The rise and fall of Bitcoin billionaire Arthur Hayes

Arthur Hayes lives in grand style. In a big way like Bobby Axelrod from Billions. Just replace New York with Hong Kong and spice it up with a pinch of Silicon Valley – where unicorns fly out of the minds of runaway company founders – and you’re presented with the big picture. Hayes is skiing one minute in Hokkaido, and the next is running around on the underground squash court in Central, the Hong Kong version of Wall Street. And all this while with one trained eye he follows the currency exchange with a vague name, which he created from scratch and through which more than $ 3 trillion was passed.

With a movie star appearance, the fabulously wealthy, adventurous African American banker epitomizes the modern financial technology pioneer. But the feds describe Arthur Hayes differently: a wanted criminal who “trampled” the law, acting from the “shadow of the financial markets.” The decision to prosecute Hayes was made public in October. He is hiding in Asia while prosecutors in New York hopes to arrest and convict him on grave charges, which can carry up to 10 years in prison.

This is a story about the confrontation between money, new and old, financial talents that surround the old bank guard, and the American authorities, trying to apply the laws of the XX century to the innovations of the XXI. The prosecution alleges that Hayes, along with his business partners, violated the provisions of the bank secrecy law by failing to take proper measures to counter money laundering – to keep criminals and dirty money away. Meanwhile, Hayes’s peers in the cryptocurrency world believe he is being persecuted for creating an extraordinary product that has baffled lawmakers, confused regulators and – after gaining wild popularity – began to pose a threat to some of the largest players in the market. In all this variety of voices, one can hear reputable legal experts,

At a time when the SEC appears to be cajoling the Wall Street titans by showing a willingness to punish the unwashed masses of day traders for destroying bank and hedge fund trading positions on GameStop and other stocks, Hayes can only become patient zero when it comes to denouncing double standards in big finance, which are now becoming apparent.

Cryptocurrency Gold Rush and Cash Backpack

Since October, 35-year-old Hayes has not been heard of. But the cryptokondor wasn’t always so secretive. Born into a middle-class family whose parents worked at General Motors and depended on the car giant’s fickle successes, Hayes spent his formative years traveling between Detroit and Buffalo, where his mother, Barbara, turned mountains for her gifted son to go to Nichols School. an elite private educational institution founded in 1892. “He was successful in everything from school to sports and building lasting friendships,” Barbara said in a statement posted on a fundraising page on the school’s website. “Nichols’s school gave him the foundation, the motivation and, at some point, the scholarship to get up.” Hayes, in turn, gave back: by accepting the scholarship, he made a commitment to

After studying at the Wharton School of Business, he went to Hong Kong, where he worked at Deutsche Bank and Citibank as a market maker for Exchange Traded Funds or ETFs – hybrid securities that, like co-investment funds, diversify investor risks but can also trade like stocks. … Hayes was just starting to gain traction when he received a letter of resignation in May 2013. “The bankers tell you everyone has a bullet with their name on it,” he explained over afternoon tea at Singapore’s Marina Bay Sands, the iconic hotel featured in the Crazy Rich Asians finale. He was wearing his standard attire: a tight-fitting T-shirt, jeans and an expensive watch (Hublot Big Bang). “I was not married, I had no children, no obligations. I was an investment banker so I didn’t have to sleep on the streets.

(I interviewed Hayes and some of his associates in Hong Kong, Singapore and New York in 2018 and 2019. Since the indictment in October, I have had lengthy conversations with insiders who are in touch with Hayes and his two accused business associates, Ben Case and Sam Reed. Many of these sources demanded anonymity in order not to harm the unfinished legal proceedings. On the recommendation of a lawyer, Hayes, Case and Reed decided not to comment on this material).

But back to the layoff. Eight years ago, Hayes, unemployed, decided to go it alone, combining his ability to create original financial instruments with his newfound passion: cryptocurrency, namely bitcoin.

Cryptocurrency, it should be recalled, is a digital form of payment and a method of storing value. It relies on a secure, decentralized ledger – called a blockchain – that is used to record transactions, manage the issuance of new “coins” or “tokens”, and prevent fraud and counterfeiting. Although there are thousands of such currencies, bitcoin is by far the most durable, albeit with a dark backstory, including a shrouded creator named Satoshi Nakamoto, whose existence and identity have not been confirmed. The bitcoin blockchain was designed in such a way that only 21 million “virtual coins” could be “mined”. This seemingly affirmed scarcity sets it apart from the penchant of central banks to print money, be it a pandemic or political expediency. It also contributed to the steep rise in prices, from less than a cent in 2009 to over $ 41,000 in January 2021. In 2020 alone, the coin has grown in value by more than 300%.

At first, Hayes was nothing in a cryptocurrency riotous sea of ​​tax evaders, drug and gun traffickers, producers of pornography involving minors, freedom fighters and nutty bankers yearning for the gold standard. They were united by their detachment from old-school banking and its leisurely pace, rejection of identity requirements for opening accounts and moving money, and a feeling that the relationship between Big Finance and Big Government had become too docile. In their view, the authorities from the United States onwards believed and acted as if they had a monopoly on money and resisted the rise of cryptocurrencies, in which people invested to make money, hide capital, send the establishment far or all at once.

Unsurprisingly, Hayes has entered the mainstream. “I bought my first bitcoin from Arthur in 2013,” recalls Jehan Chu, a New Jersey native who relocated to the Pacific Rim. As a graduate student at Johns Hopkins University, he learned to code just in time for the first dot-com boom in the late 90s. After graduating from a small web development studio in New York, he received a call from Sotheby’s to increase his online presence. “We thundered when we sold the Declaration of Independence in 2000,” he exclaimed, referring to one of the last copies in the hands of private collectors. After the $ 8.14 million deal, the online market quieted down and Chu moved to Hong Kong to help Sotheby’s serve super-wealthy Asian customers.

In his spare time, Chu organized brainstorming sessions for digital currency enthusiasts. What started in a smoky bar in Senwang with five people involved quickly grew into a community of thousands. By 2016, he told me, Chu had “turned his passion into a career,” starting Kenetic, a venture capital firm that trades in cryptocurrencies and has invested in over 150 companies. In the meantime, he watched with admiration as his friend Arthur storm the cryptocurrency world, going from a handicraft trader to an industry titan.

Arthur Hayes started small, with arbitrage, buying bitcoin in one market and then selling it at a premium in another. His method worked until October 2013, when he had trouble getting the coins he sent to Mt. Gox is a Tokyo-based bitcoin exchange that has helped clients convert savings into fiat money, a traditional legal tender such as the dollar, euro, pound or yuan. In early 2014, Mt. Gox announced that hackers had stolen approximately $ 500 million from its bins. Unlike most other depositors, which number around 24,000, Hayes was able to recover the money and learned an important lesson in the process: exchanges represent a single point of failure in an otherwise secure Bitcoin ecosystem. Hacking Mt. Gox may be the most infamous, but dozens of other exchanges have been attacked

Hayes, however, decided not to leave his money idle. Upon learning that Bitcoin is trading significantly higher in China, he bought a large amount, transferred it to the Chinese exchange and exchanged it for yuan – literally dragging around with a backpack of money. “For some time, I physically crossed the border on a bus to Shenzhen with friends, dined there, and walked back across the border with an acceptable amount of cash,” he recalled. It was a smart and relatively lucrative idea. But the difficulties of moving money across international borders in the real world made him wonder: why not create an online exchange where people can actually make money with their bitcoins using derivatives? (A derivative is a financial contract, the value of which is determined by the indicators of the underlying asset, in this case cryptocurrency).

This idea required serious technological implementation – not only to create, but also to convince a deeply skeptical community that Hayes solved the security and accounting problems that plagued early exchanges.

Bitcoin and Beer

In January 2014, Hayes hosted a meeting on a fashionable rooftop pool with Ben Delo, a brainy British mathematician and computer programmer. Oxford classmates presumably cast him as the person most likely to become a millionaire and the second person to go to prison. After graduating in 2005, he worked for IBM, two hedge funds and, after moving to Hong Kong, JPMorgan.

When Hayes and Cause teamed up, there was little indication that they would storm the fortresses. The resumes of both spoke of belonging to the establishment: elite training and jobs at leading companies. Both, however, turned out to be exceptions. Hayes, the erudite son of auto workers, left the strict and highly regulated world of investment banking for the crypto Wild West, where rules were set on the fly and regulation was barely there. The case, in the words of Sir Jonathan Bate, rector of Worcester College, Oxford, “overcame enormous learning difficulties to win a place at Oxford after the local school.” As the child of an engineer father and teacher mother, he was dropped from three elementary schools before he was diagnosed with Asperger’s Syndrome.

While the two were pondering what it would take to make Hayes’s vision a reality, Delo, a technical expert in complex algorithms and high-speed trading systems, noted that they needed a frontend developer to tackle user interactions. Hayes knew a guy, a young American coder and IT propagandist named Sam Reed, whom he met after Reed talked to his audience of tech buddies not to join startups whose owners often exploit and abandon their employees. When Hayes presented Reed with the idea of ​​a bitcoin derivatives exchange, Reed, forgetting his own recommendations, immediately agreed.

The youngest of the trio, Reed grew up in Wisconsin. His father was an Air Force network administrator and his mother was a newspaper editor. The Reeds had plenty of old computers at home, and Reed was able to bring them back to life. By the age of 12, Reed’s hack was already generating income: he repaired computers for friends and neighbors.

Reed was much younger than Hayes and Delo, but he came to cryptocurrencies before them. By 2009, when it was time to graduate from the University of Washington and Lee, who calls himself the “bitcoin hipare”, Reed was mining bitcoin on his laptop – the cost of the cryptocurrency was then near zero. During this time, Reed accumulated about 100 bitcoins, but in the process of formatting the hard drive, he accidentally erased the private keys to gain access to them. (These coins are worth $ 3.1 million today.)

Even before the events described, Reed was less involved in institutional arrangements and was more of a free wanderer than Hayes and Case. He worked for a large defense contractor, found the corporate world too stifling, and switched to a couple of startups and also freelance jobs before moving to Hong Kong in 2013. At the forum of his alma mater on building a career on the network, Reed from a bungalow in Thailand shared ideas for creating a cryptocurrency business. Among his calculations: “During the gold rush, you do not need to mine gold. We need to sell shovels. ” Reed once noted that he was considering creating an online exchange for trading cryptocurrencies, explaining his motivation as follows: “If you can cut off the banks, you will be able to get rid of most of the difficulties. You can cut off a lot where American law interferes,

Hayes, Delo, and Reid began to get serious about their project, calling it the Bitcoin Mercantile Exchange (BitMEX). Arthur Hayes became Chief Executive Officer (CEO), Ben Delo became Chief Operating Officer (COO), and Sam Reid became Technical Officer (CTO). Despite the loud sounding of the titles, BitMEX was originally the work of three guys who spent days working on their laptops from Starbucks at Jardine House, a 70s-era Hong Kong skyscraper decorated with porthole windows. They returned to Hayes’s apartment overnight with a beer from the 7-Eleven store.

Where NASDAQ meets Vegas

BitMEX presented itself as “a peer-to-peer trading platform offering leveraged contracts that are bought and sold in Bitcoin.” This allowed users, in effect, to bet on the future price of a currency with up to unimaginable 100x leverage. In other words, a client with $ 10,000 in the BitMEX wallet could directly transact a cool million dollars. The attractiveness of the exchange stemmed from the fact that people could make large sums of money by investing relatively modest initial capital.

On the BitMEX blog, Hayes argued: “Trading without leverage is like driving a Lamborghini in first gear: you know it’s safer, but that’s not why you bought it.” His friend Jehan Chu compared BitMEX to NASDAQ – “if NASDAQ was located in Las Vegas.” Pressured by the question of the potentially catastrophic effect of giving clients such leverage to trade, Chu insisted on personal responsibility, which has always been a central motive in cryptocurrency morality. “Do you take 100x? Make sure to read the information. There’s no mom here to make sure you don’t fall off your skateboard. “

Hartei Singh Souny is another colorful character in the cryptocurrency circles of American expats. Wearing a turban that he says was made of “secret fabric” and an eponymous clothing line that he describes as Burning Man in the Punjab style, Souny, the first generation of American Sikhs, began collecting Bitcoin meetups a decade ago in Vegas, including early visitors to which included budding magicians and poker players. He now lives in Kiev – which he insists is much more hospitable to digital currencies than the US – where he helps build and secure blockchain companies. Sawney encouraged BitMEX’s commercial model, saying, “They set up a pretty smart casino environment. But I am for free markets. I believe that BitMEX should do what it wants. Their terms are very clear. “

The timing for BitMEX to emerge six years ago was a good one – and a dangerously stressful one. According to the American authorities, bitcoin was then going through a transition period from the favorite currency of criminals (as evidenced by the closure of the infamous Silk Road darknet marketplace in 2013) to becoming an investment-grade asset, which institutional players began to buy in order to protect against inflation – and due to higher than usual income expectations. Hayes, Reed, and Cause were in a good position to amass serious money (all three became billionaires, according to sources familiar with their financial situation).

At the same time, they were outsiders who suddenly started playing on the field, which the insiders were going to take advantage of. Their high-speed, high-margin offering echoes the potentially toxic financial instruments that subsequently caught the attention of regulators and were later derided in Adam McKay’s 2015 short-selling movie based on Michael Lewis’s bestselling novel. (Remember synthetic secured debt?) Despite all the benefits, BitMEX came with dizzying risks.

“These things are happening very, very quickly – they didn’t happen 10 years ago,” said Christopher Giancarlo, who served on the powerful Commodity Futures Trading Commission (CFTC) during the Obama presidency and later headed it under Trump. “Regulators always follow innovation, and sometimes, in democracies, they go a little further, entering foreign jurisdictions.”

For several years, Giancarlo has urged Congress to introduce a comprehensive regulatory regime for the cryptocurrency industry. Instead, lawmakers have relied on regulations from the 1930s – the stock exchange law and the commodity exchange law – that were later changed in the wake of the 2008 financial crisis. However, the rules remain horribly outdated. Consequently, regulators, according to Giancarlo, need to determine how emerging platforms such as Hayes’ exchange will be regulated, if at all. “About 8,000 new instruments have been identified,” he said. “In each case, the regulators ask:“ Are they on the side of the CFTC or the side of the SEC, or on the side? ”“

Shortsighted thinking

Understanding what BitMEX was selling may not be as important as understanding who it was selling it to. In our early conversations with him, Hayes insisted that BitMEX was careful about keeping US customers out, and technological barriers such as blocking US IP addresses shielded them from the platform, allowing the exchange to stay away from local regulators.

But American officials say this is not the case. Their attention was not lost on the fact that there were enough American depositors on BitMEX, many of whom hid their true location using virtual private networks (VPNs). They flocked to the platform in the thousands. And while Hayes has become a product of the banking establishment, where entire departments monitor money laundering prevention and customer identification, his immersion in the libertarian world of cryptocurrency seems to have blinded him to certain realities. Among them: the American authorities have long arms, a long memory and a fondness for getting people back to their place – especially if they rise insolently.

“Arthur is a man who fights against traditional foundations,” said his friend Meltem Demirors. “He’s not afraid to be odious, and, you know, history hasn’t been kind to such people.” Demirors, the strategic director of digital asset investing company CoinShares, is dubbed the Sheryl Sandberg of the cryptocurrency world, which sounds like a reductionist label created by what she calls “pseudo-intelligent fucking”.

Born in the Netherlands to a Turkish family, Demirors moved to the US at age 10 and studied mathematics and economics at Rice University. She received her MBA from the Massachusetts Institute of Technology, where she taught disciplines related to fintech and blockchain strategy, and later moved on to the same specialization at Oxford. It’s not hard to guess why Hayes and Demirors became friends – and soul mates. “I feel like an outsider,” she said. – In the sense that I am a woman; I am not funded by Silicon Valley; my mom and dad are not rich … I don’t have the same background as many in this industry, and when I walk into a room, people still have big eyes. ” The same can be said about Hayes, who, as Demirors sees it, “Had no known venture capitalist trustees. He did not have the advantages that others have. ” Hayes’s original sin may be that he refused to play by the rules. “He didn’t care about the fuss and the impression it made and the crap and Silicon Valley and the thought factories — all that stupid crap they do for prestige. He just didn’t care … Sometimes the greatest qualities of people become their biggest punctures. “

BitMEX registered in the Seychelles, which allowed it to grow rapidly and reduce tax risks, while Western governments could not even understand – let alone create ways to manage – the latest financial instruments and markets that BitMEX was creating. In 2015, during a presentation to investors, Hayes outlined his point of view that “Bitcoin derivatives are completely unregulated around the world … Regulators are still trying to cope with the exchange of fiat for bitcoin.”

In this, his thinking could be short-sighted. “In the beginning there were no rules, and the authorities were not interested in creating such rules,” Chu recalls. – You go to them and ask for guidance, but you get nothing. “It is legal?” No answer”. It was only after the fact itself, he said, that strict restrictions formulated in a hint for the control of the cryptocurrency space arose – usually in response to some violations that had not been clarified by regulators before. But where Chu saw chaos, Hayes saw opportunities.

For about a year after its launch, BitMEX’s business was inactive. “On some days we had no deals,” Hayes said. “Nobody bought or sold anything.” The fees for trading on the platform were barely enough to pay for the servers – Reed paid for them with his credit card. While Hayes and Case remained in Hong Kong, Reed married and returned to the States, settling in Wisconsin, where he worked from a coworking space. Time zones were different, but they used it to their advantage: Reed and Delo, in a typical startup fashion, took turns supporting users 24/7.

That all changed in late 2015 when they started offering trading at up to 100x leverage – five times that of their closest competitor. Political volatility the following year, with Brexit and the election of Donald Trump, boosted trading volumes. In 2017, BitMEX had to hire 30 employees to cope with the explosion of activity. The firm moved to a new office space, which it soon outgrew too.

By 2018, BitMEX had become a big betting bazaar, moving multi-billion dollar amounts daily. During one of our meetings, Hayes said, “We have the world’s largest trading platform by volume. Among everyone who trades in cryptocurrency products. ” BitMEX, he said, was one of the “most liquid exchanges in the world, regardless of asset class.” According to this parameter, it was in the same league as NASDAQ and the stock exchanges of New York, London and Tokyo. In four short years, Hayes’s ragged casino has become, by the standards of the gambling industry, a gambling house. (BitMEX was hit hard after the October indictment; its market share and trading volumes plummeted.)

Sharks and Lambas

In May 2018, on the opening day of Consensus – the crypto equivalent of the Consumer Electronics Show – Hayes taxied up to the Hilton in Midtown Manhattan in an orange Lamborghini and tweeted: “Did you see me driving to # Consensus2018 today?”

A close friend insists that he simply ridiculed the thousands of visitors gathered inside the hotel – investors who talked about how they make money from cryptocurrencies, while they themselves only succeeded in burning millions of venture capital on headless schemes and ICOs. However, looking back, the Lambeau maneuver could have been more of that moment than any other when Hayes drew a target on his back.

Indeed, the firm’s partners took a different approach to their positioning and thriving business. Hayes, who was not averse to causing great irritation, reveled in the role of financial non-conformist. Sam Reed tried his best to stay in the shadows, the hidden billionaire (on paper) walked the streets of Milwaukee. Ben Deal appears to have been greedy for mass adoption. When BitMEX was named the world’s largest cryptocurrency exchange in 2018, a number of British newspapers called it “the country’s youngest self-made billionaire.” In October of that year, he donated £ 5 million to Oxford College of Worcester, and a few months later became a member of the Giving Pledge initiative. launched by Bill and Melinda Gates along with Warren Buffett as “an open invitation for billionaires … to make a public commitment to donate most of their fortune to philanthropy.” Explaining his decision, he wrote: “When I was a sixteen-year-old British schoolboy and was asked to outline a list of my ambitions for the future, I replied succinctly:“ Computer programmer. Internet entrepreneur. Millionaire”. I am very fortunate to have surpassed these goals, and I am grateful to be in a position to sign this commitment. “

Two years later, BitMEX leased the 45th floor of Chengkhon Center, the most expensive real estate in Hong Kong, home to Goldman Sachs, Barclays, Bloomberg and Bank of America. Hayes, Delo, and Reed literally pounced on the establishment. But always wanting to make a name for itself, BitMEX has equipped its office in a way that none of these heavyweight companies of the old world did: a huge aquarium, inhabited, to match, with live sharks.

Hardcover in Taipei

By the summer of 2019, staggering amounts were going through BitMEX. On June 27, the company announced it was setting a new daily record for $ 16 billion. Hayes tweeted two days later: “One trillion dollars in trades over the year. Statistics don’t lie. No need to contact (unlicensed) BitMEX. Nouriel, see you Wednesday. “

Hayes reached out to Nouriel Roubini, a respected professor of economics at New York University – and an implacable critic of BitMEX. Nicknamed “Doctor Doom,” Roubini has served on President Clinton’s Council of Economic Advisers, worked for the Treasury Department, the International Monetary Fund and the World Bank. In other words, he was as much of the establishment as Hayes was against him. On July 3, the two met onstage at the Asia Blockchain Summit – dubbed the “Taipei Binder” – as they took their seats while Rocky music thundered in the background.

The professor spoke first and immediately launched a bloodthirsty attack: “Shitty behavior occurs in this particular industry – crooks, criminals, dealers in quack potions, and so on. Sitting next to me is a gentleman who works with degenerate gamblers and retail bullshit, non-accredited investors. ” Speaking in Italian with an Italian accent, Roubini continued: “There is a whole beautiful Twitter thread called BitMEX Rekt – rekt means being forced into anal intercourse (obscene) – where in a second someone gets killed by these guys, and thousands plunging into financial ruin. ” He accused the company of bypassing regulation, insisting that the above scenario is happening to everyone on BitMEX, with the exception of Hayes and his colleagues, who, according to the economist,

Hayes retorted in a look at you: “BitMEX. Leverage 100 times. So what? You can trade with this leverage anywhere else. In the USA we have such a thing called ETF. They were great and based on the idea of ​​short volatility. One day jump in February 2018 – in the most regulated financial market in the world, highly liquid, and all these great banks, people in jackets, going to good universities, and your ETFs crashed to fucking zero. Rekt! “

Hayes, in fact, had many fans in the audience that day, people who believed him, like Mark Zuckerberg with his Facebook, who created an entire marketplace from scratch, an influential, safe and highly profitable platform, although before that people did not even think that need her. As Hayes spoke, it was impossible not to notice other parallels with Zuckerberg: overconfidence, disregard for authority, and tonal deafness that led to self-sabotage. All this took place on a stage in Taipei. When the panelist asked about BitMEX’s decision to register in the Seychelles, which is supposedly unregulated, Hayes blurted out, “Maybe the US-centric Roubini thinks that the NYC Department of Financial Services and Attorney General’s Office is the only option and we should , you know, bow to them and put up with nonsense ) of the American government, just because it is regulated. I do not know. This is clearly not my option. “

Answering the question that the decision of BitMEX can be explained by different approaches to the regulation of the US and Seychelles authorities, Hayes said: “It’s just more expensive to bribe them.” When asked further how much it costs to bribe the Seychelles authorities, he replied: “One coconut.”

Several weeks later, Doctor Doom returned to the topic with an article titled “The Great Crypto Heist.” In it, he pointed to dangerous signals in the systematic illegality of offshore exchanges. Still inflamed after Taipei, he directed his anger at BitMEX and its CEO, accusing them of dubious business practices, such as using an internal sales force to stay ahead of users’ actions and taking half the profit from liquidations, in other words, accusing BitMEX of being motivated to lose money. her own clients.

Roubini then pulled out his trump card: “BitMEX insiders told me that the exchange is being used on a daily basis for massive money laundering by terrorists and other criminals from Russia, Iran and elsewhere; the exchange does nothing to prevent this, as it makes money on such transactions. ” He concluded by shaming regulators who “sleep behind the wheel while cryptocurrency cancer metastases.”

Demirors more favorably assesses the events in Taipei: “This is an example of the fact that Arthur is a showman, arranging scenes, you know, the economy of attention.” She admires how strangers – even those who left their money on BitMEX – walked up to Hayes on the street and wanted to hug him. “For many, Arthur is like a cult figure. He believed that we would change the world. He believed in a money revolution. He believed we were doing a great job. He also believed that it should be fun and cocky, and that we should be able to laugh at ourselves and expose eyewash. “

Coup de grâce

On October 1, 2020, at 6 a.m., FBI agents arrived at a large colonial-style house located in a cozy suburb of Boston. The house was reportedly purchased a year earlier by Delaware LLC. The real owner of the property, Sam Reed, was taken away in handcuffs.

Hours later, Audrey Strauss, the current Attorney General for the Southern District of New York, and William Sweeney, the head of the FBI’s regional office in New York, announced the charges against BitMEX founders Hayes, Case and Reed and their close friend and first employee Gregory Dwyer. … The men were accused of violating and conspiring to violate bank secrecy laws because they “deliberately avoided establishing, implementing and maintaining an adequate anti-money laundering program.” Each charge carries a maximum sentence of five years in prison. Reed, the only US defendant at the time, was released on $ 5 million bail and agreed to keep his passport.

FBI Sweeney tried to smash Hayes heartily: “One defendant went so far as to boast of registering his company in a jurisdiction outside the United States, because it is only ‘one coconut’ to bribe regulators in that jurisdiction.” He warned that “they will soon find out that the price of the crimes imputed to them cannot be paid with tropical fruit, but, rather, could lead to fines, withholding of illegally obtained income and a federal prison term.”

Professor Roubini sounded the alarm for over a year, and in October the feds responded. Not only the Ministry of Justice responded. The CFTC – which protects retail and institutional investors from fraud, manipulation and fraud in the sale of futures and options – has filed a civil lawsuit against BitMEX and its founders for running an unregistered trading platform and failing to apply the necessary anti-money laundering procedures.

The criminal case stunned legal observers. “I do not know – and I have been doing this for a really long time – about any other cases of criminal prosecution and, of course, about cases of persecution of individuals, which would be based solely on the fact that they did not use the anti-money laundering program,” the expert said. Financial Crimes Officer from O’Melveny & Myers Laurel Loomis Rimon, 16 years with the Department of Justice. She was struck by the absence of more substantive charges. “The indictment usually cites evidence of certain criminal activity, be it fraud, theft of credit cards, pornography involving minors, or terrorist financing. There is nothing in this case ”. (Of course, the possibility remains that that the prosecution – which received a total of about 100,000 pages of BitMEX documents in the course of its investigation – could file a new indictment, adding additional points if it finds them justified. Prosecutors declined to comment on the case.)

For context, when the DOJ pursued the BTC-e exchange in 2017, they indicted 21 counts, including but not limited to identity theft, involvement in drug trafficking and money laundering of criminal syndicates – including those allegedly related to hacking Mt. Gox. In the case of BitMEX, Rimon says, US authorities have targeted the founders of the largest and brightest player in the cryptocurrency derivatives space to send a message to the entire cryptocurrency community: “We’ll make sure you understand that this industry comes under our jurisdiction.”

Regarding the civil case, a source familiar with the authorities’ mindset said that BitMEX failed to meet the difficult task of becoming the “exception to the exception” of the CFTC jurisdiction. In fact, unlisted exchanges like BitMEX are allowed to leverage exchange commodities to US retail investors. But they must complete such transactions within 28 days. The problem is that BitMEX’s most in-demand products – called perpetual swaps – do not have an expiration date and allow clients to keep positions open. In short, Hayes, Delo and Reed – three literate guys who did not lack expensive legal support – became victims of the 1936 Mercantile Exchange Act. Which was amended by the Dodd-Frank Act in 2010. Which was subsequently further clarified in the new CFTC guidance on such transactions,

The commission did not buy into the company’s line that its platform was out of American reach. According to the civil lawsuit, BitMEX received a significant portion of its volume and fees from US clients. The prosecution argues that the company’s anti-money laundering and customer identification measures were only present for a diversion: “BitMEX allows customers to open accounts with anonymous e-mails and passwords and make deposits in Bitcoin. BitMEX does not collect any documents to verify the identity or location of the vast majority of its clients. ” The CFTC said in federal court that it “seeks the recovery of illegal proceeds, civil fines, restitution in favor of clients, permanent bans on registration and trade, as well as a standing order for further violations. ” (The company announced in January that all users of its platform have been verified.)

By accusing the founders of BitMEX – personally – of serious and time-bound crimes, officials angered many in the broader cryptocurrency community. Some people think they are playing unfairly. “Show me a bank that has no anti-money laundering violations, and I’ll show you a piggy bank,” said Jehan Chu. – These are double standards. Who was put in HSBC for laundering money and, you know, their Iranian deals and all these sanctions violations? They were fined. ” He is not wrong. After HSBC admitted to laundering billions of dollars for the Sinaloa cartel and making money transfers to sanctioned clients in Cuba, Iran, Libya, Sudan and Myanmar, the Justice Department decided not to prosecute the bank or its representatives, instead forcing them to pay $ 1.

And this is no exception. Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, ING, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered have all paid fines for activities that have included money laundering, sanctions violations, and massive tax fraud cases. In the world of big finance, executives are rarely personally blamed. “You can google JPMorgan and the scam and see what it gives you,” suggested Hartei Singh Souni. Wells Fargo, JPMorgan, Goldman Sachs all confessed to fraud. And not a single term or fine, which at least approximately resembled what they want to hang on Arthur. “

By the way, 48 hours before the charges were brought against Hayes and partners, JPMorgan Chase “entered into a settlement” – as they call it in decent terms – with the Department of Justice, CFTC and SEC, agreeing to pay about a billion dollars in connection with two fraudulent schemes: one using futures for precious metals, another – with treasury notes and bonds. Among others, FBI Sweeney said about the settlement: “For nearly a decade, a significant number of JPMorgan traders and salespeople have openly defied US anti-illegal market laws … Today’s deferred prosecution agreement … serves as a stark reminder to others that charges of this nature will be actively investigated and prosecuted. “

Seriously? Since 2000, JPMorgan Chase, America’s largest bank, has paid tens of billions of dollars in fines, including over $ 2 billion for anti-money laundering violations alone. However, its CEO and Chairman Jamie Dimon and his top associates are not prosecuted. In contrast, Daimon, who played with the 2020 presidential election, received $ 31.5 million in salary and incentives over the past year.

“You can look at the history of anti-money laundering cases over the past 10 years, and you won’t find many names of individuals as defendants,” Rimon added. – It’s unusual. And I think this was done on purpose. I think the authorities decided to do this in order to send a message. “

Naturally, intimidation is an essential element of the American criminal justice system. Again, everything is done at the discretion of the prosecution. Whether it’s big banks or even big pharmaceutical companies like Purdue – whose owners, the Sackler family, have been accused of deliberately creating addictions to millions of Americans, resulting in hundreds of thousands of deaths (the Sacklers deny this) – Chu expressed the sentiments of many when described the gentlemen’s agreement: “There is a class of elites from multinational corporations who have learned very well to work with their partners in power. It is not a barter relationship, but a working relationship that includes wrongfulness and coercion as part of the art of dance. It is literally a choreographed dance. No one was individually responsible for the Sacklers. But rest assured

“I can object to this in a big way,” replied former CFTC chairman Giancarlo. “The CFTC is not messing around by including defendants in criminal cases.” He cited Refco and Peregrine Financial as examples where, at the Commission’s filing, the Justice Department indicted executives who were then given lengthy prison sentences. (The CFTC also sanctioned former Goldman Sachs co-chair John Corzine, banning him from trading in regulated markets for life for his role in the collapse of MF Global.) but with an openness to new ideas. ” In other words, he is not opposed to cryptocurrencies. The same position, according to him, is held by his former colleagues in the CFTC, last year, they notified the cryptocurrency community that the regulator is taking its tasks seriously. “BitMEX obviously didn’t heed the message and the CFTC went against them.”

Be that as it may, the founders of BitMEX were taken by surprise. The case, a Hong Kong resident, was in the UK when the charge was made public. While the US has yet to begin extradition proceedings (due in part to COVID), sources close to the Case say he will show up when called. Hayes, I was told, is now in Singapore, where he supposedly has a permanent residence. When, or if, he will return to the States to stand trial is an open question.

However, even if they manage to win in court or settle their claims early, their problems may not end there. BitMEX and its founders are being sued by investors and clients who claim to have lost money while trading on the platform they claim was playing against them. The most curious accusation of early investor Frank Amato, who wants to sue money for a stake in the company. (“The case was withdrawn after the dispute was resolved on confidential terms,” a spokesman for the holding company BitMEX said.) In one of the lawsuits, Amato claims that Hayes, Delo and Reed “began to secretly withdraw their money long ago … and did not later in January 2019, they knew they were being investigated by US regulators as co-founder Reed was questioned – and allegedly false – by the CFTC. ” A source familiar with Amato’s lawsuit told me that, knowing this, each of them paid themselves $ 140 million for several tranches. While this data is impossible to verify – nor is it unusual, since executives often receive dividends on the results of companies – it is nevertheless a decent enough fee, even for a trinity of billionaires.

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