Since July 19, mainstream media including Bloomberg have reported extensively on BitMEX being investigated by U.S. Commodity Futures Trading Commission (CFTC). The probe focuses on whether BitMEX broke the rules by allowing U.S traders to trade on its platform and its suspected large-scale money laundering activities revealed by commentators previously. According to Bloomberg, the investigation has been undergoing for months.

The incident has continued to fester as Bitcoinist reported on July 28 that Arthur Hayes, CEO of BitMEX, had been inactive on Twitter for two weeks and was absent from duty. Furthermore, BitMEX has seen slumps in trading volume and traders have withdrawn large amounts of cryptocurrencies from BitMEX’s cold wallets. Speculations have it that the executives in BitMEX may have run off. 

​It was very unusual to see BitMEX and its CEO’s Twitter accounts stop updating for such a long time. BitMEX has not responded publicly under the massive pressure from the public. Although Hayes uploaded a selfie to Twitter on Aug1, he did not respond to any inquiries from the public, arousing speculations that the current situation the exchange is facing is not optimistic.

​A public relations representative of BitMEX explained that under the guidance of U.S. regulators, particularly CFTC, since 2015, BitMEX has long forbidden U.S users to trade on its platform. The exchange claimed to be committed to investigating registered accounts that provide fraudulent identity information and will immediately terminate the concerned accounts. They also reiterated they had announced on their website to remind their new users that U.S. citizens are not served.

It was very slow for BitMEX to start setting reminders on the website until the end of 2018. On the contrary, when OKEx and Huobi first launched their global services, they explicitly emphasized that they do not accept U.S. citizens to use their platforms. Moreover, the U.S. has long occupied the Top 5 countries position according to BitMEX’s website traffic data, not to mention that their marketing promotions have been focusing on the U.S. market for years. It would be tough for BitMEX to cover up these facts.

It is also noteworthy that Binance issued a statement in June, stating they are unable to provide services to U.S. traders. Known for its bold moves, Binance has been doing high-profile promotions in the U.S. market over the past two years. They even insisted​ on providing services to U.S. users regardless of the regulatory instructions and did not compromise with the authorities nor bow to regulations.  

What’s more, two well-known U.S.-based exchanges Bittrex and Poloniex have delisted several tokens in March and May, claiming to deal with possible compliance risks and may continue to delist some more tokens in the future. It’s clear that the U.S. regulators have adopted comprehensive measures and penalties that leave the ‘disobedient’ trading platforms no room for negotiation.

1. The U.S. regulators, including Financial Crimes Enforcement Network (FinCEN), The Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC), have formed a joint supervisory force for the blockchain and crypto industry. BitMEX and Binance are key investigation targets.  

As a subsidiary of the U.S. Treasury Department, the Financial Crimes Enforcement Network (FinCEN) issued the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies on March 18, 2013. The guideline requires enterprises doing virtual currency business to complete the registration of the Money Services Business (MSB) and fulfill their corresponding compliance duties. The primary responsibility of a registered company is to establish an anti-money laundering program and reporting system. However, BitMEX and Binance are not on the FinCEN MSB registration list.

The SEC initiated an investigation to an ICO project named DAO in 2017 in order to combat crypto securities offerings and trading. It has reiterated in a statement that for any trading platform that offers trading of crypto securities, it must register with the Commission as a national securities exchange. Yet, BitMEX and Binance never registered. However, as BitMEX offers limited trading products such as BTC and ETH, which are classified as “securities” at the moment, it is currently not under the radar of SEC. On the other hand, for Binance, it previously provided U.S. traders trading services of a wide range of ICO cryptocurrencies, most of which were delisted from Bittrex and Poloniex under U.S. regulators’ pressure. That is why the Binance is facing a much obvious pressure from the SEC investigation and punishment.

Early this year, the CFTC gradually stepped into regulating the digital assets market. The Commission was initially responsible for the issuance and supervision of licenses in traditional futures and other derivatives markets. However, starting from February 19 this year, the SEC and CFTC jointly voiced that they will consider cooperating to regulate the cryptocurrency market. Particularly, CFTC will be focusing on regulating trading platforms with futures trading. It is worth paying attention that BTC is defined as a commodity in the U.S., and commodity futures are supervised by the CFTC.​​

On the other hand, on April 2, U.S. Congressmen Darren Soto and Ted Budd submitted two legislative supplements aimed at avoiding the manipulation of virtual currency prices and maintaining the leading position of the U.S. cryptocurrency industry. The two bills will require the CFTC to make recommendations on how to take corrective measures to prevent price manipulation in the virtual currency sector. Since then, CFTC has been added a new function to regulate price manipulation and fraudulent behaviors in U.S.’s digital assets market. Although BitMEX runs a large derivatives market and offers up to 100x leverage to U.S. traders, it does not obtain any license for commodity futures trading and clearing services. It comes with no surprise that BitMEX has come into the radar of CFTC.​​

Financial Crimes Enforcement Network (FinCEN)Anti-money laundering (AML) and counter-terrorism financing (CFT)
Securities and Exchange Commission (SEC)Combating ICO offerings and crypto trading with securities attributes  
Commodity Futures Trading Commission (CFTC)  Combating unregulated futures trading platforms, as well as price manipulation and fraud in the futures market

2. BitMEX’s users are aware of the crisis and its trading volume has dropped continuously in recent days.

Since the release of Bloomberg’s story about the CFTC investigation to BitMEX on July 19, the number of users and traffic on BitMEX has continued to decline. The number of user visits decreased by 11.57% compared to the previous month.

Even worse, the BitMEX’s trading volume has been dropping for nearly two weeks.

3. U.S. regulations is becoming strict, putting U.S.-focused exchanges in a tough situation

The U.S. authorities have formed a regulatory structure with FinCEN, SEC, and CFTC, posing challenges to the survival of U.S. market-focused digital asset exchanges.

Generally speaking, in order to provide a compliant digital asset trading service in the U.S. market, a trading platform has to complete at least the following steps:

First, all digital asset trading platforms are required to apply for FinCEN’s Money Services Business (MSB) license, and the Money Transmitter License (MTL) of each state.

The registration cost for FinCEN’s MSB is indeed not high. The main responsibility of an MSB-licensed company is to set up an anti-money laundering procedure and reporting system. These systems facilitate FinCEN to track funds and strengthen the control over crimes such as money laundering and terrorist financing.

The licensing standards for MTL vary from state to state as each state has a different attitude towards digital asset trading platforms varies. For example, Montana does not have an MTL system due to its open attitude to money transfer business, and New Hampshire has announced that digital asset traders are exempted from MTL.

In the contrary, California is an exception. Companies in California only need to register for MSB on the federal level but need not to apply for a Californian MTL.

Also, if a company provides trading services in the State of New York, it has to apply for a special license, BitLicense, from the New York State Department of Financial Services (NYSDFS).

Second, trading platforms that provide ICO token trading services must obtain a SEC license for securities trading.

Since SEC has determined many ICO tokens as securities, most transaction services of ICO tokens are deemed equivalent to providing securities trading services, and therefore the trading platforms have to obtain a securities exchange license.

Although the market threshold for digital asset exchanges is lower in the U.S. than in China, it is still difficult to obtain a U.S. securities trading license.

Alternatively, the Alternative Trading System (ATS) license is comparatively easier to acquire. According to SEC’s official website, there are currently more than 21 national securities exchanges and about 90 ATSs in the U.S. market. About 11% of stock transactions now takes place on ATSs.

An Alternative Trading Systems (ATS) is an electronic trading system regulated by SEC that matches buyers and sellers to find counterparties for securities transactions. An ATS is not a national securities exchange. It is generally regulated by the SEC as a broker-dealer. Of course, it can also apply to become a national securities exchange.

Whether it is the ATS or national securities trading system license, for most digital asset trading platforms, it is actually a task that cannot be completed in the short term.

Therefore, a group of U.S. trading platforms represented by Coinbase are extremely cautious about listing. They stay from all ICO tokens that are likely determined by the SEC as securities. They only provide trading services of a limited range of relatively low-risk digital assets such as Bitcoin and Ethereum.

Third, trading platforms offering derivatives must apply to CFTC for a derivatives trading license.

Major CFTC licenses for derivatives trading include:

LicenseRegulated ByUser TypeProduct Type
Designated Contract Markets (DCM)CFTCAll types of traders (including institutional and individual users)Derivatives such as futures and options
Derivatives Clearing Organization (DCO)CFTC/Clearing service for derivatives trading
Swap Execution Facility (SEF)CFTCTraders who meet the requirementsSwap trading

Among them, Designated Contract Market (DCM) license and Derivative Clearing Organization (DCO) license are

two essential licenses. Only after obtaining these licenses a trading platform is eligible to provide Bitcoin deriatives trading services to U.S. users. However, if a derivative trade involves an ICO token of security attribute, SEC’s approval is still required.

Recently, Bakkt, a cryptocurrency trading platform of ICE, has made a high-profile entrance to the digital asset industry and has already filed an application for licenses to CFTC. However, no approve has been announced.

In general, U.S.-focused trading platforms are facing great challenges in establishing a compliant business structure. It is believed that Binance’s recent exit from the U.S. is an unwilling compromise. Given that Binance and BitMEX have spent tremendous efforts in developing the U.S. market, their exits will inevitable cost them an arm and a leg. Their move is also expected to change the game of the competition between digital asset trading platforms.

It is unlikely BitMEX will be able to get out of the trouble intact. Taking reference to CFTC’s penalties for 1pool Ltd (a trading platform that provided BTC margin trading which was later found to be illegally serving U.S. customers) in March 2019, BitMEX is likely facing a tough penalty.