On Thursday (October 1), crypto investor Adam Cochran, explained why the actions of the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice against BitMEX are are bad news for decentralized finance (DeFi).
On Thursday (October 1), the CFTC announced that it had brought charges against “five entities and three individuals” that own and operate the crypto derivatives exchange BitMEX.
CFTC’s press release (“Release Number 8270-20”) said that the agency had filed “a civil enforcement action in the U.S. District Court for the Southern District of New York charging five entities and three individuals that own and operate the BitMEX trading platform with operating an unregistered trading platform and violating multiple CFTC regulations, including failing to implement required anti-money laundering procedures.”
It went on to say that the three co-founders of BitMEX—Arthur Hayes, Ben Delo, and Samuel Reed—were among those charged. The entities named as co-defendants are “HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited,and HDR Global Services (Bermuda) Limited (BitMEX).”
The CFTC said that it is bring these charges because it believes that BitMEX is “conducting significant aspects of its business from the U.S. and accepting orders and funds from U.S. customers.”
Around the same time, the U.S. Department of Justice (DOJ) issued a press release, which announced the indictment of Arthur Hayes, Benjamin Delo, Samuel Reed, and Gregory Dwyer, saying that these four individuals had been charged with “violating the Bank Secrecy Act and conspiring to violate the Bank Secrecy Act, by wilfully failing to establish, implement, and maintain an adequate anti-money laundering (‘AML’) program” at BitMEX.
Shortly afterwards, prominent blockchain/crypto investor Cochran took to Twitter to explain why these two developments were bad news not just for centralized exchanges who deal with U.S.-based customers but potentially also for decentralized exchange and other DeFi platforms since none of these platforms worry too much about anti money laundering (AML) guidelines based on the belief that they don’t need to know anything about their customers.
Here were the main points of Cochran’s argument:
- “Today, *JOINT* charges from the CFTC and the DoJ were handed down to BitMex. The CFTC is a regulator, like the SEC that handles commodities. It applies regulatory and civil penalties, but it itself does not pursue criminal action. It lets the DoJ handle that.”
- “BitMex was charged by the CFTC as running an unlicensed commodities exchange which allowed US customers.”
- “Just like dealing with the SEC, the ways the rules are written and applied, and the spirit of those rules in CFTC guidelines make it unclear if the regulation should apply to DeFi.”
- “The DOJ handles the prosecution of the BSA which includes criminal charges. The Bank Secrecy Act does not have the goal of protecting consumers. The Bank Secrecy Act has the goal of stopping money laundering.”
- “The BSA essentially says ‘if you in anyway knowingly, purposefully or through failure to meet industry standards, support, enable, facilitate or profit from money laundering, we’re going to throw the book at you'”
- “Now – many people presume there to be some sort of magical ‘peer-to-peer’ exemption that exists in these laws. I’m not sure where that myth comes from, it might be an oversimplification of understanding the SEC/CFTC limitations. But it doesn’t exist.”
- “Proof of this is that the DOJ has pursued individuals on sites like http://localbitcoins.com and http://paxful.com with having been involved with facilitating money laundering or failing to comply with preventative measures.”
- “The only thing that the BSA cares about is not if you are in the US or if you are a corporate entity, it cares about are you a “‘financial agency’ which can include a person, issuer, redeemer, exchanger, entity, depository trustee or agent, or a collection of such persons”
- “Note how a company isn’t relevant. The only thing that matters is do you make it easier for criminals in the US to exchange monetary instruments without applying the US standards of KYC/AML.”
Cochran then goes to point out that it doesn’t matter that smart contracts can’t be shut down:
- “No, you can’t but DAO or no DAO you can find that developers with admin keys, users who create front-ends, companies hiring individuals to work on the protocol and others who enable or profit from the contract, to be in violation on the BSA.”
- “That can lead to seizing domain names and hosting servers, shutting down front-ends, and arresting developers. If that happened to a protocol a large bulk of users would stop using it and not interact with the contract directly, essentially killing the protocol.”
Of course, not everyone agree’s with Cochran’s take on the BitMEX case.
For example, as Decrypt reported yesterday, Jake Chervinsky, general counsel at Compound Labs, who is one of the most popular crypto lawyers on Twitter, told The Defiant that some of the complaints against centralized exchange BitMEX do not apply to DeFi platforms (such as decentralized exchanges):
Most governance token holders don’t ‘operate’ a protocol in the way that owners of a centralized exchange company ‘operate’ a trading platform. DeFi protocols are autonomous, self-executing code.
Chervinsky also said that another reason that DeFi platforms could be safe from legal threats is that they do not hold customers’ funds.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.