Image: Flickr Commons

Bitcoin and other cryptos suddenly dropped in price on Thursday after US prosecutors filed criminal charges accusing four executives of BitMEX, one of the world’s biggest cryptocurrency derivatives exchanges, of flouting rules designed to stop money laundering.

The Department of Justice charged Arthur Hayes, Samuel Reed and Benjamin Delo, who together founded BitMEX in 2014, and Gregory Dwyer, its first employee and later head of business development, with violating the federal Bank Secrecy Act and conspiring to violate that law, Reuters reported.

Hayes, 34, of Buffalo, New York and Hong Kong, is also chief executive of BitMEX, while Reed is its chief technology officer.

The Commodity Futures Trading Commission filed a separate civil lawsuit to halt BitMEX’s US commodity derivatives business. BitMEX is short for Bitcoin Mercantile Exchange.

“We strongly disagree with the US government’s heavy-handed decision to bring these charges, and intend to defend the allegations vigorously,” said a spokesman for BitMEX’s parent HDR Global Trading Ltd.

Lawyers for the individual defendants could not immediately be identified.

An indictment filed in Manhattan federal court said the defendants flouted their obligation to implement an anti-money laundering program with a “know your customer” requirement, which they knew was needed because BitMEX served US customers.

Their steps allegedly included incorporating BitMEX in the Seychelles because of its seemingly less stringent regulations, and where Hayes once bragged it would cost less to bribe authorities – just “a coconut” – than in the United States.

BitMEX ultimately made itself a “vehicle” for money laundering and sanctions violations, which included claims it was used to launder proceeds of a cryptocurrency hack and that customers from Iran traded on its platform, the indictment said.

The defendants “will soon learn the price of their alleged crimes will not be paid with tropical fruit,” FBI Assistant Director William Sweeney said in a statement.

Each count carries a maximum five-year prison term. Reed was arrested in Massachusetts and the other defendants are at large.

Will crypto prices recover?

After the announcement, the price of bitcoin fell from $10,889 to $10,442, recovering slightly to $10,576 by the time of writing (3.50 am in Hong Kong), according to CoinMarketCap.

Observers, however, said they were optimistic that a rapid recovery is likely.

Among them was Cointelegraph analyst Joseph Young.

“There are several factors that could aid the recovery of bitcoin in the short term. The catalysts are the short duration of the current correction, bitcoin’s previous reactions to regulatory threats, and the $10,500 support holding for the moment,” observed Young.

“Usually, when bitcoin falls with such intensity, it causes a cascade of liquidations. Since many trades in the futures market are highly leveraged, it leads to a loop of long contract liquidations, resulting in a larger fall.

“This time around, open interest and the volume in the futures market is significantly lower. There are fewer overleveraged trades actively open in the market and this reduces the probability of a massive correction.”

This is not the first time bitcoin has faced a sudden regulatory hurdle and is likely no cause for serious concern, stressed bitcoin researcher Vijay Boyapati: “The bitcoin market has always reacted negatively to major exchange issues or government confiscations. Historically this has always presented a great buying opportunity for bitcoin. The Department of Justice action against BitMEX will be no different.”

For most of August and September, $10,500 has been a strong support level. Bitcoin dropped below it briefly at times but quickly rebounded above it, which is evidence that traders are optimistic that the price of bitcoin will be higher in the future.

Bitcoin traders are indicating that they are short-term cautious but neutral in the medium term.

Cryptocurrency trader Cantering Clark tweeted: “In the near term, I think this presents some great two-way trade opportunities. Ultimately, a week from now, it’s water under the bridge. This place has a short-term attention span and is quick to react.”

Buy now or wait?

Bitcoin has strong support at both the $10,500 and $10,200 price levels, say analysts, and judging from its price action in September, any drop below $10,000 will likely attract enough dip buyers to pull it back over the line.

Asia Times Financial is now live. Linking accurate news, insightful analysis and local knowledge with the ATF China Bond 50 Index, the world's first benchmark cross sector Chinese Bond Indices. Read ATF now.