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CRYPTO WORLD UNDER SIEGE
The cryptocurrency industry attracts unwanted attention from the CFTC and other regulators. Crypto companies are paying hefty fines.
The use of digital currency or cryptocurrency is rapidly growing. But cryptocurrency (or crypto) is still misunderstood by many as primarily a vehicle for illegal transactions. As such, cryptocurrency transactions continue to attract unwanted attention from federal government investigators.
Both federal and state regulators, and lawmakers, are ramping up their oversight of the cryptocurrency industry. Still, the general consensus is that we need more regulation, specifically tailored to this rapidly growing industry.
Recent reports indicate that U.S. regulators’ fines in the cryptocurrency industry are more than $2.5 billion since bitcoin emerged in 2009. This year alone, cryptocurrency platforms agreed to pay over $150 million in fines to settle federal government claims against them.
More government cases are pending. Agencies involved in the prosecution of these cases include the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Internal Revenue Service (IRS), the Financial Crimes Enforcement Network (FinCEN), the Financial Stability Oversight Council (FSOC), and States Attorneys General (AGs).
As if that were not enough, private plaintiffs are also circling the wagons, planning class-action lawsuits.
The reality is this: the cryptocurrency world is under siege.
RECENT CASES & INVESTIGATIONS
Every day, news headlines report on cryptocurrency cases, settlements, massive fines, and new investigations.
For example, on August 10, 2021, the cryptocurrency trading platform BitMEX agreed to pay $100 million as part of a settlement with the CFTC and FinCEN for multiple violations of the Bank Secrecy Act and other anti-money laundering laws.
In another case, last March, Coinbase (the largest publicly traded crypto-exchange) agreed to pay a $6.5 million civil penalty to settle charges from the CFTC for reporting violations and improper trading activity by a former employee.
And earlier this month, the SEC charged two Florida men for allegedly selling more than $30 million of crypto securities to investors in unregistered offerings. They used the Ethereum blockchain to sell two types of cryptocurrencies and misled investors about the operations and profitability of their business. Blockchain Credit Partners and the two executives settled the SEC charges without admitting or denying the allegations, but they agreed to disgorge more than $12.8 million and paid $125,000 each in penalties.
On investigations, in May 2021, Bloomberg reported that Binance Holdings (the world’s largest cryptocurrency exchange) is under DOJ and IRS investigation for money laundering and tax evasion.
All of the latest news is concerning for the crypto industry. While the current headlines focus on the government’s actions against trading platforms and their executives, anyone involved in the sector should remain aware of the government’s intense scrutiny. Many people are bound to get swept up in these investigations as the government devotes more resources to regulate this industry.
*Pro-Tip: Remember to consult criminal defense counsel for legal advice regarding any court case.
Prison Professors, an Earning Freedom company, regularly helps people locate and vet experienced legal counsel. We work alongside counsel to help mitigate clients’ risks and concerns surrounding a government investigation.
THE CFTC
The CFTC is currently considered the leading agency focused on the cryptocurrency industry. It often coordinates complex matters involving multiple government agencies and refers cases to the DOJ for prosecution.
From 2015 to 2020, the CFTC filed over 20 enforcement actions against crypto operators. In the last year, the CFTC filed additional enforcement actions. In 2018, the agency formed a specialized Virtual Currency Task Force.
The CFTC focuses on five types of enforcement cases, according to the National Law Review:
- Fraudulent schemes (such as Bitcoin Ponzi schemes marketed to retail customers);
- Failure to register with the CFTC (as the regulations require);
- Illegal off-exchange transactions;
- Market manipulation/Price manipulation of virtual currencies (for example, wash trading);
- Anti-money Laundering Violations (like failure to follow “know-your-customer” rules).
However, it is essential to remember that the CFTC does not have complete jurisdiction over the crypto industry. In the coming years, the U.S. will need to establish a robust regulatory approach to crypto.
BitMEX Agrees to Pay a $100 Million Fine
A $100 million fine is one of the largest crypto settlements as regulators increase enforcement in this industry. Only one other company paid a more significant monetary penalty. In 2017, BTC-e paid a $110 million fine to resolve FinCEN allegations that it facilitated drug sales and other illegal transactions. Significantly, BTC-e is now out of business.
The most significant allegations against BitMex and its three co-founders include:
- Operating a crypto exchange from the U.S. without regulator clearance.
- Unlawfully accepting orders and money from U.S. investors to trade cryptocurrencies without regulator clearance.
- Failing to maintain necessary anti-money laundering protocols.
- Conducting at least $209 million in transactions with “known “darknet markets or unregistered money services businesses.”
Significantly, the company has shut down all of its marketing and trading operations in the U.S. This is a sober reminder of how high the stakes are for companies and executives accused in government investigations.
The U.S. Attorney’s Office for the Southern District of New York indicted four individual BitMEX executives, alleging they willfully caused BitMEX to violate the Bank Secrecy Act and conspired to violate the Bank Secrecy Act. The defendants have entered not guilty pleas in this criminal matter, and the case remains pending.
Coinbase Agrees to Pay a $6.5 Million Fine
Earlier this year, the CFTC brought a civil enforcement action against Coinbase.
According to the CFTC, Coinbase violated federal securities laws by
recklessly delivering false, misleading, or inaccurate reports concerning cryptocurrency transactions. CFTC officials also allege that a Coinbase employee engaged in “wash trading.”
According to Bloomberg, wash trading is a form of market manipulation where an investor buys and sells the same product to inflate trading volume, manipulate pricing and feed false and misleading information to the market. The CFTC charged Coinbase with the actions of one of its traders.
To resolve this matter, Coinbase agreed to:
- Pay a $6.5 million civil penalty.
- Cease and desist from any further illegal trading activities.
- Fully cooperate with the CFTC in any further investigation.
- Refrain from making any public statements opposing the allegations or the settlement.
In the settlement, Coinbase did not admit or deny liability.
CONCLUSION
Government regulators and lawmakers will not let up on the crypto industry any time soon. The DOJ will continue to conduct criminal investigations and seek criminal charges. Crypto companies will continue to pay significant fines.
Many people will become involved in these investigations. In addition to defendants directly accused of wrongdoing, government investigators are interested in potential witnesses and whistleblowers, including cryptocurrency company employees.
Indeed, the CFTC is actively seeking tips, witnesses, and whistleblowers to come forward regarding abuses in the cryptocurrency industry. And there are significant whistleblower incentives available.
*NOTE: Here is what a CFTC call for witnesses and whistleblowers looks like verbatim:
“Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint or contact the CFTC Whistleblower Office. Whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected paid from the CFTC Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA.”
Witnesses, whistleblowers, potential suspects, and targets should remain vigilant and proactive in any possible government investigation. Risks and consequences vary case by case. However, there are common strategic steps to help people navigate government investigations and achieve better outcomes.
Anyone concerned about a possible government investigation into their cryptocurrency activities should reach out to Prison Professors, an Earning Freedom company. We help people locate and vet experienced counsel for many legal matters and work alongside counsel on mitigation strategies.
