By Chris Dolmetsch
BitMEX co-founder Arthur Hayes was spared from prison despite admitting he failed to guard against money laundering at the pioneering cryptocurrency exchange, which the US blames for hundreds of millions of dollars in shady transactions.
On Friday a federal judge sentenced Hayes to two years’ probation, after Hayes and BitMEX’s other founders were charged in 2020 with violating the Bank Secrecy Act, which requires the establishment of such safeguards, including verifying the identities of an exchange’s customers.
Hayes, who was ordered to spend the first six months of his sentence in home confinement, avoided time behind bars even though prosecutors argued that the court had to send a signal.
“This is a very serious offense,” Assistant US Attorney Samuel Raymond told US District Judge John Koeltl in Manhattan before Koeltl pronounced the sentence. “There were real consequences. When individuals like Mr. Hayes operate platforms without anti-money-laundering programs or know-your-customer programs, they become a magnet for people to launder money.”
Derivatives Pioneer
BitMEX — among the first to offer cryptocurrency derivatives, such as futures contracts that allow investors to make leveraged bets — carried out at least $209 million in transactions “with known darknet markets or unregistered money services businesses,” the Treasury Department said in August. BitMEX agreed to pay $100 million to settle civil allegations that it allowed illegal trades for years and violated rules requiring anti-money-laundering programs, without admitting to or denying the claims.
In his plea deal, Hayes agreed to forfeit $10 million. Despite his conviction, he has remained active in the world of crypto and regularly posts essays outlining his thoughts on issues ranging from market prices to the recent Terra stablecoin meltdown.
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Allowing Hayes to stay out of prison “would send a message to him that the cost of doing business is merely a fine, and he could continue to violate the law for huge amounts and pay any fine,” Raymond warned. “This case is being closely watched by cryptocurrency exchanges and other companies around the world.”
Prosecutors and regulators are increasing their scrutiny of digital asset exchanges amid a broader focus on cryptocurrency. Securities and Exchange Commission Chairman Gary Gensler said this month that some platforms are shirking rules and may be betting against their own customers. He has asked lawmakers to increase the agency’s budget as he seeks to require exchanges to register with the SEC.
‘Intellectual Powerhouse’
Hayes told the judge that he took “full responsibility” for his role in BitMEX’s failure to implement the measures.
“I know that my best years are ahead of me,” said Hayes, 36. “I will always have to live with the consequences of these actions. I am ready to turn the page and start again.”
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His lawyer, James Benjamin, called Hayes an “intellectual powerhouse” and “charismatic leader” and said prosecutors were trying to make the case a “referendum on abstract principles they seek to endorse,” pursuing a “draconian sentence” to vindicate US policy.
Prosecutors had asked Koeltl to send Hayes to prison for significantly more than a year to help deter similar violations. Hayes sought no jail time and the right to live abroad and travel freely, saying the case itself was a landmark that would help the US prosecute financial crimes at exchanges around the world. Probation officials recommended two years of supervised release.
‘Willful Violation’
“Did BitMEX do a perfect and seamless job on its path from startup to a mature fintech company?” Benjamin said in court on Friday. “No, it did not. There were some bumps in the road.”
As he prepared to mete out Hayes’s punishment, Koeltl said the BitMEX founder was “a sophisticated businessman.”
“He knew these procedures were required to avoid having his company used for money laundering and other illegal purposes,” the judge said. “The crime was more than a simple regulatory oversight.” He called it “a willful violation of the Bank Secrecy Act.”
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Hayes and co-founder Benjamin Delo pleaded guilty in February, and Samuel Reed in March, each agreeing to forfeit $10 million. Delo is scheduled to be sentenced next month and Reed in July. Another BitMEX employee charged in the scheme, former head of business development Gregory Dwyer, has pleaded not guilty and is set for trial in October.
Outstripped by Binance
Hayes founded BitMEX in 2014 with Delo, a computer scientist who built high-frequency trading systems for JPMorgan Chase & Co., and Reed, a programmer specializing in fast web applications. While BitMEX was once the largest crypto derivatives platform, Binance now dominates the field. BitMEX recently laid off about a quarter of its workforce of 300 people, not long after its planned acquisition of a German bank fell through.
The company on Tuesday launched a spot exchange, which will start off with seven trading pairs including Bitcoin, Ether and Polygon versus the Tether stablecoin.
Damian Williams, the top federal prosecutor in Manhattan, said in a statement Friday that Hayes’s failures “allowed BitMEX to operate as a platform in the shadows of the financial markets.” He vowed to “vigorously enforce United States law intended to prevent money laundering through financial institutions, including cryptocurrency platforms.”
The case is US v. Hayes, 20-cr-500, US District Court, Southern District of New York (Manhattan).
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