The Rise and Fall of Bitcoin Billionaire Arthur Hayes
vanityfair.com
vanityfair.com
In this case Bitmex was not incorporated in the US, informed US residents that they were not allowed to use the platform, and even blocked all US IP addresses from accessing their services as well. As the article mentions, yes, some people got around this with VPN blocks, lying about their location, and more. Apparently the US views the solution to this loophole as arresting the founders of Bitmex, regardless of their country of residence, for not complying with US laws. As another commenter reminded me to mention, Bitmex also did not touch USD: they didn't allow withdrawals, deposits, nor transactions in USD, ever. The discrepancy between this treatment and that which established US megabanks receive is made perfectly clear by the latter section of this article, in which billions in fines are often paid in exchange for having purposefully committed blatantly illegal activity for profits on a massive scale.
Perhaps there is more to this story that we do not know (I see accusations of a lack of solvency, front-running, and other more serious activities), but if there is no true bombshell awaiting explosion here, I certainly hope his legal defense is sufficient for a solution in his favor.
Essentially it is just a platform that lets non-US bitcoin users deposit bitcoin and place side bets on price of Bitcoin (and several altcoins, note that you couldn't deposit and withdraw those altcoins AFAIK, just place sidebets on their exchange rates).
It is easily (ab?)used as a gambling platform.
From a consumer protection perspective it's probably a disaster-- the vast majority of users lose their shirts. But I'm not aware of any accusation that there was widespread use by US persons. And CFD gambling houses are common in many places outside of the US.
The gambling problem is absolutely true, but it's difficult to know how to approach it properly, since it's obvious that there's people gambling just as badly on brokerages in the US right now, primarily with options (especially Robinhood).
But I don't disagree that the there are much larger and more relevant gambling-in-the-guise-of-investing targets.
Also to be clear: I think there are legitimate investment uses of that product-- e.g. if you have a credible reason to believe the Bitcoin price will drop soon you could short a small amount with leverage while keeping the bulk of your holdings safe in cold storage. The extra fees and specific risks of the CFD may be offset by avoiding a need to touch cold coins. But I do also doubt that most users are using it that way.
Buying a three (?) month call which is out of the money by 4.8% is "medium risk" ?!?.
Too bad there isn't a date on that image so I can figure out what the black scholes probability of expiring worthless they consider 'medium risk' is exactly. -- Assuming it's 90 days, they consider a 63% probability of total loss "medium risk".
I'm not really sure where I'd draw the line but anything where my best model said total loss was more likely than not is certainly past the high risk line.
And high risk investments can be totally fine, treated as such. Presumably most users won't go broke losing one contract worth though it might hurt some (I'm assuming that isn't a mini option or some kind of split contract-- so we're talking about a $788 loss for one contract if it expires worthless). But if they call it "medium risk" I'm guessing people are going to buy more than one.
Actually I think it might be rather good for laundering money. Say you sell your shipment of cocaine for bitcoins - you put that in a tainted bitcoin wallet and send that to Bitmex and claim they are nothing to do with you. But actually you withdraw from Bitmex to a clean wallet where you claim the money came from your brilliant trading on that one.
It falls apart if bitmex share all their records with the revenue services but I don't think they do.
In a very non KYC way they don't ask for any proof of who you are. You can open an account for Mickey Mouse and if you send in bitcoin you are good to go.
That said there are probably less regulated exchanges out there for that kind of stuff. If you really wanted to launder large sums you might be better off setting up your own one.
> That said there are probably less regulated exchanges out there for that kind of stuff.
That is believed to be a big part of the illiquid altcoin market.
Premine some altcoin, sell it at high prices to your dirty money account. Even where the exchange has "kyc" the launderer just needs a disposable identity for the dirty account that is good enough to pass it for a few days.
The law isn't optional. Crypto doesn't change that.
> It's particularly interesting to watch various cryptocurrency platforms slowly transform into that which they originally detested, not of their own will, but via the strong guiding hands of US agencies.
The reality is that cryptocurrency exchanges aren't actually operated with ideological purity as a goal. They're profit-driven enterprises. They just want to be in the middle of the action and collect a percentage fee of all the money moving back and forth. They're not going to sacrifice profits in the name of arbitrarily resisting governments.
It's sort of like dragging Somali pirates to court in NYC. If it affects Americans, even indirectly, it matters.
You could argue that money laundering in any part of the world is connected to the drug trade in USA which harms citizens. This makes you automatically the target of us law enforcement.
The article is about a US citizen being arrested, in the US, for failing to obey US laws.
You can't simply circumvent the laws of a country by declaring your business to be operated in another country. That's not unique to the United States.
The only person who's been arrested (Sam Reed) was arrested at his home in the United States.
Arthur Hayes, the main focus of this story, is a US citizen and spent most of his life in the US, though seemingly has lived in various countries of late. By virtue of being a billionaire, he can most likely reside whereever he likes. I cant see why that should make him immune from prosecution in the US (a Grand Jury found there was enough evidence to indict him, though this does not mean hes been found guilty of anything).
Is there any product like this in traditional financial markets?
Regarding the authorities' pursuit of Hayes, it does strike me as odd that they're not going after their major competitors (mostly China-based) who also don't have KYC and are therefore serving US customers through VPN too.
The real genius was to invert the trading process. People often talk about Bitmex being a Bitcoin derivatives platform, but it isn’t. It’s a USD derivatives platform. When you trade on Bitmex you’re trading USD derivatives funded in Bitcoin. This is what in theory allowed them to sidestep all that pesky KYC.
The inversion was another big innovation of the perp contract, yes.
They claim to have invented it: "A Perpetual Swap is an innovative product invented by BitMEX"
You a professional crypto trader? Hit me up if so, always looking to connect/network/etc.
What does that mean? A futures contract says "on [date], we will exchange [X amount of goods] for [Y amount of money]". If there's no date, nothing ever happens.
The retail crowd doesn't realize this and is significantly disadvantaged compared to sophisticated market makers with rate models.
tl;dr ignoring swap rates is very dangerous
In perps we compensate the market through funding, and in futures we do so through term structure (ie the futures price exceeding spot).
Annualized rates can be that high during periods of excess demand for perps but on average they're much lower. Agreed that it's important to take them into account.
If you're looking for cheap delta, longer term futures are almost always the way to go. They are a lot less liquid, though. retail has a strange fascination with swaps. I have two theories for why this is: 1) they are easier to manage (you don't need to roll them). 2) they look cheaper on am absolute basis than long term futures.
But if you want long delta, go with long dated futures. If you want short delta, go with swaps. The extra juicy trades come from buying long dated futures on one exchange and selling high rate swaps on another. However, you need a lot of margin or a sophisticated system to manage the risk.
In addition to the reasons you mention (retail cluelessness, margin requirements, risk systems), these are some other reasons I can think of as to why the arb persists over time:
- Perps are popular on Bitmex/Bybit, and futures are popular on Ok and Huobi (even though the latter has perps, they're relatively illiquid). So there's a cross-exchange dimension which adds more difficulty and risk in performing the arb.
- Counterparty risk of keeping funds on an exchange increases the required compensation for performing the arb, which allows it to persist.
Products like USO or some vix etns are examples
EDIT: My apologies, you are right. I called it a "Perpetual Future" in my OP, which was a typo. It should've read "Perpetual Swap".
Without one or something substantially similar why would you ever exit a losing position? :)
And now the govt wants its pound of flesh for having been shown to be clowns, because (OMG!) foreign businesses may not respect the laws of other countries!
TBH I think Hayes only mistake was to incorporate in the Seychelles instead of HK or Russia: BitMex would then be in a place that can't be trampled on with impunity.
Some people in the West lament that most mining is done is China. I think it's clearly in crypto best interest to be in bed with the underdog, as the incumbent may not willingly give up its position as the world currency.
Some people say "eat the rich"? Their appetite for justice would be better satiated by taking a bite of politicians and their lackey prosecutors.
Americans (well, US Persons, which includes residents, LPRs, and citizens) are not allowed to open bank accounts in much of the world because of FATCA. They're not allowed to open a brokerage account anywhere that isn't SEC regulated (hit: those only exist in America). They're required to file taxes with the IRS for life, and if they open a business outside of America, they own a controlled foreign corporation. If they have more than $10K USD in a foreign bank account they have to file FBARs with FinCEN.
The US government gets away with this because of the size of the market, level of influence and military. It's been happening forever.
Not that there's a short supply of examples, but just look at the current meddling in oil pipeline agreement Nordstream 2 between Russia and Germany; the US financial empire regulates whichever foreign nation's affairs they can get away with.
I mean that the government can claim whatever it wants, the validity of the claims still have to be demonstrated in court - since we are not yet in a dictatorship the executive and the judicial branch remain separate.
> the US financial empire regulates whichever foreign nation's affairs they can get away with.
Germany is a lapdog, but Russia less so. I get the feeling it won't be allowed to fly: if Germany really wants its Sputnik vaccines, it will have to show some spine.
And let's talk again when the "US financial empire" thinks it can do the same with China :)
Whose courts? Who decides? The sovereign here is whoever has the power to dictate terms, and for far to long that has been the US.
I completely agree re: Russia and China
And just to be clear I couldn't be less of a fan of this current global order. But it is what it is.
Just so people don't twist themselves into knots talking about rule of law, and trying to rationalize this as if there is some benevolent removed 3rd party deciding fairly, rather than power making up its own rules. Hopefully, the rest of the world at some point tips the scales the other way. Hasn't happened so far.
where is his deferred prosecution agreement? why wasnt it even offered here, was it offered here?
all they try to pin on him is two bank secrecy act violations and don’t offer a “pay us to go away” route
this state has zero credibility
I think there's two reads to it: either the fraud at BitMEX was so rampant and pervasive that taking the time to indict a particular instance of villainy was not in the interest of justice, or this was something else entirely more complicated. In either case the whole thing is fascinating.
I, for one, cannot wait to see the court documents as they come out. I can only imagine that there will be a great many fireworks.
Being a "fintech" product doesn't exempt an operator from the law: KYC is the law on the US.
I'm surprised there haven't been more indictments, since I'm sure other exchanges have operated fast+loose w.r.t. AML and KYC
The laws around KYC and AML are written for the traditional banking system, and are a bit nonsensical when applied to crypto. BitMEX deals only in Bitcoin, so it begs the question of how one could “launder” anything through it.
It may be the case they the US has jurisdiction over US customers anywhere in the world even if they aren’t transacting in US dollars. I guess we’re going to find out?
To be extra clear, it would be hard to call what bitmex sold a commodity futures contract because there was never a way to take delivery of the asset nor intention to do so. Their contracts were perpetual futures, which is to say: fictitious markers of value that can only ever be btc at the end of the day. This is why so many people referred to it as Arthur’s digital casino.
Edit: lastly, IANAL, it could be possible that the bsa includes Bitmex perpetual futures and this is open and shut. The interesting thing to me is the btc component but maybe that doesn’t matter at all?
Yeah, we've all heard of these. They only get fined.
*"I can push back on that—big time,” replied former CFTC chairman Giancarlo. “The CFTC has been no slouch in making referrals for criminal action.” He cited Refco and Peregrine Financial as examples where, at the commission’s urging, the Justice Department charged CEOs who later received lengthy prison terms.*
Nope, never heard of these. They go to jail.
The balance of power is shifting though.
So a ripe target for regulation? You may not remember the Nixon shock, but overnight gold was devalued and the target of enforcement was on conversion from gold to USD. All it takes is a very heavy handed law to collapse a delicate single point of failure
To shut this down you need to shut down our darling Coinbase because the rest of this can be done completely anonymously with smart contracts.
They kinda nailed the space with this quote lol.
The only reason this guy got wealthy was because he was willing to look the other way and accept dirty money without the required follow-up questions that anyone who's ever worked at a payments company knows is required ramp-up viewing.
I personally know a lot of people who own crypto, and none of them are criminals. There are some contrarian libertarians though—guilty as charged!