BitMEX co-founder and ex-CEO Arthur Hayes sentenced to 6 months' detention by US court after breaching Bank Secrecy Act

Arthur Hayes, the co-founder and former CEO of BitMEX, once the world's largest cryptocurrency derivative exchange before his indictment by US authorities in 2020, was sentenced Friday by a New York court to six months of home detention after pleading guilty to a breach of the Bank Secrecy Act (BSA).

The sentence, imposed by a federal judge in the Southern District of New York, also included two years' probation for the 36-year-old entrepreneur.

Hayes' sentencing concludes a landmark case against the Seychelles-based exchange, which was founded in 2014 in Hong Kong and where it still leases one of the city's priciest office buildings. It marks the first time the US government has invoked criminal provisions of the BSA against a cryptocurrency derivative platform.

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Hayes and co-founder Ben Delo, 38, pled guilty in February and have each agreed to pay US$10 million in criminal fines. They were convicted of wilfully failing to establish, implement and maintain an anti-money-laundering programme at BitMEX, thus enabling users to trade trillions of dollars anonymously, according to a pre-sentencing letter submitted to the court by the federal prosecutor.

"While building a cryptocurrency platform that profited him millions of dollars, Arthur Hayes wilfully defied US law that requires businesses to do their part to help in preventing crime and corruption," said Damian Williams, the US Attorney for the Southern District of New York.

Hayes' failure to implement basic anti-money laundering policies had "allowed BitMEX to operate as a platform in the shadows of the financial markets," Williams said.

Hayes' counsel had requested probation and the ability to live and travel abroad.

Friday's sentencing closes a turbulent chapter for BitMEX, in which Hayes still owns a 30 per cent stake. The firm recently completed a round of downsizing after laying off a quarter of its global workforce of 300 people under current CEO Alexander Hoptner.

Hayes' home confinement sentence comes at a time when most risky assets, including bitcoin, have suffered from one of the worst sell-offs in recent years, as the US Federal Reserve continues to raise interest rates even amid mounting recession concerns. At US$30,000, bitcoin has dropped 57 per cent from its all-time peak in November last year.

BitMEX currently does not crack a list of the top 20 derivative exchanges compiled by data provider CryptoCompare. This contrasts sharply with its meteoric rise - BitMEX grew to become the world's largest derivative exchange despite the last cryptocurrency bear market in 2018. It appealed to traders with its innovative yet highly leveraged contracts that enabled them to bet up to 100 times their capital.

During its heyday in 2018, when bitcoin was languishing below US$4,000, BitMEX claimed that it traded more than US$960 billion that year, surpassing even the annual derivatives turnover at bourse operator Hong Kong Exchanges and Clearing.

Co-founded by former chief operating officer Delo and former chief technology officer Sam Reed, BitMEX had helped Hayes, who grew up in a middle-class family in Buffalo, New York, and was known as a varsity tennis player and volunteer tutor to the underprivileged, earn more than US$100 million from the business, according to the federal prosecutor.

But his fortunes quickly reversed not long after the Commodity Futures Trading Commission (CFTC) filed a separate case in US courts in October 2020 against five companies and its three founders for operating the BitMEX platform as a futures commission merchant without CFTC registration, and for failing to implement adequate anti-money-laundering procedures.

In August 2021, the five companies reached a US$100 million settlement with the US regulator to resolve the charges. The three founders also settled with the CFTC in May and agreed to pay the US$10 million fines.

In a sentencing letter submitted to the US District Court, Neil Cameron Hosie - head of equities for Asia-Pacific, Europe, Middle East and Africa at Credit Suisse and Hayes' boss when he was working as an equity trader at Deutsche Bank in 2008 - said Hayes was trying to manage a business "exploding to the upside faster than he could fathom".

For Hayes to be punished "for being a pioneer, a black entrepreneur who was ahead of his time, would be wrong", he said. "Looking back, he was riding a wild horse and trying not to fall off. There were no regulations in this field as it started, it was a gold rush which favoured the brave and Arthur was at the centre of trying to change the world," he added.

BitMEX grew to become the world's largest derivative exchange despite the last cryptocurrency bear market in 2018. Photo: Handout alt=BitMEX grew to become the world's largest derivative exchange despite the last cryptocurrency bear market in 2018. Photo: Handout>

In Hong Kong, authorities plan to advance an amendment bill to change the city's anti-money-laundering ordinance and ensure that all virtual asset service providers (VASP) be required to obtain a mandatory licence. It will also propose up to seven years in jail to deter unlicensed activity.

An applicant's "fitness and propriety" will be taken into account by regulators in Hong Kong, and one determining factor will be whether the person has breached any law or been sanctioned by authorities in Hong Kong or overseas, said Hoi Tak Leung, a counsel at law firm Ashurst.

"We would expect the new VASP regime to impose similar 'fit and proper' requirements, and an applicant's overseas compliance track records are likely to be relevant," he added.

Additional reporting by Owen Churchill

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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