basis.

Avoiding US markets is only effective if you actually avoid US markets. Although tautological, a company can only avoid US regulation by truly staying out of US markets. According to the US government, it is not enough to deny contacts with the United States and take half measures to achieve that goal. In particular, the government has focused in this case on BitMEX’s continuing marketing efforts in the United States

See also: BitMEX Says It’s ‘Business As Usual’ Despite Bitcoin Balance 30% Drop After CFTC, DOJ Action

Founders and employees may be exposed to a platform’s activity if steps are not taken to comply with applicable law. If a platform has contacts within the United States or has not taken reasonable and affirmative steps to exclude U.S. persons from the platform, U.S. regulators may seek to establish jurisdiction. Even in the absence of centralized ownership or founder control, regulators can target people within the company, including those who developed or created the digital asset, protocol or platform, if it was designed and launched. without taking into account compliance obligations.

The absence of immediate legal repercussions is not proof of an absence of liability. The DOJ and the CFTC cite behaviors from more than five years ago. Law enforcement does not need, and rarely will, charge a defendant at the first sign of potential illegality. Therefore, compliance with applicable laws should be a constant priority, regardless of whether a company faces immediate regulatory scrutiny.

BitMEX has developed a reputation as one of the largest and most successful offshore digital currency exchanges. The government’s actions show how US regulators will work together to initiate law enforcement actions, bringing scrutiny even to what may initially appear outside the scope of US law.