BitMEX, one of the most popular derivatives exchanges in the cryptocurrency market, has come under fire with accusations of being purposefully designed to facilitate “a myriad of illegal activities." The accusations were made in a lawsuit filed by BMA LLC in the United States District Court for the Northern District of California on May 16.

In the lawsuit, both HDR Global Trading — BitMEX’s parent company — and Arthur Hayes, Ben Delo and Samuel Reed — the exchange’s top executives —— stand accused of either engaging in or facilitating multiple criminal activities including racketeering, money laundering, wire fraud and operating an unlicensed money transmitting business.

Both BitMEX and the plaintiff, BMA LLC, have been or are currently involved in other noticeable lawsuits in the cryptocurrency space. BitMEX, for one, is facing another suit filed by multiple initial investors of the exchange seeking $540 million in damages for violation of their contracts. BMA LLC, a Puerto Rican company whose name stands for “Bitcoin Manipulation Abatement,” has previously sued other noticeable companies in the cryptosphere such as FTX and Ripple.

Despite the multiple accusations, BitMEX has dismissed them, citing the plaintiff’s previous actions as a serial filer of lawsuits. A spokesperson for HDR Global Trading told Cointelegraph that the complaint is “clearly rehashed from information culled from the internet,” adding that the intention is to defend “ourselves vigorously against this spurious claim.”

What’s in the lawsuit?

The filing states that the defender, BitMEX, and its top-level executives have engaged in and hosted illegal activities of a “truly staggering” magnitude. They are accused of “engaging in or abetting multiple crimes” including racketeering, money laundering, wire fraud, operating without a money transmitting license and market manipulation, along with a few other associated claims.

The 106-page document goes through great lengths to show multiple ways in which HDR Global Trading and the individual defendants have a presence in the U.S., especially in California where the suit was filed. The emphasis in highlighting its U.S. presence aims to back the accusations that it is operating in the country without a money transmitting license.

The suit cites unnamed sources “close to the company” when revealing that around 15% of BitMEX’s trading volume in 2019 — roughly $138 billion — came from U.S. citizens. However, it does not show any way in which BitMEX actively marketed to a U.S. user base besides inviting customers in the country to try out the BitMEX testnet version.

While the document doesn’t provide any evidence for active marketing to a U.S. audience, it does make a case for BitMEX’s willfulness to turn a blind eye to its American customers, given the revenue generated by that portion of its user base. The document also recalls that Hayes, BitMEX’s CEO, himself conceded that it is possible to trade on the platform using a virtual private network. The lawsuit reads:

“Defendants knowingly and willfully permitted United States citizens and residents of this District as well as United States based companies to freely trade on the BitMEX exchange because of the lucrative business relationships between Defendants and the aforesaid individuals and companies, which financially benefited Defendants.”

Many of these allegations seem to be substantiated by general perceptions rather than concrete facts. In order to justify accusations of money laundering, for example, BMA LLC claims that BitMEX has allowed illicit funds to pass through the exchange. However, the same can be said for other exchanges and even banks. BitMEX enforces Know Your Customer protocols and seems to comply with all required Anti-Money Laundering laws, which is where the company’s liability ends. The virtually unknown firm’s recent history in targeting cryptocurrency companies suggests the lawsuit may not hold up in court, such as was the case with its previous action against FTX.

While some accusations may not be backed by hard evidence at first sight, others seem to be fairly substantiated and also highlight well-known issues within BitMEX’s platform, including its frequent downtimes that have reportedly caused traders to lose funds and its high leverages which go up to 100 times. According to BMA LLC, these downtimes are used by BitMEX as market manipulation. When asked about this, a spokesperson for HDR Global Trading told Cointelegraph:

“Trading downtime degrades the experience for all customers and it would be against our own interests to fabricate downtime. We have always communicated openly and transparently regarding unscheduled downtime events, as reflected in our live status updates and postmortem blog posts. We’re working hard to further improve the resiliency of our platform and to achieve our ambition of near-zero downtime.”

According to BMA LLC, BitMEX also enables manipulators and money launderers to operate illicitly by allowing them to open an unlimited number of anonymous and unverified accounts, without trading or withdrawal limits, and by cooperating with various manipulation activities such as organized price “pump-and-dumps” and “stop loss hunting.”

BMA LLC: A serial lawsuit filer?

BMA LLC is a fairly unknown entity, but it has been involved in a few lawsuits within the cryptosphere. A spokesperson for HDR Global Trading referenced this very fact, telling Cointelegraph:

“We’re aware of two ‘copy and paste’ complaints filed by Pavel Pogodin of ‘Consensus Law’, the law firm behind ‘Bitcoin Manipulation Abatement, LLC’ which has also filed complaints against FTX and Ripple Labs.”

The small law firm first made the rounds in crypto-centric news outlets in November 2019, when it filed a lawsuit against FTX, another cryptocurrency derivatives exchange incubated by Alameda Research. The claims were similar to the ones BitMEX is now facing: racketeering, market manipulation and unlicensed securities sales, among others. In that case, BMA LLC asked for a payment of $150 million in punitive and exemplary damages. The lawsuit surfaced after, and in possible relation to, Binance CEO Changpeng Zhao’s tweet in September 2019 about an attack attempt on its platform and his belief that it came from a “smaller futures exchange.”

No names were given at the time, but the general belief was that Zhao was talking about FTX. The whole situation was cleared up shortly after in a follow-up tweet stating that everything turned out to be an accident and things were “all good now.” Alameda Research promptly presented a motion to dismiss the lawsuit, which was granted by a judge who dismissed the complaint in its entirety with prejudice.

Before the case was dismissed, Alameda made a public statement responding to the accusations through a post on Medium, sparing no harsh words for BMA LLC and the lawyer behind it. It stated that the whole suit was a “nuisance [...] riddled with laughable inaccuracies” and referred to the plaintiff as a “troll [that] has no evidence of any wrongdoing.” In a since-deleted tweet, Binance’s CEO also commented on the lawsuit claims at the time, describing them as “very far fetched.”

Striking once more on May 1, BMA LLC took legal action against yet another crypto giant: Ripple. The Puerto Rican law firm alleged that Ripple and its CEO violated federal and California laws with the company’s $1.1 billion XRP sale. BMA LLC now seeks to have Ripple return all the money from the sale as well as to receive compensatory damage due to its accusation that Ripple promoted the sale to investors in a misleading manner to drive up demand and maximize profits without registering the sale with the relevant regulator. This is not the only lawsuit Ripple is facing, as another class-action lawsuit claims the company has violated securities rules.

BitMEX and the law

While BitMEX and other companies accused by BMA LLC state that the company is somewhat of a serial lawsuit filer hoping to take advantage of the cryptocurrency industry, this is not the first time that BitMEX has faced legal complaints. There is another ongoing lawsuit filed by plaintiffs Frank Amato, RGB Coin Ltd. and Elfio Guido Capone suing the exchange for $540 million. The plaintiffs claim to be early investors of the platform and allege their initial collective investment should have been converted into equity at over $90 million. They are now seeking to receive compensation that includes the equity and $450 million in punitive damages.

But there’s more: On April 3, 11 class action lawsuits alleging unlicensed cryptocurrency sales were presented against 42 defendants in 16 different countries, and BitMEX was one of them. Binance, Tron and were also mentioned along with BitMEX in the lawsuit filed by the firm Roche Cyrulnik Freedman LLP in a Manhattan federal court.

BitMEX’s bumpy history

Only hours after the lawsuit was reported on by Cointelegraph, BitMEX suffered yet another outage, which has become somewhat of a usual occurrence. In fact, the lawsuit at hand actually accuses BitMEX of “weaponizing deliberate server freezes, using fraudulent ‘system overload’ events to accept some trading orders and reject others” — a market manipulation practice.

A 2019 YouTube video of BitMEX’s CEO, Arthur Hayes, that was shot during the Asia Blockchain Summit has also resurfaced. In the video, when asked about the location chosen to file the company, Hayes stated that “it just costs more to bribe” authorities in the U.S. than it does in Seychelles where the exchange is located. He then jokingly added that the cost of a bribe in Seychelles was “a coconut,” setting the tone for a heated argument with Nouriel Roubini, an American economist and a professor at New York University. It’s clear that the aforementioned statement was made in a playful tone, but the video has not aged well at all given BitMEX’s current legal disputes.

Along with the various accusations and allegations presented in court, BitMEX was also at the center of some controversy in March due to its server issues and liquidation system. At the time, XBT/USD perpetual contracts fell more than 50% in value over a 12-day span even though the price of BTC was rallying, which led to suspicions in the crypto community of market manipulation by the exchange.

What to make of all this?

While BMA LLC seems to bring up a few valid points in its lawsuit, most of the accusations can be quickly dismissed. It’s not clear if the goal of this lawsuit is to “attack” BitMEX’s reputation or to receive actual compensation, but judging by the contents of the lawsuit and BMA LLC’s history, the suit will most likely be dismissed or dropped.

Nevertheless, BMA LLC still raises a few important issues when addressing some of BitMEX’s flaws, especially when it comes to the high leverage trading allowed, which is extremely dangerous to inexperienced traders, and its frequent downtimes. When asked about its high leverage, however, a spokesperson for HDR Global Trading told Cointelegraph:

“We operate a sophisticated trading platform which offers up to 100x leverage on some contracts. This is the upper limit and by no means the norm, with the average effective leverage typically around 8x. On our website and blog, we provide users with a wealth of information on how the platform works.”

If the cryptocurrency industry continues its current trend, however, it is likely that exchanges and other infrastructure players will continue to work on these types of issues, a factor that is crucial for the long-term success of Bitcoin and other cryptocurrencies.