Top crypto derivatives exchange BitMEX is currently dealing with the fallout from a legal tussle with two federal agencies. While the chances of the exchange escaping unscathed are slim to none, a top financial regulator sees the situation as a win for the industry.
A Wake-Up Call
Earlier this week, Hester M. Pierce, a Commissioner with the United States Securities and Exchange Commission, spoke with Laura Shin of the Unchained Podcast, where she assessed the exchange’s current issue.
As the Commissioner explained, one of the primary benefits of this issue is the increased attention that it would bring to anti-money laundering (AML) enforcement across the industry. Pierce pointed out that asset custodians have been aware of the need to improve the AML and know-your-customer (KYC) infrastructure for a while, but many have thumbed their noses at it. With BitMEX serving as a scapegoat, exchanges will be forced to sit up and get their act together.
The AMML charges against BitMEX were leveled by the Department of Justice (DoJ). In a filing earlier this month, the Department accused the exchange and four of its executives – Arthur Hayes, Ben Delo, Gregory Dwyer, and Samuel Reed – of targeting American traders with their “unregistered” exchange. The company also reportedly failed to implement the most basic AML and KYC issues, with the DoJ accusing it of enabling money launderers and cybercriminals.
Along with the charge, BitMEX is also facing an indictment from the Commodity Futures Trading Commission (CFTC). Per a complaint with the Southern District of New York, the financial watchdog alleged that BitMEX had offered illegal leverage trading to customers. The agency’s estimates show that BitMEX offered up to $1 trillion in leverage since it launched in 2014.
As Pierce added, the AML and KYC enforcement part shows that the United States government won’t joke with enforcement going forward.
“It’s definitely sending a message to the crypto world that when there are U.S. users of a product or a service, there’s going to be enforcement of U.S. laws,” she said in part.
The issue is especially prominent, as reports show that a majority of exchanges have inadequate security and identity verification procedures. Last month, blockchain analytics firm CipherTrace confirmed in a study that over half of all exchanges worldwide have weak KYC identification structures – especially those in the United States, the United Kingdom, and Europe.
The study analyzed over 800 exchanges and market makers, finding that 56 percent didn’t follow KYC guidelines. Europe had the highest concentration of violators. However, in terms of countries, the top violators were from the U.S., the U.K., and Russia.
As part of the study’s findings, many exchanges reportedly don’t bother to mention their countries of incorporation anywhere on their website and official documents. CipherTrace posited that this is deliberate, as many of them would want to hide their jurisdictions to avoid having to comply with AML regulations.