It’s an open secret: Incorporate offshore so that regulators can’t touch you.

by Edmund Yong

[From Part 1]

A little footnote before we begin.

Back in Nov 2019, BMA had litigated against a young crypto derivatives exchange FTX on grounds of market manipulation. It accused FTX of dumping 255 bitcoins to trigger panic liquidation at Binance’s newly opened futures desk. The following month, BMA voluntary dismissed the suit with prejudice – before even serving the defendants with it!

Binance, which was cited 22 times in the case, called it “very far fetched” and said “we have resolved the issues long ago”. The co-defendant Alameda Research, which incubates FTX, put out a media statement that’s not fit to print: “It is an unfortunate reality that it is easy to file bullsh*t lawsuits and annoying to fight them, and some a**holes will use this as an excuse to extort anyone they see as high profile”.

Now BMA has a new complaint against BitMEX:

It can be downloaded on Scribd (BMA LLC v HDR Global Trading Limited et. al.; case number 3:20-cv-03345 filed on May 16, 2020 at the Northern District of California).

Having read the files, you will notice that a lot of text from the FTX suit is repeated here – though this time it’s much better researched. Some wordings like “weaponizing deliberate server freezes” are identical to the Williams class action (discussed in our previous article).

As alleged by the plaintiff and quoted verbatim:

  1. On Seychelles: This is a global exchange that “serves customers all over the world in five languages” (p10) with average turnover of $2 billion per day (p70). Its founders are US and UK citizens, based in Hong Kong – where it pays the highest ever rent for office space – while the company is registered in Seychelles, with backend operations in San Francisco. According to the complaint, the defendant “publicly claimed that Seychelles is cheaper to bribe than [the United States]” and it only took a “coconout” to register there (p5).
  1. On Linkedin, Youtube and Amazon: In order to show “substantial, systematic and continuous business” in California where the suit seeks jurisdiction (p36), it details out 74 LinkedIn profiles of current and former BitMEX staff in the US (pp 26-32), including 17 new hire postings; 40 Youtube videos by BitMEX traders in the US (pp 21-24) and another 11 on how to use VPN to bypass IP blocking (p25); as well as a list of BitMEX service providers like Amazon Web Services. The defendant “employs at least 5 Kubernetes engineers who interact with AWS in this District on a daily basis” (pp 11-12) and all its three “site reliability engineers” are based there too (pp 46, 93). 
  1. On American Users: Here it gets even more interesting. The claim lists the names of BitMEX users, many which are publicly recognizable, along with their assigned affiliate codes for referral commission (pp 26-27). In the preceding pages, we get to see the names of both individual and corporate customers (pp19-20). “Nearly 15% of the BitMEX’s 2019 trading volume, or about $138 billion worth, is attributable to traders located in the US” based on “several sources close to the company” (p24).
  1. On Bart Simpson: In explaining market manipulation techniques, there are several mentions of “Bart” patterns which involve “intense pumps or dumps occurring within a very short time frame”, to “trick other market participants into reacting”, and “causing price action to find a new high or low for a very short period, followed by equally violent return to the previous level” (p40). Now you may think: Surely these can be caused by external actors as they commonly are, not by the platform operator BitMEX itself… But see next point.

  1. On Negligence (Wow!): The plaintiff is faulting BitMEX for its failure to run fair and orderly markets. Under “Blue Sky” laws in California, and it becomes clearer why the suit is brought in that state, there is a duty imposed to “prevent purely economic loss to third parties in financial transactions”! It argues that BitMEX “owed a duty to Plaintiff BMA to maintain a functional cryptocurrency derivatives marketplace” based on two weighty precedents: In Re Facebook, IPO Securities and Derivatives Litigation, and Berk v. Coinbase, both class actions. While Count VII (pp 93-95) cites negligence, Count VIII (pp 96-98) also captures fraud for instances where these Barts et al. directly involve the defendants’ conduct.
  1. On the Star Witness? The alleged rap sheet goes into racketeering, far beyond our topic of focus. But for market manipulation, which “spread like forest fires, from BitMEX to other exchanges wreaking havoc on the entire cryptocurency ecosystem, costing traders and investors billions of dollars in losses and resulting in a domestic injury in the United States”, a lot hinges on what can be extracted from BitMEX employee, Nick Andrianov, who mans its proprietary trading desk. In particular, the two “catastrophic market manipulation events, such as May 16, 2019 and July 15, 2019…. perpetrated by Andrianov in order to financially benefit Defendants” (p61).

BitMEX has been a fine specimen of crypto nomadism for all these years, but this is increasingly being tested. It is being forced further afield as more regulators tighten their screws against it (UK’s FCA, Quebec’s AMF, Japan’s FSA to name a few). BitMEX even tried to hire a former regulator from HK’s SFC as its Chief Operating Officer, but didn’t last long – she left soon after US’s CFTC opened investigations on it.

While BitMEX is the bogeyman today, we know that the global axis of crypto trading is in the East, not the West. Putting value judgments aside, we need to ask ourselves:

Can we imagine a crypto world without BitMEX? Can we survive without it?

This is a monster we all built.

And there are others just like it, that follows its path and greedily await its destruction. Are we willing to reconstruct the industry according to the better angels of our nature, if that’s even possible?

Messari sums it well in his 2020 theses: BitMEX is “arguably THE source of price discovery in crypto today.” So suck it up! “But BitMEX still scares the sh*t out of me, and seems like a ticking time bomb from a regulatory standpoint. Fortunately, running the world’s largest crypto casino means you can also afford great lawyers.”

The lawyers win. Case closed.

Important Disclaimer: None of the allegations above have been proven at date of writing. You can follow the court docket as it develops here. The rest are opinions.