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What the BitMEX Decision Means for Crypto Exchanges Operating in the United States

Cozen O'Connor via Mondaq  | Kara L. Kapp | March 4, 2022

Department of justice  - What the BitMEX Decision Means for Crypto Exchanges Operating in the United StatesThis has been a blockbuster week for cryptocurrency enforcement actions in the United States against cryptocurrency exchanges. To cover just two of the major developments that occurred in the past week, two co-founders of a cryptocurrency exchange, BitMEX, Arthur Hayes and Benjamin Delo, pled guilty to violating the Bank Secrecy Act (the BSA) by failing to implement and maintain an anti-money laundering (AML) program. Shortly thereafter, the court overseeing the BitMEX prosecution denied a motion to dismiss the indictment against Samuel Reed, a third co-founder of BitMEX.

See:  U.S. Justice Department Sets Up National Cryptocurrency Enforcement Team

This alert breaks down the decision in detail below, but for the busy reader, here are key takeaways from this decision:

  • If a cryptocurrency exchange lists digital assets that require registration with the U.S. Securities and Exchange Commission (SEC), that does not preclude the possibility that the exchange may also need to register with the Commodity Futures Trading Commission (CFTC).
  • The registration categories of the Commodity Exchange Act are not exclusive, and the fact that an exchange meets the qualifications to register under one category does not relieve the exchange of the obligation to register under all other applicable categories as well.
  • The strictures of U.S. law cannot be safely avoided by implementing a geoblock if an exchange allows U.S. users to evade that geoblock by using a VPN or through other mechanisms known to the exchange.
  • U.S. users known to exchange management must be actively and regularly removed by an exchange that wishes to avoid having to comply with U.S. laws and regulations.
  • Where an exchange knowingly allows at least some U.S. users to access its platform, it should anticipate that it will be required to comply with U.S. laws and regulations.
  • The failure to register with the CFTC and follow AML requirements, where required, can result in up to five years imprisonment, and the Department of Justice has signaled through the BitMEX indictment its willingness to enforce such penalties.

See: 

A Tsunami of Regulatory Change Overwhelms Organizations

US Government Accountability Office Urges Crypto Regulations to Counter Human Trafficking and Drug Cartels

Crazy Rich Bitcoin Gold Rush: Rise (and Fall) of BTC Billionaire Arthur Hayes

The BitMEX decision is thus a significant one for all cryptocurrency exchanges that operate in the United States. Most importantly, it serves as a caution to all such exchanges that they should engage in a careful evaluation of their registration obligations under the CEA and U.S. securities laws, as well as their potential obligations to comply with the BSA's AML requirements.

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NCFA Jan 2018 resize - What the BitMEX Decision Means for Crypto Exchanges Operating in the United States The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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