CFTC and FinCEN Settle Charges Against Offshore Cryptocurrency Derivatives Exchange BitMEX

Practical Law Legal Update w-032-2488 (Approx. 7 pages)

CFTC and FinCEN Settle Charges Against Offshore Cryptocurrency Derivatives Exchange BitMEX

by Practical Law Finance

FinCEN Civil Money Penalty

In its first enforcement action against a futures commission merchant (FCM), FinCEN assessed a civil money penalty of $100 million against BitMEX for violations of the Bank Secrecy Act and FinCEN’s implementing regulations (collectively, BSA). FinCEN alleged that from November 2014 until December 2020, BitMEX willfully violated certain of its obligations under the BSA and its implementing regulations by failing to:

Implement and maintain a compliant AML program reasonably designed to guard against money laundering or the financing of terrorist activities, in violation of 31 U.S.C. §§ 5318(a)(2) and 5318(h)(1) and 31 C.F.R. § 1026.210.
Implement and maintain a compliant customer identification program (CIP) appropriate for its size and business profile, in violation of 31 U.S.C. §§ 5318(a)(2) and 5318(l)(1), and 31 C.F.R. §1026.220.
Accurately and timely report certain suspicious activity and transactions, in violation of 31 U.S.C. § 5318(g) and 31 C.F.R. § 1026.320.

FinCEN found that US customers were able to access the BitMEX platform and conduct cryptocurrency derivatives trading without appropriate customer due diligence. Notwithstanding BitMEX's public representation that its platform was not conducting business with US persons, FinCEN found that BitMEX failed to implement appropriate policies and actions to prevent US customers from accessing the exchange. Additionally, in certain cases, FinCEN found that BitMEX senior leadership altered US customer information to hide the customer's true location.

In connection with this matter, BitMEX has agreed to:

Pay a civil money penalty.
Engage an independent consultant to conduct a historical analysis of its transaction data, to determine whether BitMEX must file additional suspicious activity reports (SARs) on past activity.
Engage an independent consultant to conduct two reviews, including relevant testing, to ensure that appropriate and effective measures are in place and implemented to ensure that BitMEX is not operating in the US.

The CFTC and BitMEX have separately agreed to orders requiring the payment of a civil money penalty with additional equitable relief. FinCEN’s $100 million assessment will be satisfied by immediate payments totaling $80 million to FinCEN and the CFTC, with $20 million suspended pending the successful completion of the SAR lookback and independent consultant reviews.

CFTC Civil Enforcement Action

In October 2020, the CFTC brought a civil enforcement action against BitMEX for violations of the Commodity Exchange Act (CEA) and its implementing regulations (see Legal Update, Offshore Cryptocurrency Derivatives Exchange BitMEX Charged With AML and BSA Violations). The CFTC found that from November 2014 to October 2020, BitMEX:

Offered leveraged trading of cryptocurrency derivatives to retail and institutional customers in the US and elsewhere, and was aware that US customers could access the BitMEX platform. The CFTC found that US customers were able to place orders directly through BitMEX's user interfaces, and BitMEX acted as a counterparty to certain transactions, therefore violating the CEA by operating a facility to trade or process swaps without being approved as a designated contract market (DCM) or a swap execution facility (SEF).
Violated the CEA by operating as an FCM without registering with the CFTC.
Violated BSA and related regulations by failing to implement a CIP, know-your-customer (KYC) procedures, or an adequate AML program.

To settle the CFTC charges, on August 10, 2021 BitMEX signed a consent order entered by the US District Court for the Southern District of New York (SDNY) agreeing to:

Pay a $100 million civil monetary penalty. The order provides that BitMEX must pay $50 million within ten business days of the date of the entry of the order and the remaining $50 million may be offset by payments the BitMEX entities make or are credited pursuant to its consent order with FinCEN.
A permanent injunction to prevent further violations of the CEA and CFTC's regulations.

As part of the order, BitMEX has certified to the CFTC that:

US persons are prohibited from accessing the BitMEX trading platform.
All active users of the BitMEX platform have undergone BitMEX's user-verification process to prevent any user identified as a US person from accessing the platform.
All users identified as US persons by BitMEX's user-verification procedures, or unverified users, have been blocked from trading on the platform or making withdrawals.
As of June 30, 2021, BitMEX will no longer maintain any significant operations or business functions in the US,

Acting CFTC Chairman Rostin Behnam commented on the significance of the case, which he stated "enforces the expectation that the digital assets industry, as it continues to touch a broader pool of market participants, takes seriously its responsibilities in the regulated financial industry and its duties to develop and adhere to a culture of compliance." BitMEX released a statement acknowledging the settlements and stating its ongoing commitment to working with regulators around the world to help shape the future of the asset class.

CFTC and FinCEN Settle Charges Against Offshore Cryptocurrency Derivatives Exchange BitMEX | Practical Law