Cryptocurrency Derivatives Exchange Reaches $100 Million Settlement With CFTC, FinCEN
On August 10, 2021, BitMEX, an offshore cryptocurrency derivatives exchange (the “Exchange”), agreed to a $100 million settlement with the U.S. Commodity Futures Trading Commission (the “CFTC”) and the Financial Crimes Enforcement Network (“FinCEN”), resolving claims that the Exchange operated illegally in the U.S. and failed to comply with anti-money laundering (“AML”) laws and regulations.
Founded in 2014, the Exchange is one of the oldest and largest convertible virtual currency (“CVC”) exchanges in the world. Last October, the CFTC filed a civil complaint against the five companies operating the Exchange, as well as the Exchange’s three individual founders, alleging that the Exchange did the following: executed futures transaction on an unregistered board of trade; transacted in illegal off-exchange commodity options; failed to register as a futures commission merchant (“FCM”); failed to register as a designated contract market or swap execution facility; failed to diligently supervise the handling by its officers, employees, and agents of all commodity interest accounts carried by the Exchange and all other activities relating to its business as a registrant; and violated the Bank Secrecy Act (“BSA”) by failing to implement a Customer Information Program, failing to implement Know-Your-Customer policies and procedures, failing to implement an AML program, failing to retain required customer information, and failing to implement procedures to determine whether a customer appears on lists of known or suspected terrorists or terrorist organizations such as those issued by OFAC.
Without admitting to the CFTC’s allegations, the five operating companies entered into a consent order, agreeing to pay a $100 million penalty ($50 million of which may be offset in connection with the Exchange’s settlement with FinCEN) in order to resolve the CFTC’s claims. In addition to agreeing to pay these penalties, the Exchange has represented that it has implemented remedial measures to address the alleged BSA/AML failures.
This consent order does not resolve the CFTC’s litigation against the Exchange’s individual founders, who have also separately been indicted by the Department of Justice for alleged violations of the BSA.
For its part, in its first enforcement action against a CFM, FinCEN also assessed a $100 million civil penalty for alleged violations of the BSA, although it will credit the $50 million payment to the CFTC against this penalty. Without admitting to FinCEN’s factual and legal conclusions, the operating companies consented to the assessment and agreed to (1) engage an independent consultant to conduct a historical analysis of its transaction data to determine whether the Exchange must file additional suspicious activity reports (“SARs”) and (2) engage an independent consultant to conduct two reviews, including relevant testing, to ensure that appropriate policies, procedures, and controls are in place that are effective and reasonably designed and implemented to ensure that the Exchange is not operating wholly or in substantial part in the United States. FinCEN agreed to suspend $20 million of the civil penalty if the Exchange complies with both of these undertakings.
Acting CFTC Chairman Rostin Behnam said, “This case reinforces the expectation that the digital assets industry, as it continues to touch a broader pool of market participants, takes seriously its responsibilities in the regulated financial industry and its duties to develop and adhere to a culture of compliance.” FinCEN’s Deputy Director AnnaLou Tirol stated, “[the Exchange’s] rapid growth into one of the largest futures commission merchants offering convertible virtual currency derivatives without a commensurate anti-money laundering program put the U.S. financial system at meaningful risk. . . It is critical that platforms build in financial integrity from the start, so that financial innovation and opportunity are protected from vulnerabilities and exploitation.”