Markets • October 9, 2020, 5:41PM EDT

Three big questions now that the U.S. government is cracking down on BitMEX

Quick Take

Now that the U.S. government has come down on BitMEX and its former executives, three big questions linger about what might happen next.
The Block interviewed legal experts to get answers.

Last week, the U.S. Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) filed charges against crypto derivatives exchange BitMEX and its owner-operators, including co-founder and CEO Arthur Hayes.

Hayes and co-founders Ben Delo and Samuel Reed are accused of operating an unregistered trading platform as well as violating CFTC rules, including anti-money laundering and know-your-customer regulations. Meanwhile, the DOJ has filed criminal charges against Hayes, Delo, Reed, and BitMEX head of business development Greg Dwyer for violations of the Bank Secrecy Act.

Reed was arrested in Massachusetts on October 1 and was later released on a $5 million bond. The other three defendants are outside the U.S. and remain at large. All four have been relieved of their positions at BitMEX.

Now that the U.S. government has come down on BitMEX and its former executives, big questions remain about what the near future holds for these former executives, their old employer, and other crypto exchanges.

The Block spoke with legal experts to try and find some answers for what comes next.

1. Will the U.S. government be able to extradite the three defendants who are at large?

The answer to this one "depends on where the defendants are, how fast the government gets to them,” said Angela Angelovska-Wilson, co-founder of blockchain-focused law firm DLx Law.

According to information on LinkedIn, Hayes is either in Hong Kong or Singapore, Delo is in Hong Kong, and Dwyer in Bermuda.

The U.S. has extradition agreements in place with Singapore, Bermuda, and Seychelles, where BitMEX is registered. It does not currently have an active agreement with Hong Kong, however, because it was suspended in August.

If individuals happen to be in a country that has an extradition treaty with the U.S., "the long arm" of its federal government can certainly find them and get them arrested, said David Haas of Haas Law.

“If they decide not to either surrender or turn themselves in, they're limited for the rest of their lives as to where they go until that warrant is resolved,” said Haas, who is a former federal prosecutor.

They would have to give up a lot of freedom. “Their ability to visit their family, their ability to go to a wedding, their ability to, you know, see people that are dear to them. All of that is going to be very limited. It’s like the golden cage prison. It doesn't matter that it's a golden cage, it's still a cage,” said Angelovska-Wilson.

2. Will the government move to shut BitMEX down?

In 2017, the U.S. government seized the domain of BTC-e, which had been charged with a host of money laundering crimes. Could something similar happen to BitMEX?

Lawyers who spoke with The Block have differing opinions, although most think BitMEX will be able to continue its operations.

According to Haas, the government could seek to seize BitMEX's domain "as part of the restitution, or part of the injunctive relief.”

Josias Dewey, partner at the law firm Holland and Knight, said that is unlikely, however. “The government can really only prevent them from offering the services to U.S. residents," he said. "So I think the most likely outcome of all this is that they will ultimately agree to some consent order or some settlement that results in them discontinuing operations in the U.S.,” said Dewey.

Carol Van Cleef, chair of law firm Bradley's blockchain and digital asset practice, agreed. She said that the action against BitMEX is different from the BTC-e case, in which the U.S. government in cooperation with a number of other countries effectively shuttered the exchange and seized the owner’s assets.

"The BitMEX action is not aimed at shutting down the entity but focused on getting it properly licensed and compliant with law," said Van Cleef, adding that "this could be an uphill battle with the criminal indictment of the principals, but having the right dialogue with U.S. prosecutors and regulators is key."

Alleged BTC-e operator Alexander Vinnik was arrested in Greece in 2017 at the request of U.S. authorities and was extradited to France in January of this year, where he faces a trial. The BitMEX case has a “very different posture,” said Van Cleef.

BitMEX has said that despite the legal troubles of its former executives, it remains “business as usual” at the exchange.

Still, the exchange has seen significant withdrawals of bitcoin from its platform, and volumes and open interest in bitcoin futures on the platform have slumped since the news broke.

3. Could other crypto exchanges face similar charges?

Definitely, according to lawyers who spoke with The Block.

“It's a good wakeup call for organizations to review what they're doing,” said Van Cleef. “I think it's also an important time for organizations to make sure they understand what the rules are. And unfortunately, there's still too many lawyers who have been advising clients in this space not fully understanding what laws and regulations apply in this space and, equally important, how they apply.”

Angelovska-Wilson said the BitMEX case seems like a “very relevant precedent” that other crypto exchanges should examine and use to make sure they are not engaging in activities that might put them at risk of this kind of prosecution.

Meanwhile, The Block has learned that Binance.com still effectively allows U.S. residents to trade on its platform despite use terms saying they are not allowed. A U.S. resident just has to click “I’m not [American]” to set up an account on the platform.

Binance did not respond to questions from The Block before press time.

Meanwhile, fellow crypto derivatives exchanges Deribit and FTX are blocking U.S. residents. Below are screenshots of notifications that a U.S. user will see if they try to register on Deribit, FTX, and BitMEX, respectively.

Disclaimer: The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.