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October 12, 2020

Impact of BitMEX Legal Action & Unusually Low BTC Vol

Last week, leading cryptocurrency derivatives exchange BitMEX faced a one-two punch of charges from the U.S. Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC). They are charged with knowingly soliciting U.S. investors for the platform, which set off a chain of events including violating money laundering requirements.

If convicted on the DOJ criminal charges, four BitMEX executives including Arthur Hayes face five years (in prison?), while the CFTC charges could come with a hefty fine. Teana Baker-Taylor spoke with Sadie Raney, COO of Strix Leviathan, about what it means for the company, the cryptocurrency industry and the bitcoin market.

Raney says the impact on the market has been filled with both bullish and bearish narratives. She explained,

“What we’re seeing reports of happening are that upwards of 50,000 BTC has now been pulled off of BitMEX, which is notionally a half billion dollars U.S. And the open and futures positions are down 50% from a reported high just about a month ago in early September. On the flipside, we’re also hearing reporting that there’s a record number of new BTC wallets being opened. So one might think that BTC is leaving BitMEX but people aren’t leaving BTC.”

Raney went on to explain that the regulatory crackdown was not a surprise from Strix Leviathan’s standpoint.  She explained that when the company started three years ago, there was very little regulation that applied to digital assets. Some people thought that meant you could do whatever they wanted and worry when regulation crept up. Strix Leviathan took the opposite tack, looking at the regulations that were currently out there and how it might apply to them. She added,

“I think that’s actually one of the biggest issues for non-U.S. companies, is that they think that they’re not based in the U.S., so they’re not subject to U.S. rules. But the U.S. definitely disagrees with you if you have U.S. customers that are using your platform or your products.”

Raney gave the example of online blockchain-based betting game Satoshi Dice, which supported BTC. At the time, there were no no regulations against online gaming or anything saying bitcoin was a security. In 2013, Satoshi Dice blocked all U.S. IPs but it was too late — they already had $400 million transacted through their website. She explained,

“The SEC fined them and went after them for securities violations, which leads to another issue with our industry, is that regulators can double down on you. They can penalize you for not registering, but then they can also penalize you for violating the regulations that applied to the registration that you didn’t get. It doesn’t even have to be digital asset specific. They can decide that retroactively, which is really hard from our standpoint…It stifles innovation in this space quite a bit.”

Overall, Raney doesn’t expect that the BitMEX situation will deter people in general in the financial markets. She said that it’s not a new occurrence and it’s not specific to crypto, pointing to the DOJ and CFTC’s recent actions against JPMorgan for fraudulently engaging in the manipulative trading of U.S. securities, the fines for which are over $900  million in fines.

As for how the BitMEX case might resolve, Raney said,

“The BitMEX case, I think that really is going to heavily depend on what BitMEX was doing behind the scenes…to ensure that they had no money laundering happening on their platform. Having a policy that says you can’t have U.S. customers is definitely not enough. Even if you have terms and conditions that the investor signs that says they’re not a U.S. citizen, that still doesn’t cover you. The regulators put the onus on the company. So it really is going to depend on what BitMEX was doing behind the scenes. But whatever happens, it’s going to take a long time I think.”

She added that the first two years could be spent arguing about jurisdiction alone, “unless there’s a smoking gun somewhere that we don’t know about.”

OnChain Reaction

James Bennett, CEO of Bytetree, provided this week’s onchain reaction. He noted that there was a drop in activity, or a quiet period, on and off the chain. Over a 30-day period, and annualized, bitcoin price volatility is hovering near a record low of approximately 30%.

Prior to a dip in September, these are “unprecedented levels of low volatility for bitcoin,” noted Bennett, especially when there is so much serious news surrounding bitcoin around the world. For example, BitMEX is facing charges in the United States, the FCA has banned crypto derivatives in the UK starting in 2021, and John McAfee has been arrested in Spain. In 2017, each of these developments would have caused a 20% drop in the BTC price. But instead, bitcoin volatility is near an all-time low.
Bennett explained,

“It really indicates that there’s a more mature investor presence now here in this market that isn’t willing to sell at the first sign of bad news.”

In on-chain activity, miner difficulty has reached another all-time high this month. While it is encouraging to see total compute power increasing on the network, miners have struggled to keep up.

He adds that block times are increasing, which means miners aren’t able to quite produce at the 10 minute rate, and we can expect difficulty to drop in the next period.

In terms of transaction value, or the amount of value that is settled on the network in USD, there has been a steady flow of on-chain activity — perhaps slightly trending downward. The bitcoin price has held steady.

Miners have been sending out fewer of their newly minted coins. Historically, when the market has a firm bid, miners sell more of their inventory. When they’re uncertain, they hold back on selling their inventory. Miners are a bit unsure about their next move, Bennett explained.

He concluded that overall, the network is looking healthy, adding that they’re expecting a big move in the next couple of weeks. If you want to know which direction it will be, you’ll just have to follow ByteTree to find out.

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