BitMEX reportedly under CFTC investigation for possible use by US traders

Is BitMEX closer to the financial services industry or the entertainment industry?

BitMEX is under investigation by the Commodity Futures and Trading Commission (CFTC), Bloomberg reports, to see whether BitMEX has broken the law when Americans trade on the platform.

BitMEX is not registered with the commission, which it would need to be in order to allow US traders to participate in its high-risk leveraged cryptocurrency trading products.

The platform's CEO Arthur Hayes has previously said that BitMEX removes US traders, but he has also pointed out that traders will sometimes use virtual private networks (VPNs) to mask their locations and evade the filter.

Cause and effect

According to Bloomberg, the investigation has been going on for months and would have been active even as BitMEX was breaking its own Bitcoin trading volume records in the recent Bitcoin price action.

Market watchers note that trading volumes on the exchange quickly dropped after news of the investigation broke.

Opinion: Degenerate gamblers

Arthur Hayes has previously characterised BitMEX as being in the "entertainment business of traders" and referred to high-leverage retail Bitcoin traders as "degenerate gamblers". But despite that, BitMEX is lumped into the serious financial services side of the fence rather than the recreational gambling side of the fence.

Part of the reason for this is because Bitcoin is considered a commodity by at least one interpretation of existing laws, which gives the CFTC jurisdiction over derivatives based on it. But that's largely a technicality. For practical purposes, high-leverage Bitcoin trading is much more akin to gambling than commodity derivatives trading. From one angle, we're just regulating it as a serious financial product instead of gambling out of sheer force of habit.

So what's the difference?

One of the main differences is that the odds of winning when gambling on games of chance can be precisely calculated. You can calculate exactly how likely someone is to win when a hand of blackjack is dealt, when pulling the lever on a slot machine or when the lottery tickets are being called, and in every case the gambler is statistically more likely to lose money than not.

But it's not possible to say when the stock or crypto markets are going to swing, and even if the average gambler trader loses money with a certain financial services provider, it's not socially acceptable to write that off as "the house always wins".

The other main difference is that gamblers theoretically conduct their hobby as a series of one-off recreational instances, while traders lay down a strategy and pursue it with the goal of net gains in the long run, while winning some and losing some.

However, the latter is entirely a question of mindset, which is difficult to encompass with easy regulatory guidelines. It's not easy to pass laws saying someone is only allowed to gamble if they're doing it with the intention of having fun rather than winning.

In the end, the closest approximation to Bitcoin and Bitcoin trading may be online poker. When you put money down, it's gambling with a fair amount of luck involved, although there is theoretically an element of skill involved – unless it's rigged, which it might be. Similarly, attempts at more holistically legalising it have been confounded by money laundering issues, and it has given rise to a series of state-by-state regulatory headaches.

According to some theories, one of the main reasons Bitcoin was created was actually specifically to serve as a currency for online casinos. The online gambling industry was also one of the first to embrace the technology on account of being so hungry for non-reversible international payments without a third party.

Close parallels are also found in China, where BTC/CNY trading volumes took off in line with the bursting of the Chinese stock exchange bubble and subsequent market settling in 2015. When stock market gambling went out, volatility-hunters flocked to Bitcoin.

Go back a bit further to 2014, and you find a picture of frustrated Chinese regulators struggling to curb the casino atmosphere of the stock markets. At the time, IPOs were being conducted through lottery systems due to the enormous demand from retail speculators. Winning ticket-holders were treated to easy money because they could sometimes buy into IPOs and then flip the stocks for 500% gains on the first day of trading.

That probably sounds familiar. Fast forward to today, and now you have the Binance ICO IEO lottery system, where people can win tickets to get into early token offerings and then flip them onto other gamblers.

Among all the talk of how cryptocurrency may impact the global economy, it may be worth considering the impact decentralised finance, and a more inclusive and accessible economy, could have on the global markets. If anyone in the world can start participating in IPOs, the world is likely going to start experiencing similar problems as China's stock market did in 2014, but without the means to rein it in quite so easily.

Similar to how regulators are fretting over the impact of Libra on the US dollar, it's not too soon to start fretting how the global economy will change when everyone can directly access stock markets without intermediary brokers, when the barriers for investment are lowered and made more open to everyone and when you start removing the frictions in moving money.

There's a good amount of precedent saying it won't be entirely unlike gambling. After all, that's what investing is. The only consistent difference is the mindset with which one approaches it.

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Disclosure: The author holds BNB and BTC at the time of writing.

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