Two of the three founders of the BitMEX cryptocurrency exchange will surrender to US authorities in coming weeks. Their forthcoming trials could help throw light on the controversial crypto-dollar, tether.
In October, the US Justice Department charged the three founders, Arthur Hayes, Benjamin Delo and Samuel Reed, with money laundering offences, together with a fourth BitMEX executive, Gregory Dwyer. Reed was arrested in the US at the time of the indictment, while the other three have since remained at large.
According to court papers shared on Twitter yesterday by Pavel Pogodin, a US attorney representing plaintiffs in a separate civil case against BitMEX, Delo and Hayes have been negotiating a voluntary surrender to US authorities to face the money laundering charges, which carry a prison sentence of up to five years.
The court papers, which are dated February 16, reveal that Hayes, who is currently in Singapore, has discussed a possible surrender on April 6 in Hawaii. Delo is reportedly discussing a surrender by 18 March, to take place in New York.
According to assistant US attorney Jessica Greenwood, the prosecutor named in the court papers, the remaining BitMEX defendant, Greg Dwyer, remains in Bermuda and has not agreed to a voluntary surrender. The US has therefore opened extradition proceedings against him, said Greenwood.
BitMEX, set up in 2014 by Hayes, Delo and Reed, made its founders billionaires within a few years by offering clients leverage of up to 100:1 in cryptocurrency trading.
The exchange pioneered a derivative called a ‘perpetual swap’ to allow traders to gamble on bitcoin prices without settling transactions in cash.
“Their alleged crimes will not be paid with tropical fruit”
BitMEX, however, flouted US regulations by allowing clients to sign up with an email address and no identity documents.
“BitMEX willfully violated the Bank Secrecy Act by evading US anti-money laundering requirements,” FBI Assistant Director William Sweeney said in October.
“One defendant went as far as to brag the company incorporated in a jurisdiction outside the US because bribing regulators in that jurisdiction cost just ‘a coconut’.”
“Thanks to the diligent work of our agents, analysts, and partners with the Commodity Futures Trading Commission, they will soon learn the price of their alleged crimes will not be paid with tropical fruit, but rather could result in fines, restitution, and federal prison time,” Sweeney said.
According to Nouriel Roubini, a long-standing cryptocurrency sceptic, BitMEX also defrauded its clients by trading against them.
“Insiders at BitMEX told me the internal trading group follows the order flow & bets against clients to liquidate them & profit from it,” Roubini said in 2019.
“And they use ‘overloads’ to rekt [wreck] u more. As if a dealer at a casino who knows your cards was allowed to bet against you,” said Roubini.
Could the forthcoming trials of BitMEX executives help throw light on the controversial crypto-dollar tether?
Under a recent settlement agreement with the New York Attorney General (NYAG), Tether, the issuer of tether tokens, has committed to disclose information on its reserve backing by May.
The NYAG said last week that Tether had repeatedly lied in the past about its asset backing and, specifically, a promise to support all tether tokens in issue by dollars held in bank accounts.
“We did for our own and we kept the company alive”
In the past, BitMEX’s Hayes has revealed the extent to which Tether has depended on cryptocurrency exchanges to bail it out.
Speaking on a panel discussion in Taiwan in July 2019, shortly after the NYAG had accused Tether of depleting its reserves via an undisclosed loan to an affiliated company, BitFinex, Hayes said:
“What I found amazing about the tether episode is [that] after the NYAG went after them…they were able to raise $1bn in two weeks from the cryptocurrency community to keep tether up and running.”
Hayes was apparently referring to the issue of a new token called Leo, conducted by BitFinex in May 2019.
“That to me says that the community values keeping one of the biggest companies around stable enough and [it] came to their aid just as the central bankers of the world come to the aid of the too big to fail banks so we did for our own and we kept the company alive. I think that’s absolutely amazing,” Hayes went on.
The market value of tether tokens in issue has risen from around $2bn in mid-2019 to $36bn earlier today. The pace of issuance of tethers has picked up sharply since the beginning of this year.
In January this year, Gregory Pepin, deputy chief executive of Deltec, Tether’s Bahamas-based bank, said on the ‘Unchained’ podcast that every tether in issue is backed by a reserve.
However, he declined to say what proportion of the reserve is in cash. Pepin also disclosed that the reserves are held not only by Deltec but “probably by other institutions” as well.
In 2019, under pressure from US authorities, Tether made a formal admission that it had weakened the asset backing of its tokens, which are supposed to trade one-to-one against the dollar.
Prior to February 2019, Tether had said that its tokens were fully backed by traditional currency held in bank accounts.
However, in March 2019, Tether changed this disclosure, stating that henceforth tether tokens would be backed not only by currency reserves, but also by loans made by Tether to third parties.
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