On August 10, 2021, the Commodity Futures Buying and selling Fee (CFTC) introduced that the US District Courtroom for the Southern District of New York entered a consent order towards HDR World Buying and selling Restricted, 100x Holding Restricted, ABS World Buying and selling Restricted, Shine Effort Inc Restricted and HDR World Providers (Bermuda) Restricted (collectively, the BitMEX Entities or BitMEX) and charged every with working the BitMEX cryptocurrency derivatives buying and selling platform. Because of this, market members ought to anticipate elevated CFTC enforcement throughout the cryptocurrency area and be aware of—and adjust to—all related CFTC guidelines.
The BitMEX Entities are required to pay a $100 million civil financial penalty and offers that as much as $50 million of the penalty could also be offset by funds made by the BitMEX Entities or credited pursuant to a Consent to Evaluation of Civil Financial Penalty entered by the Monetary Crimes Enforcement Community (FinCEN). The order additionally prohibits BitMEX from making additional violations of the Commodity Trade Act (CEA) and the CFTC’s rules, as charged.
This order stems from a CFTC motion filed on October 1, 2020, towards the BitMEX Entities and their three particular person founders. The CFTC criticism charged the entities and their founders with working the BitMEX platform whereas conducting important points of BitMEX’s enterprise from the US and unlawfully accepting orders and funds from US prospects to commerce cryptocurrencies, together with Bitcoin, Ether and Litecoin derivatives. BitMEX supplied leveraged buying and selling of cryptocurrency derivatives to retail non-eligible contract members and institutional prospects in the US and all through the world by its web site, cellular software and by direct connection to its buying and selling engine servers through the BitMEX software programming interface (API). Moreover, BitMEX acted because the counterparty to sure transactions on its platform and, extra importantly, operated with out registering as a chosen contract market or a swap execution facility with the CFTC. The order additionally finds that BitMEX violated the CEA by working as a Futures Fee Service provider (FCM) with out CFTC registration.
On Could 13, 2016, BitMEX launched its first swap product, a “perpetual bitcoin U.S. greenback leveraged swap product.” On its web site, BitMEX described its “Perpetual Contract” (or “perpetual swap contract”) as “a product just like a standard Futures Contract in the way it trades.” BitMEX solicited orders from US-based prospects for futures, choices and swaps by its web site and on social media, which have been obtainable to, and accessed by, US-based prospects. BitMEX was conscious that US prospects used digital personal networks (VPNs) to entry the BitMEX platform and supplied, entered into, confirmed the execution of and in any other case carried out actions referring to commodity choice transactions in interstate commerce. These transactions weren’t executed on any registered board of commerce, nor was BitMEX registered as a overseas board of commerce.
BitMEX solicited or accepted orders for the acquisition or sale of commodities for future supply; engaged in soliciting or accepting orders for swaps; engaged in soliciting or accepting orders for retail commodity transactions and/or acted as a counterparty to these transactions. In reference to these actions, BitMEX additionally accepted cash, securities or property—together with Bitcoin—to margin, assure or safe ensuing trades on its platform. (The swaps solicited or accepted by BitMEX included “perpetual swaps” or “perpetual contracts” on Bitcoin, Ether and Litecoin.) BitMEX additionally operated a buying and selling system or platform wherein multiple market participant has the power to execute or commerce swaps on digital belongings with multiple different market participant on the system or platform—with out registering with the CFTC as a chosen contract market or a swap execution facility.
Moreover, BitMEX didn’t implement a buyer identification program (CIP), together with know-your-customer (KYC) procedures, that may allow it to determine US individuals utilizing the BitMEX platform or decide the true identification of the overwhelming majority of its prospects. BitMEX additionally didn’t implement an sufficient anti-money laundering (AML) program, which is required to forestall or detect, amongst different issues, terrorist financing or different felony exercise, and didn’t implement procedures to find out whether or not a buyer seems on lists of recognized or suspected terrorists or terrorist organizations, resembling these issued by the US Division of the Treasury’s Workplace of International Belongings Management (OFAC).
Appearing Chairman of the CFTC Rostin Benham states that, “this case reinforces the expectation that the digital belongings trade, because it continues to the touch a broader pool of market members, takes severely its obligations within the regulated monetary trade and its duties to develop and cling to a tradition of compliance.” The CFTC is anticipated to take immediate motion when actions impacting its jurisdictional markets increase buyer and shopper safety considerations.
Commissioner of the CFTC Dan Berkovitz said, “In the present day’s order enforces our registration, exchange-trading, and anti-money laundering necessities as they apply to cryptocurrency buying and selling. The Fee’s statutory mission additionally contains selling ‘accountable innovation and truthful competitors’ amongst markets and market members. Blockchains, sensible contracts, and different new applied sciences have the potential to enhance the transparency and effectivity of our derivatives markets. Nonetheless, for innovation to be accountable and competitors to be truthful, it should adjust to the CEA and our rules.”
Market members must be conscious that sure merchandise within the crypto area are commodities or derivatives and are regulated by the CFTC. Very like the US Securities and Trade Fee (SEC) and FinCEN, the CFTC is more likely to improve its enforcement actions within the digital asset area, and market members should be aware of all related CFTC rules.