The arrest of Arthur Hayes in April this year tells a familiar story. He is charged with violating the Bank Secrecy Act and conspiring to violate it by failing to put sufficient anti-money-laundering safeguards in place. In the April 2021 issue of Vanity Fair, journalist Adam Ciralsky wrote a long piece on “The Rise and Fall of Bitcoin Billionaire Arthur Hayes”. The subheading of the article elaborated:
“The BitMEX co-founder created a cryptocurrency exchange that has traded trillions. Now he’s wanted by U.S. authorities, and insiders wonder whether he and his partners are villains—or victims of a two-tiered justice system that favors big banks over brash outsiders.”
Mr. Ciralsky detailed the rise of a former investment banker who branched out into the emerging world of cryptocurrency by creating a popular exchange. Very heady stuff! The value of Bitcoin, Ethereum, and other cryptocurrencies has rocketed. It is therefore not surprising that the US government is focussing on this emerging part of the financial landscape.
The story is told in detail, but the bottom-line is prosecutors in New York decided to arrest Mr. Hayes and try him on two felony counts. These carry a possible penalty of 10 years in prison.
“A villain is just a victim whose story hasn’t been told.”
The arrest of Arthur Hayes: is he a victim or a villain?
I am not in a position to judge whether Mr Hayes is a victim or a villain. However, in my three decades since being called to the bar, I have seen this movie many times. Indeed, the plot of “Emerging technology runs headlong into newly zealous authorities” reminds me of the mid-2000s. Then the emerging technology was On-Line Gaming and Sports Books.
Back then, several American founders of high-profile On-Line Gaming sites hired me to acquire second citizenships and residences as part of their Backup Plans. They wanted to use their Backup Plans as part of their legitimate tax savings expatriation strategies. They were about to undergo initial public offerings on the London FTSE exchange… so they were planning ahead. The Backup Plans worked wonderfully and the cost to set them up was paid for many times over in tax savings.
Market share increases – calls for criminalization begin…
A year or so after their IPOs, these sites started to significantly increase their market share of the gaming space. And guess what? Instead of responding with better gaming products, jealous brick and mortar Las Vegas casino owners lobbied US politicians to criminalize parts of the on-line business. The situation came to a head when the British CEO of one of the largest sites was arrested as he transited through Dallas-Fort Worth airport. He was later convicted and sentenced….to 33 months!
This arrest sent shockwaves through the online gaming industry. I vividly remember one of my clients saying to me soon after the arrest:
“If I walk onto a football pitch in the UK I get a standing ovation. If I fly through Newark I get arrested. What do we do?”
How Backup Plans Helped
Fortunately, unlike the executives/owners of competitors who only held US citizenship, my clients had given themselves options. The American-only competitors who may have been living in the UK or elsewhere outside the US were suddenly in trouble. The US government quickly canceled their US passports. This eliminated their ability to travel to anywhere except the US. Ultimately this was a “private business-to-regulatory authority” dispute. This power play emphatically put the bargaining power into the hands of the US government. It was then followed by one of their favourite techniques… arresting a high profile business executive and then “negotiating” with the company after it had been “softened up” by their executive’s “perp walk”.
Having non-American passports and having previously renounced the US citizenship (as part of their Backup Plans), my clients could continue to live and travel outside the US where there was no question of the legality of their business. In this way they were able to maintain their freedom. In the meantime, their corporate lawyers were able to fairly negotiate with US authorities as to how to comply with these new rules. As a result, their businesses survived and thrived, with the resulting terms reached with the US being much more equitable and in line with global standards for the gaming industry. Not surprisingly, many of my clients’ American-only competitors were unable to survive this turmoil.
Similarities with the trend in cryptocurrencies
Back to my observation about having seen this movie before. Today’s operators in the crypto arena – including currencies, exchanges and traders – should recognise that they are a threat to the status quo. Just as Mr. Hayes is receiving much harsher treatment than his counterparts in the traditional banking world, crypto-operators should anticipate the predictable threat these officials pose to their businesses and freedom… and be ready.
The logical response is to have a Backup Plan that anticipates and thwarts this and other possible threats. Prudent companies have “key person insurance”. This protects against business interruption caused by medical or accidental issues. In the same way, those in the crypto space should consider Backup Plans for their key people. The key to survival is to have a well-designed and flexible plan in place. This will, among other things, maintain both their security and leverage in any possible, and probable, future negotiations with over-zealous authorities as their regulatory regimes evolve in the crypto arena.