BitMEX Meets the US Regulators
Will the indictment of BitMEX's founder-owners stifle innovation in fintech, or will the protective action of regulators bring confidence - and capital - to the space?
On October 1, 2020, the CFTC announced that they had charged the owners of the BitMEX “exchange” with violation of multiple CFTC regulations, including the operation of an unregistered trading platform. At the same time, the U.S. Attorney for the District of New York indicted these same individuals on federal charges of violating the Bank Secrecy Act and conspiracy to violate the Bank Secrecy Act, which is the primary US anti-money-laundering law.
While it is unsurprising that the outspoken personalities charged in this action attracted the attention of the US regulators, I was personally pleased to see that the regulators chose to use existing regulations to address this situation in a predictable manner, rather than establishing new precedents specific to digital currencies.
In my opinion these actions send three positive messages to digital currency investors:
- First, that the market-abuse protections in the Commodity Exchange Act, including prohibitions on “spoofing” or other manipulations, should be expected to apply to trading on any exchange taking business from US investors;
- Also, that investors should expect that standard anti-money-laundering surveillance practices will be applied to their activities, improving the predictability of these practices and simplifying onboarding experiences; and
- Finally, investors in the digital currency markets can and should expect their regulators to act decisively to establish a trusted base of conduct on which product innovation can flourish.
Given the libertarian origins of the digital currency markets, some observers have speculated that the precedent set by these regulatory actions will stifle innovation in the development of new financial products, especially the decentralized projects described as “DeFi”. However, I believe that the continued mainstreaming of these markets through regulatory oversight will have a capital-attracting benefit which outweighs any perceived barriers to entry being raised here.
That said, I acknowledge that these are only the initial steps to more consistent regulatory oversight in the digital currency markets, and that investors should still proceed with caution when selecting trade counterparties and service providers. Examples of good practice here include:
Know-Your-Customer (KYC) rules:
- Does your partner have a consistently applied KYC process, or do they have lower standards for certain groups of investors, such as those alleging non-US residency?
- Are the KYC and due-diligence standards consistent with what you would expect from any other financial institution?
- Has the partner backfilled their KYC information on their entire book of clients?
Protection from market abuse:
- Does the market or trading venue have procedures in place to monitor for abusive activity, such as spoofing?
- Does the market or trading venue control programmatic (API) access to their order books, such that they can trace any abusive activity to a specific person subject to due diligence (beyond a simple “verify that you own this email address”)?
Diligence on owners / operators of trading venues:
- Are the investors / owners of the trading venue / lending platform disclosed?
- Have any of these parties previously been subject to regulatory or legal action?
- Are any of these parties associated with high-risk jurisdictions, such as the “Jurisdictions under Increased Monitoring” list published by the Financial Action Task Force or the OECD’s similar list?