How Can Centralized Crypto Exchanges Enforce Geography-Based Trade Bans?

Bittrex was forced to withdraw from New York, but it may struggle to keep Empire State users fully off the platform.

By Alissa Fleck


Earlier in April, Bittrex, by decree of the New York Department of Financial Services, banned New Yorkers from trading on its platform. While it’s likely most New Yorkers proceeded to dutifully withdraw their assets, some were certainly left wondering: When it comes to crypto, how strictly can such rulings actually be enforced?

The NYDFS originally rejected Bittrex’s application for a BitLicense, citing lax anti-money laundering procedures and other deficiencies in how the platform vets its customers, employees and listed coins. Although it is part of the generally decentralized world of crypto, Bittrex is nonetheless a centralized exchange with employees and users who are legally accountable to state entities for their actions. And some of the very things that troubled New York officials in the first place may allow some New Yorkers to continue trading on the platform.

It would not be the first time this happened. Despite OFAC sanctions, residents of Iran were able to trade on Bittrex as recently as 2017, when the platform finally caught on. The NYDFS also flagged two accounts it claimed belonged to North Koreans, though Bittrex’s subsequent research indicated they were most likely South Koreans who “mistakenly selected North Korea from a pull-down menu.”  As the NYDFS pointed out, however, these are just the accounts it found in a random sampling of users, and it’s possible that a platform like Bittrex — with 1,670,000 users — has simply gotten too big and unwieldy to monitor, let alone control.

Further, the exchange has a significant cache of accounts from 2017 with clearly fake names, like “Give Me My Money” (these accounts are now allegedly inactive, according to Bittrex).  

In a response letter to the NYDFS, Bittrex told regulators it has made strides since 2017 in improving its monitoring and compliance processes. The Bittrex team explained that in line with traditional banking and virtual currency industry standards, the exchange now requires that “all customers submit government-issued ID and a ‘selfie’ which is then compared against the ID to ensure a match.”

In a rapidly evolving industry, Bittrex certainly deserves an opportunity to catch up with the technology (the exchange was previously allowed to operate in New York for a period of time under Safe Harbor laws). However, while the measures implemented by Bittrex may complicate the registration process for “Daffy Duck” and “Elvis Presley,” they are unlikely to faze a New York legal resident — crypto wizard or not — who is intent on trading on the exchange and who possesses the resources to thwart regulations.

Given the platform’s flimsy compliance measures, the NYDFS’s concerns appear legitimate. Beyond falsified identification, traders can rely on proxies and VPNs to skirt IP bans, and the untraceable nature of crypto has the potential to stop regulators from ever catching on. Indeed, if Bittrex can’t keep the platform compliant and secure with the likes of John Roth, Chief Compliance Officer for New York and former inspector general at the Department of Homeland Security, at its helm, there’s little hope for anyone else.

To remain relevant, centralized exchanges like Bittrex will need to continually develop new means of tracking the traders on their platforms — a strategy entirely antithetical to crypto’s decentralized ethos. The great irony is that if Bittrex can figure out how to block New Yorkers from participating on its site, doing so may demonstrate the very legitimacy needed to  re-submit an application for its New York state BitLicense.

By that point, however, crypto traders may have moved on to more decentralized exchanges — if the maximalists get their way — making state-level regulations a moot point.

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