In a settled enforcement case announced August 9, 2021, the SEC fined Poloniex, LLC, a crypto trading platform, for operating an unregistered securities exchange. Then, on August 10, 2021, the CFTC and FinCEN announced a settled enforcement case against crypto exchange BitMEX for anti-money laundering violations and failure to register with the CFTC as a trading platform. The cases highlight US regulators’ increased focus on cryptocurrency exchanges.
In the Poloniex case, the SEC’s order finds that Poloniex operated a web-based trading platform that facilitated buying and selling digital assets, including digital assets that were investment contracts and, therefore, securities under the SEC’s Howey test. According to the order, the trading platform thus met the criteria of an “exchange” under the federal securities laws because it provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine. The SEC order finds that Poloniex did not register as a national securities exchange nor did it operate under a valid exemption from registration at any time, and its failure to do so was a violation of Section 5 of the Securities Exchange Act of 1934. To settle the case, Poloniex agreed to cease and desist from future violations of Section 5, and agreed to pay over $10 million consisting of funds repaid in disgorgement, interest and a civil monetary penalty.
To settle its case, a series of related entities doing business as BitMEX agreed to pay up to a $100 million civil monetary penalty, split evenly between the CFTC and FinCEN. BitMEX operated a peer-to-peer trading platform for cryptocurrency derivatives, including derivatives on bitcoin, ether and litecoin. According to the CFTC’s consent order, BitMEX offered leveraged trading of cryptocurrency derivatives to retail and institutional customers in the US and abroad, and was aware that US customers could access the BitMEX platform. It further finds that customers in the US placed orders directly through BitMEX’s user interfaces, and that BitMEX acted as a counterparty to certain transactions. Thus, the order finds that BitMEX violated the Commodity Exchange Act by operating a facility to trade or process swaps without being approved as a Designated Contract Market or a Swap Execution Facility. The order also finds that BitMEX violated the Act by operating as a Futures Commission Merchant without CFTC registration, including by accepting bitcoin to margin digital asset derivative transactions and acting as a counterparty to leveraged retail commodity transactions. The order further finds that BitMEX violated CFTC regulations by failing to implement an adequate Anti-Money Laundering (AML) program. As part of the settlement, BitMEX agreed to a permanent injunction against future violations of the Commodity Exchange Act, and it also agreed to scale back its US operations significantly, including blocking all US persons and unverified persons from trading on the platform.
FinCEN’s consent order found that BitMEX failed to implement and maintain a compliant anti-money laundering program and a customer identification program, and it failed to report certain suspicious activity. According to FinCEN, BitMEX conducted at least $209 million worth of transactions with known darknet markets or unregistered money services businesses providing mixing services. FinCEN found that BitMEX also allowed customers to access its platform and conduct trading activities without appropriate customer due diligence by collecting only an email address and failing to verify customer identity. Despite BitMEX’s public representation that its platform was not conducting business with US persons, FinCEN found that BitMEX failed to implement appropriate policies, procedures, and internal controls to screen for customers that use a virtual private network to access the trading platform to circumvent internet protocol monitoring.
In some instances, FinCEN determined that BitMEX senior leadership altered US customer information to hide the customer’s true location. The US Attorney’s Office for the Southern District of New York also indicted several BitMEX founders on charges of willfully causing BitMEX to violate the Bank Secrecy Act and conspiracy to commit that same offense.
The actions against Poloniex and BitMEX come on the heels of SEC Chair Gary Gensler’s provocative speech likening crypto trading to the “Wild West” and characterized digital assets as an asset class rife with “fraud, scams and abuse.” Speaking to the Aspen Security Forum, Gensler made clear that he largely agrees with his predecessor’s view that Howey provides broad authority for the SEC to regulate digital assets as securities. Gensler then laid out an ambitious agenda where he hopes to see the SEC increase its enforcement initiatives in the digital asset space, focus on crypto trading platforms, zero in on stablecoins, and revisit asset managers’ use of digital assets. In doing so, however, Gensler conceded that he would need additional Congressional authority for much of this agenda, and that the “legislative priority should center on crypto trading, lending and DeFi platforms.”
Regulation of crypto exchanges is also drawing increased attention from policy makers and members of Congress. Senator Elizabeth Warren, for example, recently wrote to Chair Gensler seeking information about the SEC’s “authority to regulate cryptocurrency exchanges and to determine if Congress needs to act to ensure that the SEC has the proper authority to close existing gaps in regulation that leave investors and consumers vulnerable to dangers in this highly opaque and volatile market.” In addition, the President’s Working Group has announced new initiatives on stablecoins and other digital assets.