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.”