Is someone using a BitMEX trading bot

How US investigators targeted the Bitmex crypto exchange

US investigators are hunting down the founders of Bitmex, one of the largest crypto derivatives exchanges in the world. Their lax handling of money laundering rules was their undoing - although Bitmex was recently trying desperately to establish compliance processes.

If you want to understand how Arthur Hayes, founder of the second largest crypto derivatives exchange in the world, deals with criticism, you only have to look at the "Tangle of Tapei". At an industry conference in Taiwan's capital, Hayes and the economist and crypto critic Nouriel Roubini met on a podium in the summer of 2019 - and tackled each other from the very first second.

Whereby: it was mainly Roubini who pounded Hayes. Its trading platform, the world-famous researcher complained, was profiting from driving people into financial ruin. Bitmex, registered in the Seychelles, does not adhere to any rules to protect investors or prevent money laundering. "You are an example of everything that is sick and broken in this industry," said Roubini.

And Hayes? It showed how unimportant he didn't care: in tattered jeans and with a thick watch on his wrist, he lounged in his armchair while Roubini made his accusations, and he could hardly laugh at the excited demeanor of the professor.

The situation at Bitmex has not been laughable since Thursday. The prosecution of the Southern District of New York has brought charges against Hayes and his co-founders for failing to put effective anti-money laundering processes in place. However, the founders were aware that something was going to happen at some point and that they urgently had to work on their compliance - this is shown, among other things, by the recent attempt to take over a German specialist for know-your-customer technology.

This article first appeared on Finance Forward. On OMR's sister portal, everything revolves around the topics of fintechs, cryptocurrencies and digital banking.

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A trading volume of $ 60 billion - per month

Bitmex is far from the first crypto firm to be targeted by prosecutors or financial regulators. But the fact that one of the oldest and now the world's second largest trading platform for crypto derivatives (number one is Binance) is facing legal problems is remarkable. The trading volume on Bitmex was, according to its own information, almost $ 60 billion last month.

Hayes, a former Deutsche Bank and Citibank trader, founded Bitmex in 2014 together with British programmer Ben Delo, who once developed high-frequency trading systems for JPMorgan, and web specialist Samuel Reed. Bitmex brought buyers and sellers of Bitcoin derivatives together, with only a minimum of rules, even for inexperienced investors - investors can leverage their bets up to 100 times.

Bitmex formally excluded Americans from trading on the platform as early as 2015. But this requirement could easily be circumvented, for example with VPN tunnels. Otherwise, Bitmex felt safe with its corporate setup: Although it has an office in New York and founder Hayes operates out of Hong Kong, the company is registered in the Seychelles and is subject to financial supervision there.

It only costs "a coconut" to bribe officials in the Seychelles
Hayes made no attempt to hide the fact that the archipelago authorities are somewhat toothless. It only costs "a coconut" to bribe officials in the Seychelles, he joked on the stage in Taiwan. Supervisors in the USA, Great Britain or Germany “cost more,” says Hayes.

For Bitmex, the offshore construct offered the opportunity to grow unregulated and unhindered, but for the founder, the choice of the location also had ideological reasons: Like many other crypto supporters, Hayes has a massive distrust of states, governments and their monetary policy. Roubini, etched the founder during the “Tangle of Tapei”, wanted Bitmex to “bow down before the US government and be f ************ from it” just because the USA itself has certain regulations existed.

But Hayes and his co-founders knew early on, as the New York indictment shows, that many Americans were among their customers. And that they therefore need AML and KYC processes: in other words, mechanisms to unequivocally identify customers and detect suspicious transactions that indicate money laundering. But until August 2020, a confirmed email address was enough to register for trading on Bitmex. Until 2015, the stock exchange even advertised that it could be traded anonymously.

In a statement on Thursday, Bitmex said it had "strived since the early days as a startup to comply with applicable US laws".

The pressure from the authorities increased

A marketing campaign from spring 2018 already shows that Hayes had its eye on the US market: At that time, Bitmex borrowed three Lamborghinis and parked them outside of the consensus conference in New York - and Hayes was then happy to see the PR stunt Succeeded because a lot of US media reported.

Although he was advised that Bitmex was used to launder the loot of crypto hacks and that Iranians were trading on the platform despite falling under US sanctions, according to the indictment, Hayes did nothing.

That only changed in the last few months. Apparently, this was the result of official pressure: The Commodity Futures Trading Commission (CFTC), a US supervisory authority that is supposed to monitor the futures and options market, has been investigating since 2019. The CFTC filed a parallel civil case on Thursday.

Purchase negotiations with a Berlin startup

Bitmex finally began to set up compliance processes, and in August 2020 the exchange finally introduced ID verification for new customers. All users should have gone through a KYC process by February 2021.

At the same time, the company, which, according to the CFTC, is said to have collected around one billion dollars in fees in its history, was interested in a German specialist in KYC technology: Fractal, a Berlin startup financed by Innogy Ventures and the state investment fund Coparion, according to information from Finance Forward . The Fractal product is a KYC / AML platform that is used, for example, by the Etoro or Bitpanda trading apps.

There should have been purchase negotiations between Bitmex and Fractal some time ago, but they did not come to a successful conclusion. The Berlin startup did not want to comment on request.

A successful deal would probably not have changed the investigation by the New York prosecutor's office anyway: It relates to everything that has gone wrong at Bitmex over the past six years. One of the founders of the trading platform has so far been arrested, namely CTO Samuel Reed. According to the investigators, Delo and Hayes are on the run. Trading operations at Bitmex have continued so far.

Author: Niklas Wirminghaus; Image: PR