U.S. regulators have their fangs out for cryptocurrency bigwigs not playing by the rules — illustrated by the recent arrest of tech mogul John Mcafee for tax evasion and charging BitMEX executives with money-laundering violations.
Though one BitMEX executive has already been arrested, Arthur Hayes, the CEO and co-founder of BitMEX, might not be in front of a U.S. judge anytime soon even as decentralized finance (DeFi) hits a defining moment on how it will deal with regulators.
Hayes, a Hong Kong resident, might not be compelled to go anywhere, thanks to the political turmoil in the territory over the past year that has led the United States and Hong Kong to suspend their extradition agreement.
“If Arthur Hayes does not have permanent residency, the Immigration Department might have more flexibility to invalidate his right to remain in Hong Kong — though again, whether the HKSAR government is eager to assist the U.S. remains to be seen,” Ross Feingold, aTaipei-based attorney and political risk analyst, told Forkast.News.
“The likelihood of entering into such an [extradition] arrangement is low, especially in the current environment of U.S.-Hong Kong and U.S.-China relations and in the aftermath of the U.S. decision to suspended the bilateral extradition treaty,” said Feingold, who added that Hong Kong’s political leaders — most of whom the U.S. government recently slapped with sanctions — would have to go out of their way to help U.S. law enforcement for this extradition to happen.
According to CoinMarketCap, despite the capital flight from BitMex, the exchange still trades $800 million in volume a day in crypto derivatives, making it the second largest exchange of its type in the world. Back in August when BitMEX was flying high, the platform traded $72.5 billion for the month in cryptocurrency derivatives.
The crux of the charges against BitMEX and Hayes are centered around the crypto exchange’s ”know your customer/anti-money laundering” (KYC/AMC) policies — or lack thereof.
Despite operating for years, BitMEX implemented such a policy only a few months ago.
BitMEX likely has been aware of the U.S. government’s interest in its operations for a while. Over a year ago, Bloomberg reported that a probe into the company was already underway by the Commodities Futures Trading Commission. A Forkast.News Freedom of Information Act request to the CFTC produced documents showing that the commission was actively probing an exchange during the early part of this year, but the company’s identity was not revealed as the commission ruled that this information was exempt from disclosure.
According to Feingold, the case against BitMEX may be precedent-setting as it is one of the first times that the Bank Secrecy Act has been used to prosecute a non-bank financial institution, and the first against a cryptocurrency platform. The first occurred in 2018 against broker dealer Central States Capital Markets, which the government alleged had serious gaps in its anti-money laundering compliance program and ignored red flags. The government’s case against CSCM ended with a deferred prosecution agreement, in which the company agreed to mend its ways in exchange for no charges.
The Bank Secrecy Act “can be an effective tool to shut down the flow of illicit funds whether it is money laundering by criminal actors, or sanctions violations by state and not-state actors,” Feingold said. “It is also consistent with the U.S. ‘whole of government’ approach to money laundering and sanctions violations involving sanctioned persons or entities in countries such as China, Iran, North Korea and Russia.”
If BitMEX is already on the U.S. government’s radar and agreed to change its KYC/AML policies before charges were filed, would that help its case? Could it reach a deferred prosecution agreement? According to the federal complaint, BitMEX executives encouraged U.S.-based users to register for the platform via a VPN — which won’t help its case.
BitMEX directed requests for comment by Forkast.News to a published statement.
“We strongly disagree with the U.S. government’s heavy-handed decision to bring these charges, and intend to defend the allegations vigorously,” the company said, in a post. “From our early days as a start-up, we have always sought to comply with applicable U.S. laws, as those laws were understood at the time and based on available guidance.”
The case against John McAfee
In contrast to the newer legislation being used against Hayes and BitMEX, the charges brought against McAfee — a billionaire whose popular antivirus software still bears his name — are of a much more simple, garden variety: acting as a securities promoter without disclosing interest in the project, and tax evasion.
McAfee, as the charges outline, would demand a combination of cryptocurrency up front or a cut of the total raised in exchange for his promotion of the project on his Twitter feed. But, when asked publicly, he would deny his status as a hired gun and sometimes claim that he was a mere advisor.
“Not interested. I have no time to sell. If you want to use my name we can discuss,” McAfee once told an ICO project executive.
According to the Securities and Exchange Commission’s complaint, McAfee had “extravagant posts” — which often involved predicting bitcoin prices — that “generated an enormous amount of publicity.” But when speaking in private, McAfee would admit that these were only to “onboard new users.” The SEC also notes that McAfee and his associates were active in “scalping” ICO tokens, that is, selling them at the height of his market-moving tweets. The complaint lists seven ICOs that McAfee touted but does not identify any by name.
An EY study from October 2018 analyzed the top ICOs that represented the majority of funding during 2017, and by the report’s publication date, only 29% of the “Class of 2017 ICOs” had working products or prototypes, while 30% had lost substantially all value — so McAfee was likely peddling junk.
Now what do we do about DeFi?
The dual crackdowns on McAfee and BitMEX coming within the same week may be a huge wakeup call for the DeFi industry, which has notoriously rejected the need for KYC/AML as it’s not owned by a single person or company. But from the perspective of law enforcement and regulators, even if a DeFi project of or decentralized exchange is not owned by a single entity, the majority of the top projects are still administered by someone.
There’s a tendency within the industry to think a company or executive may be immune from laws and regulation because they or throw words like “decentralized” in their name or relocated their shop — or themselves — to a faraway jurisdiction. But BitMEX incorporating in Seychelles didn’t protect the company. McAfee wasn’t shielded from U.S. laws just because he was Spain, where he got arrested.
The only thing that might save other DeFi projects and crypto personalities from similar scrutiny is a commitment to transparency. Disclose your interests fully, and the Feds may not have any grounds for coming after you. DeFi could be an open book if they wanted to, with everything viewable on Etherscan. A company-wide KYC/AML policy may not be needed if everyone could see what’s coming in and out. This would make it difficult to launder funds, if fund can always be traceable back to the source. Real money launderers would stay away from open-book practices like these.