The near-infinite reach of US finance laws into every area of cryptocurrencies (among other categories) is pretty staggering. The promises that cryptocurrencies want to gift to their users are continually sacrificed in the name of draconian regulatory compliance, regardless of the national borders (or lack-thereof) involved. It's particularly interesting to watch various cryptocurrency platforms slowly transform into that which they originally detested, not of their own will, but via the strong guiding hands of US agencies.
In this case Bitmex was not incorporated in the US, informed US residents that they were not allowed to use the platform, and even blocked all US IP addresses from accessing their services as well. As the article mentions, yes, some people got around this with VPN blocks, lying about their location, and more. Apparently the US views the solution to this loophole as arresting the founders of Bitmex, regardless of their country of residence, for not complying with US laws. As another commenter reminded me to mention, Bitmex also did not touch USD: they didn't allow withdrawals, deposits, nor transactions in USD, ever. The discrepancy between this treatment and that which established US megabanks receive is made perfectly clear by the latter section of this article, in which billions in fines are often paid in exchange for having purposefully committed blatantly illegal activity for profits on a massive scale.
Perhaps there is more to this story that we do not know (I see accusations of a lack of solvency, front-running, and other more serious activities), but if there is no true bombshell awaiting explosion here, I certainly hope his legal defense is sufficient for a solution in his favor.
An extra point to add to this: Bitmex isn't an exchange and never touched USD or any other fiat currency, you couldn't obviously use it to launder money (at least not in any way that you couldn't use any other custodial wallet to do so).
Essentially it is just a platform that lets non-US bitcoin users deposit bitcoin and place side bets on price of Bitcoin (and several altcoins, note that you couldn't deposit and withdraw those altcoins AFAIK, just place sidebets on their exchange rates).
It is easily (ab?)used as a gambling platform.
From a consumer protection perspective it's probably a disaster-- the vast majority of users lose their shirts. But I'm not aware of any accusation that there was widespread use by US persons. And CFD gambling houses are common in many places outside of the US.
These are both good points, I added to my comment that Bitmex didn't touch USD since it's relevant.
The gambling problem is absolutely true, but it's difficult to know how to approach it properly, since it's obvious that there's people gambling just as badly on brokerages in the US right now, primarily with options (especially Robinhood).
I think the risk surface with options can be significantly better-- e.g. if no margin is used for longs and if short calls are covered and short puts are cash secured, then the exposure is fixed and established upfront.
But I don't disagree that the there are much larger and more relevant gambling-in-the-guise-of-investing targets.
Also to be clear: I think there are legitimate investment uses of that product-- e.g. if you have a credible reason to believe the Bitcoin price will drop soon you could short a small amount with leverage while keeping the bulk of your holdings safe in cold storage. The extra fees and specific risks of the CFD may be offset by avoiding a need to touch cold coins. But I do also doubt that most users are using it that way.
It can be much better, but a quick glance at what a lot of retail investors are actually doing with options (basically just buying calls) shows a lot of high-risk and reckless gambling. While I'm fine with people choosing whichever risk level they desire, some of the images I've seen of e.g Robinhood UI's are pushing it far beyond what I'd say is reasonable (and perhaps even to the point of illegality), for example https://pbs.twimg.com/media/EtfOof8XIAMhaX6?format=jpg&name=...
Buying a three (?) month call which is out of the money by 4.8% is "medium risk" ?!?.
Too bad there isn't a date on that image so I can figure out what the black scholes probability of expiring worthless they consider 'medium risk' is exactly. -- Assuming it's 90 days, they consider a 63% probability of total loss "medium risk".
I'm not really sure where I'd draw the line but anything where my best model said total loss was more likely than not is certainly past the high risk line.
And high risk investments can be totally fine, treated as such. Presumably most users won't go broke losing one contract worth though it might hurt some (I'm assuming that isn't a mini option or some kind of split contract-- so we're talking about a $788 loss for one contract if it expires worthless). But if they call it "medium risk" I'm guessing people are going to buy more than one.
BitMex offers 100x leverage, which is quite dangerous in any market, but in one as volatile as cryptocurrency is almost certain to wipe out your account very quickly.
Actually I think it might be rather good for laundering money. Say you sell your shipment of cocaine for bitcoins - you put that in a tainted bitcoin wallet and send that to Bitmex and claim they are nothing to do with you. But actually you withdraw from Bitmex to a clean wallet where you claim the money came from your brilliant trading on that one.
It falls apart if bitmex share all their records with the revenue services but I don't think they do.
In a very non KYC way they don't ask for any proof of who you are. You can open an account for Mickey Mouse and if you send in bitcoin you are good to go.
That said there are probably less regulated exchanges out there for that kind of stuff. If you really wanted to launder large sums you might be better off setting up your own one.
That is the same deal for any custodial wallet. Deposit coins, withdraw different coins, everything is opaque unless they share records.
> That said there are probably less regulated exchanges out there for that kind of stuff.
That is believed to be a big part of the illiquid altcoin market.
Premine some altcoin, sell it at high prices to your dirty money account. Even where the exchange has "kyc" the launderer just needs a disposable identity for the dirty account that is good enough to pass it for a few days.
> The promises that cryptocurrencies want to gift to their users are continually sacrificed in the name of draconian regulatory compliance
The law isn't optional. Crypto doesn't change that.
> It's particularly interesting to watch various cryptocurrency platforms slowly transform into that which they originally detested, not of their own will, but via the strong guiding hands of US agencies.
The reality is that cryptocurrency exchanges aren't actually operated with ideological purity as a goal. They're profit-driven enterprises. They just want to be in the middle of the action and collect a percentage fee of all the money moving back and forth. They're not going to sacrifice profits in the name of arbitrarily resisting governments.
The law applies to juridictions. Parent comment reiterates that USA should have no jurisdiction over bitmex... But they do.
It's sort of like dragging Somali pirates to court in NYC. If it affects Americans, even indirectly, it matters.
You could argue that money laundering in any part of the world is connected to the drug trade in USA which harms citizens. This makes you automatically the target of us law enforcement.
> Parent comment reiterates that USA should have no jurisdiction over bitmex... But they do
The article is about a US citizen being arrested, in the US, for failing to obey US laws.
You can't simply circumvent the laws of a country by declaring your business to be operated in another country. That's not unique to the United States.
its exactly like how chinese human rights abuses bother the americans n europeans. the chinese always say thats interfering with their domestic policies.
> Apparently the US views the solution to this loophole as arresting the founders of Bitmex, regardless of their country of residence
The only person who's been arrested (Sam Reed) was arrested at his home in the United States.
Arthur Hayes, the main focus of this story, is a US citizen and spent most of his life in the US, though seemingly has lived in various countries of late. By virtue of being a billionaire, he can most likely reside whereever he likes. I cant see why that should make him immune from prosecution in the US (a Grand Jury found there was enough evidence to indict him, though this does not mean hes been found guilty of anything).
I don't think he should be immune to prosecution or above laws in any extraordinary way, to clarify. It seems from the article that due to covid there have been delays, but I assume he will face trial or settlement from the US sooner or later. I just think this particular set of charges seems to be lacking the level of evidence and merit we would want for something of their magnitude.
The derivative contract that drove the success of Bitmex, called a Perpetual Future, was quite the innovation. It behaved like a futures contract that never expired. It then led to copycat products across their major competitors.
Is there any product like this in traditional financial markets?
Regarding the authorities' pursuit of Hayes, it does strike me as odd that they're not going after their major competitors (mostly China-based) who also don't have KYC and are therefore serving US customers through VPN too.
This isn’t true. The Bitmex “perpetual swap” isn’t any different from what spread betting and CFD dealers have been doing for years. They are basically just very short term futures that automatically roll forward.
The real genius was to invert the trading process. People often talk about Bitmex being a Bitcoin derivatives platform, but it isn’t. It’s a USD derivatives platform. When you trade on Bitmex you’re trading USD derivatives funded in Bitcoin. This is what in theory allowed them to sidestep all that pesky KYC.
Isn't it rather different to CFDs because of the interest mechanism that it uses to keep the price aligned with spot? Where else have we seen that before Bitmex?
The inversion was another big innovation of the perp contract, yes.
From my experience of trading on both it is rather different. With spread betting you are basically just making a bet with the exchange at a price they quote. With the bitmex product you are trading with other traders rather than with the exchange.
They claim to have invented it: "A Perpetual Swap is an innovative product invented by BitMEX"
yeah except retail for the life of them can't figure out how to price quantos and the exchange is dying. They had such a headstart and squandered it. ftx is now positioning itself as the leading exchange.
Are the China based competitors owned by Americans? I figured they went after this one because it is owned by an American, and they therefore have the authority to go after him.
I think violently attacking people falls under a different category than moving money or information in ways that powerful people/institutions don't like.
> It behaved like a futures contract that never expired.
What does that mean? A futures contract says "on [date], we will exchange [X amount of goods] for [Y amount of money]". If there's no date, nothing ever happens.
To make sure it actually does move near perfect tandem there is a new interest element that will incentivize the market to have the perp trade close to underlying.
Technically, it's not d1 (just like how futures aren't actually d1). And seeing that annualized % basis in swaps is so high (sometimes as high as 600%), you really need a good rate model to trade these things.
The retail crowd doesn't realize this and is significantly disadvantaged compared to sophisticated market makers with rate models.
Would the costs associated with holding perps differ substantially from getting exposure (in the same trade direction) through traditional futures?
In perps we compensate the market through funding, and in futures we do so through term structure (ie the futures price exceeding spot).
Annualized rates can be that high during periods of excess demand for perps but on average they're much lower. Agreed that it's important to take them into account.
You usually find that perps and short term futures have higher rates than longer term futures. A very common strategy is to buy longer term futures and sell shorter term ones.
If you're looking for cheap delta, longer term futures are almost always the way to go. They are a lot less liquid, though. retail has a strange fascination with swaps. I have two theories for why this is: 1) they are easier to manage (you don't need to roll them). 2) they look cheaper on am absolute basis than long term futures.
But if you want long delta, go with long dated futures. If you want short delta, go with swaps. The extra juicy trades come from buying long dated futures on one exchange and selling high rate swaps on another. However, you need a lot of margin or a sophisticated system to manage the risk.
Very interesting to hear about that arb, and the reasons it comes about and persists makes a lot of sense.
In addition to the reasons you mention (retail cluelessness, margin requirements, risk systems), these are some other reasons I can think of as to why the arb persists over time:
- Perps are popular on Bitmex/Bybit, and futures are popular on Ok and Huobi (even though the latter has perps, they're relatively illiquid). So there's a cross-exchange dimension which adds more difficulty and risk in performing the arb.
- Counterparty risk of keeping funds on an exchange increases the required compensation for performing the arb, which allows it to persist.
Correct. I'm saying it behaves like a futures contract in the sense it is delta one. It serves the same purpose as a futures contract but achieves that through a different mechanism.
EDIT: My apologies, you are right. I called it a "Perpetual Future" in my OP, which was a typo. It should've read "Perpetual Swap".
It's funny and sad: the US govt thinks it can regulate a foreign exchange based in an independent country.
And now the govt wants its pound of flesh for having been shown to be clowns, because (OMG!) foreign businesses may not respect the laws of other countries!
TBH I think Hayes only mistake was to incorporate in the Seychelles instead of HK or Russia: BitMex would then be in a place that can't be trampled on with impunity.
Some people in the West lament that most mining is done is China. I think it's clearly in crypto best interest to be in bed with the underdog, as the incumbent may not willingly give up its position as the world currency.
Some people say "eat the rich"? Their appetite for justice would be better satiated by taking a bite of politicians and their lackey prosecutors.
America has a long and storied history of extraterritorial application of its laws.
Americans (well, US Persons, which includes residents, LPRs, and citizens) are not allowed to open bank accounts in much of the world because of FATCA. They're not allowed to open a brokerage account anywhere that isn't SEC regulated (hit: those only exist in America). They're required to file taxes with the IRS for life, and if they open a business outside of America, they own a controlled foreign corporation. If they have more than $10K USD in a foreign bank account they have to file FBARs with FinCEN.
The US government gets away with this because of the size of the market, level of influence and military. It's been happening forever.
What do you mean "thinks" it can? It is clearly doing so here.
Not that there's a short supply of examples, but just look at the current meddling in oil pipeline agreement Nordstream 2 between Russia and Germany; the US financial empire regulates whichever foreign nation's affairs they can get away with.
I mean that the government can claim whatever it wants, the validity of the claims still have to be demonstrated in court - since we are not yet in a dictatorship the executive and the judicial branch remain separate.
> the US financial empire regulates whichever foreign nation's affairs they can get away with.
Germany is a lapdog, but Russia less so. I get the feeling it won't be allowed to fly: if Germany really wants its Sputnik vaccines, it will have to show some spine.
And let's talk again when the "US financial empire" thinks it can do the same with China :)
> the validity of the claims still have to be demonstrated in court
Whose courts? Who decides? The sovereign here is whoever has the power to dictate terms, and for far to long that has been the US.
I completely agree re: Russia and China
And just to be clear I couldn't be less of a fan of this current global order. But it is what it is.
Just so people don't twist themselves into knots talking about rule of law, and trying to rationalize this as if there is some benevolent removed 3rd party deciding fairly, rather than power making up its own rules. Hopefully, the rest of the world at some point tips the scales the other way. Hasn't happened so far.
> The issue is that deferred prosecutions shouldn't be offered to anyone, instead of as yourself and parent imply, being offered to this guy. In this case the system worked, in the others, it needs to be adjusted.
If it is offered to others, it should be offered here. Let's keep people out of cages.
The argument often posited is that if you don't punish the big guys then they'll just keep doing it, and the government will look the other way because they get to be "in on the take".
The solution to that isn't to punish nobody, it's to punish everyone.
I’m totally out of the loop on this but curious to know Hayes’ views on racism, especially considering how likely it is that he holds libertarian views. It piques my interest because I’ve recently been hearing heterodox views from commentators like Kmele Foster and seeing split reactions from the left.
Plenty of non-white people are libertarian. It’s in the interest of mainstream political parties to say it’s only an ideology of straight white males as a way to dismiss it. But this simply isn’t true.
Amazing article and crazy story. Arthur was one of the most entertaining speakers in cryptocurrency; not an easy feat in a gallery of magicians, rogues, and exotic financiers. I have to wonder what the court case will ultimately shake out to be about. The most interesting part of this case is how the indictment differs from BTC-E and other organizations labeled as antithetical to the free world.
I think there's two reads to it: either the fraud at BitMEX was so rampant and pervasive that taking the time to indict a particular instance of villainy was not in the interest of justice, or this was something else entirely more complicated. In either case the whole thing is fascinating.
I, for one, cannot wait to see the court documents as they come out. I can only imagine that there will be a great many fireworks.
I think the indictment is straightforward: BitMEX provided banking services to US customers without implementing Know Your Customer and other required anti-money-laundering safeguards.
Being a "fintech" product doesn't exempt an operator from the law: KYC is the law on the US.
I'm surprised there haven't been more indictments, since I'm sure other exchanges have operated fast+loose w.r.t. AML and KYC
The law covers commodity futures trading services as well, which is what the indictment cites as justification for holding them to the terms of the Banking Secrecy Act.
The laws around KYC and AML are written for the traditional banking system, and are a bit nonsensical when applied to crypto. BitMEX deals only in Bitcoin, so it begs the question of how one could “launder” anything through it.
I think this is where it gets hairy: bitmex was 100% synthetic and denominated in btc. There’s no part of what they did that related to usd except that the trades were denominated in usd pricing, but all monetary flows in and out of the exchange were btc.
It may be the case they the US has jurisdiction over US customers anywhere in the world even if they aren’t transacting in US dollars. I guess we’re going to find out?
To be extra clear, it would be hard to call what bitmex sold a commodity futures contract because there was never a way to take delivery of the asset nor intention to do so. Their contracts were perpetual futures, which is to say: fictitious markers of value that can only ever be btc at the end of the day. This is why so many people referred to it as Arthur’s digital casino.
Edit: lastly, IANAL, it could be possible that the bsa includes Bitmex perpetual futures and this is open and shut. The interesting thing to me is the btc component but maybe that doesn’t matter at all?
*Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, ING, Lloyds Banking Group, Royal Bank of Scotland, and Standard Chartered have all paid fines for conduct that has included money laundering, sanctions violations, and massive tax fraud. In the world of high finance, charging corporate officers in their individual capacity is rare.*
Yeah, we've all heard of these. They only get fined.
*"I can push back on that—big time,” replied former CFTC chairman Giancarlo. “The CFTC has been no slouch in making referrals for criminal action.” He cited Refco and Peregrine Financial as examples where, at the commission’s urging, the Justice Department charged CEOs who later received lengthy prison terms.*
All of this speeds the adoption of decentralized solutions. 2020 vs. 2017 is night and day - most of these contracts can be minted, traded, and settled in a completely decentralized and unstoppable way. Once ETH scaling solutions are fully deployed it’s game over. The world has simply changed. There won’t be anyone to arrest in 2023.
DeFi is great for “slow” finance, but anyone who wants high leverage or instant liquidity will stay on centralized exchanges. There’s plenty of room for both in a healthy financial ecosystem.
That will also be solved, using chain collateralized actors in meat space. It’s already kind of happening, with projects finding ways to tokenize off chain assets like stocks and property.
So a ripe target for regulation? You may not remember the Nixon shock, but overnight gold was devalued and the target of enforcement was on conversion from gold to USD. All it takes is a very heavy handed law to collapse a delicate single point of failure
Here in Mexico people are using LocalCrypto along with "send money to a friend by giving him a code so that he can withdraw from an ATM without a card" to perform anonymous long distance exchanges. Granted, the amounts are relatively small (350 usd max) but it looks quite useful.
> At first Hayes was a nobody among crypto’s dank sea of tax evaders, drug dealers, arms traffickers, child pornographers, contrarian libertarians, and wanker bankers pining for a return to the gold standard.
They kinda nailed the space with this quote lol.
The only reason this guy got wealthy was because he was willing to look the other way and accept dirty money without the required follow-up questions that anyone who's ever worked at a payments company knows is required ramp-up viewing.
Dude, it’s crypto to crypto. Every transaction in or out of BitMEX is on the Bitcoin blockchain. Accepting “dirty money” doesn’t really mean much when you’re a financial cul-de-sac.
I personally know a lot of people who own crypto, and none of them are criminals. There are some contrarian libertarians though—guilty as charged!
In this case Bitmex was not incorporated in the US, informed US residents that they were not allowed to use the platform, and even blocked all US IP addresses from accessing their services as well. As the article mentions, yes, some people got around this with VPN blocks, lying about their location, and more. Apparently the US views the solution to this loophole as arresting the founders of Bitmex, regardless of their country of residence, for not complying with US laws. As another commenter reminded me to mention, Bitmex also did not touch USD: they didn't allow withdrawals, deposits, nor transactions in USD, ever. The discrepancy between this treatment and that which established US megabanks receive is made perfectly clear by the latter section of this article, in which billions in fines are often paid in exchange for having purposefully committed blatantly illegal activity for profits on a massive scale.
Perhaps there is more to this story that we do not know (I see accusations of a lack of solvency, front-running, and other more serious activities), but if there is no true bombshell awaiting explosion here, I certainly hope his legal defense is sufficient for a solution in his favor.