Many foreign cryptocurrency exchanges would like to have US traders as clients, but these days US residents may as well have a sign around their necks that reads “Danger: High Voltage!”
That has been the case at least since Oct. 1, when the United States Commodity Futures Trading Commission filed a complaint against Seychelles-registered BitMEX for soliciting US residents and thereby violating the Commodity Exchange Act. According to to the complaint: “BitMEX is in no capacity registered with the CFTC and has not complied with laws and regulations.” This poses a serious problem for US regulators who try to monitor money laundering, manipulative trade and other illegal activities.
The complaint was seen by some as a turning point in the enforcement of the US cryptocurrency. According to law firm Ballard Spahr LLC, it demonstrated that “the CFTC continues to actively pursue trading venues and exchanges that request orders in the United States without proper registration.” The rule had been on the books for years, but its enforcement was erratic.
Some viewed the BitMEX complaint as more of a one-off action – likely to have no lasting repercussions in the larger cryptoverse. The company hadn’t exactly been a model of compliance, although it did have some control over US IP addresses. (Unfortunately, these were easy to get around.) “BitMEX is an illegal casino whose executives are often caught boasting about ripping off their customers. No doubt the authorities have been watching them for a long time, just looking for something to stick, ” wrote Mati Greenspan, founder of analysis company Quantum Economics, in his daily newsletter. But others believe that offshore crypto exchanges already seem to be changing their ways. Jesse Spiro, global head of policy at Chainalysis, told Cointelegraph:
“In the past, unregistered foreign exchanges were used to acquire US customers. […] Many international exchanges did not care where their customers came from, but recently exchanges have discontinued service to US customers due to the threat of US regulatory action. ”
Some US players say this circumstance is just a vital part of ongoing ambiguity and uncertainty regarding crypto regulation. Ripple CEO Brad Garlinghouse, for example, recently said his company was lose potential customers in the US for its XRP-related services due to the regulatory mess. So he claimed that although the company is based in San Francisco, 95% of its customers are abroad.
Laush pointed out that there may be truth in that statement: “Ripple’s CEO has a point. It is very difficult to be AML compliant in the United States. That is why Ripple may not want to be in the field of US regulation. Meanwhile, Wagster acknowledged that US law had failed to keep pace with the rapid evolution of blockchain technology: take a combination of jurisprudence and regulations allow clear rules. ”
However, Spiro believes US regulators have improved their game: “Overall, US regulators have gained more knowledge about virtual assets, the sellers in the space, and how to analyze blockchains. They now enforce regulations more consistently. Meanwhile, Wagster added:
“US regulators have not shied away from using long-arm jurisdiction to pursue exchanges and protocols that allow for investment or participation by US residents, and I expect such enforcement action to continue.”
The G20 countries are intervening
It’s not just the US that has been ramping up the heat on unregulated stock markets lately. John Jefferies, chief financial analyst at blockchain intelligence firm CipherTrace, told Cointelegraph, “Most G20 countries are cracking down and I expect more enforcement action globally in 2021.” He also added his opinion on the BitMEX case:
“It reflects the Treasury Department’s position that exchanges must register with FinCEN and adhere to US anti-money laundering (AML) regulations when doing business with US individuals.”
In Europe, “the same thing is happening,” agrees Dmitri Laush, CEO of GetID, a provider of identity verification solutions. “For example, the online exchange aggregator Bestchange was recently blocked due to a Russian court decision – the authority assumed the collector is involved in fraudulent schemes,” he told Cointelegraph.
But isn’t it difficult for a foreign exchange – many of them quite small – to really know whether a client is, say, a US or Estonian resident? Shouldn’t this be treated as a “buyer beware” issue anymore?
“It is not at all difficult for exchanges to determine whether their users are US residents; they just need to ask and need documentary evidence, ”John Wagster, an attorney at Frost Brown Todd LLC, told CoinTelegraph. He went on to explain, “US regulators demand jurisdiction over investments by US residents anywhere in the world that residents invest.”
“It’s really easy if you have a good KYC provider,” added Laush, “Good identity verification can also recognize if the ID is real or fake, so there’s no chance someone can pretend they don’t belong. The United States “
That said, it can sometimes be problematic for non-US residents to prove that they are not a US citizen – simply because many people around the world do not have ID. Foreign exchanges often say that things are not that simple. Binance CEO Changpeng Zhao recently told Bloomberg said his exchange needs to “get smarter about how we block US residents” from trading on Binance’s platform, adding, “We are constantly trying to improve our blocking.” Cointelegraph asked Binance for examples of the ways traders try to outsmart Binance’s defenses, but the company declined to comment.
In its October complaint, the CFTC stated that BitMEX’s so-called blocking efforts were half-hearted at best. “At that moment [CEO Arthur] Hayes wrote that BitMEX ‘blocked’ users in the US, thousands of US persons were in fact trading on the BitMEX platform, ”noted the agency.
Why use unregistered exchanges?
Why, in turn, would American traders and investors even want to take advantage of unregulated foreign exchanges? It’s not that they don’t have US dollars or access to capable exchanges (eg Coinbase, Gemini) in their own country. “Access to more tokens, lower fees, less friction, anonymity and tax evasion are some of the reasons,” replied Jefferies, “Crypto is inherently limitless, so it can be easily transferred to offshore exchanges.”
“They may also use foreign exchanges in search of services with less or no compliance or regulatory oversight to conduct transactions with illegal entities, such as sending to a service in a high-risk jurisdiction,” added Spiros.
Many of these exchanges are only too willing to accommodate them, Wagster said. “A number of exchanges and protocols embrace the fact that users can participate anonymously. […] Other exchanges only accept cryptocurrency – unlike fiat currency – in the belief that they do not need to perform KYC on individuals paying in crypto. “
What can exchanges do?
In the meantime, what should foreign scholarships do? “It is not enough to post a warning on the website: ‘We do not accept US citizens.’ You need to verify the trader’s identity and the source of his income, ”said Laush.
“A possible approach to ensure that US residents use the [unregistered] exchange is to ban access to virtual private network (VPN), which is a tricky trade-off between inclusion and exclusion, ‘said Jefferies,’ overseas exchanges could ban access to their platforms from VPNs and Tor, but if you do oppressed countries . This has led some major exchanges to create different and separate US operations. Wagster added, “The more reputable exchanges are very careful where and with whom they operate,” and tentatively:
“Any exchange with significant trading volume should expect to be investigated by US regulatory agencies. Some exchanges, such as Binance, establish separate entities in different jurisdictions so that they can comply with local laws wherever they are. ”