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Introduction
In a prior blog post in this series, we asked the question of whether the Department of Justice can keep up with the rapid developments in the cryptocurrency industry, including criminal activity.
The DOJ is determined to keep up, sparing no investment of people and resources necessary to accomplish its cryptocurrency regulation goals.
Discussion
Federal law enforcement recently announced an expansion of its efforts to scrutinize and regulate cryptocurrency markets.
Money laundering, or crypto laundering, is one of the top law enforcement concerns when it comes to addressing criminal activity involving cryptocurrencies.
But take note, in addition to money laundering using cryptocurrency exchanges and operators, the federal government is focused on all criminal activity involving crypto.
Because the DOJ defines many cryptocurrency operators as money services businesses, they come within the purview of the Bank Secrecy Act (“BSA”). The BSA helps federal law enforcement keep tabs on money laundering and other criminal risks.
Which cryptocurrency operators must register with federal regulators?
Cryptocurrency exchanges, including foreign located exchanges, doing business in the US have to register with the Financial Crimes Enforcement Network (“FinCEN”). They also must have an agent physically present in the US for BSA reporting. All crypto money services businesses must register.
Other money service businesses (or MSBs) also must register with FinCEN, including, for example:
- peer-to-peer exchanges (people who facilitate transfers of value including cryptocurrency) must register with FinCEN, although many do not, according to the DOJ;
- virtual currency casinos are also covered as casinos or money services businesses; and
- crypto kiosk operators (i.e. bitcoin ATM operators).
The Bank Secrecy Act requires that money service businesses conducting cryptocurrency transactions meet the same AML or anti-money laundering standards as other money service businesses.
They must register with FinCEN and establish an anti-money laundering program that is “reasonably designed to prevent money laundering and terrorist financing.” They must also meet certain record-keeping and reporting obligations. FinCEN’s requirements apply to money services businesses domestically and foreign-based.
What is the NCET or National Cryptocurrency Enforcement Team?
To increase scrutiny and law enforcement in the cryptocurrency space, the DOJ recently created the National Cryptocurrency Enforcement Team or NCET. The NCET adds the structure and coordination the DOJ needs in order to be able to prosecute people for the illegal uses of cryptocurrency.
The stated mission of the NCET is to “tackle complex investigations and prosecutions of criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors.”
As of now, cryptocurrencies are not directly covered by clear and specific criminal statutes. The US Attorney General directed the NCET to pursue cases against anyone that enables misuse of cryptocurrency to facilitate criminal activity. For now, prosecutors will continue to apply existing laws to prosecute cryptocurrency-related criminal activities.
Why NCET?
Since we already had the Cryptocurrency Enforcement Framework from 2020, some people wonder why did DOJ recently add NCET?
A federal Task Force like NCET, with a broad mandate and unlimited resources, is significant and will have a major impact in prosecuting cryptocurrency crimes. NCET is a more formal structure with a strong mandate. It is more powerful than the framework that existed prior.
What About Existing Cryptocurrency Investigators And Prosecutors?
The DOJ will continue to leverage the work of other federal agencies like the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). The complexity of the cryptocurrency problem requires nothing less.
The leading agencies involved in the investigation and prosecution of cryptocurrency cases to date include:
- Department of Justice (DOJ)
- Federal Bureau of Investigation (FBI)
- Securities and Exchange Commission (SEC)
- Commodity Futures Trading Commission (CFTC)
- Internal Revenue Service (IRS)
- Financial Crimes Enforcement Network (FinCEN)
- Financial Stability Oversight Council (FSOC)
- Offices of Inspectors General across the government, and
- States Attorneys General (AGs).
The new effort will require participation from all of these agencies to continue.
CFTC Enforcement
The CFTC has been the leading agency focused on the cryptocurrency industry and will continue to work closely with the NCET.
Before NCET, the CFTC coordinated many complex cryptocurrency matters involving multiple government agencies. When the cases were ready, the CFTC referred appropriate cases to the DOJ for prosecution.
From 2015 to 2020, the CFTC filed over 20 enforcement actions against crypto operators. In 2021, the CFTC filed additional enforcement actions.
The CFTC focuses on five types of enforcement cases:
- 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).
Since 2015, the CFTC determined that cryptocurrencies can be defined as “commodities” under the Commodity Exchange Act (“CEA”), which allows the CFTC to go after a wide variety of crypto crimes.
In 2020, the CFTC filed seven fraud cases involving cryptocurrency. One of those cases was against BitMEX, filed together with the DOJ.
BitMEX is a cryptocurrency derivatives exchange alleged to violate the Bank Secrecy Act for failure to maintain an adequate AML anti-money laundering program, as well as failure to register with the CFTC.
Rather than walking away from its leading role to date, we expect the CFTC to coordinate more closely with the new Task Force.
The SEC Enforcement
Despite the broad scope of its enforcement power, the CFTC does not have complete jurisdiction over the cryptocurrency industry.
Indeed, the SEC has filed dozens of cases in the cryptocurrency space, resulting in $1.77 billion in penalties through 2020.
The NCET will pursue its own cases and coordinate with the SEC as needed. The NCET will need to lean on the SEC and other agencies as the amount of activity in cryptocurrency enforcement is about to skyrocket. We anticipate there will be more subpoenas for information, more investigations, subject and target letters, witness interviews, and scrutiny of public-facing messages online.
From all this activity, we anticipate more cases filed. Law enforcement will now be able to move faster action, under the leadership of highly motivated prosecutors who can use the cryptocurrency space to make a name for themselves as criminal prosecutors.
Raising Awareness
Anyone involved in the cryptocurrency markets needs to ensure they understand the risks and scrutiny that apply to their industry.
Businesses, in particular, need to invest in training and monitoring tools for employees, market surveillance programs, compliance strategies, and “Know Your Customer” practices to be able to discern available information regarding people associated with digital transactions.
Cryptocurrency firms, their employers, customers, and anyone else dealing with cryptocurrencies, must know that the industry is under close watch. Everyone involved could find themselves in the middle of an investigation.
The 2020 Cryptocurrency Enforcement Framework
The NCET builds upon the earlier DOJ Cryptocurrency Enforcement Framework, taking the government’s prior enforcement efforts to a new level.
The DOJ disclosed its Cryptocurrency Enforcement Framework in 2020.
That 2020 framework recognized the need for a multi-agency approach and coordination to combat money laundering, fraud, and other crypto-related crimes.
Moreover, since then, the DOJ had already claimed broad powers to investigate and prosecute anyone using cryptocurrencies to commit, hide or facilitate criminal activity.
What is the DOJ’s power or jurisdiction over cryptocurrency activities?
The DOJ asserts broad powers to investigate and prosecute:
a) if a cryptocurrency transaction touches financial, data storage, or other computer systems within the US or
b) if cryptocurrency is used to import illegal goods and provide illegal services to defraud or steal from US residents.
Money laundering, or crypto laundering, is at the top of the list of law enforcement concerns regarding crypto crimes. Therefore, compliance with the Bank Secrecy Act, which helps federal law enforcement keep tabs on possible money laundering risks, is a top priority.
Other DOJ Warnings
The DOJ’s scrutiny over the last several years has led them to warn about the following potentially criminal activity as well.
Privacy Coins High-Risk
The DOJ warns that anonymity-enhanced cryptocurrencies or privacy coins like Monero, Dash, and Zcash are high-risk for money laundering or crypto laundering. Companies that offer these products should consider the increased risk of criminal activity on their platforms.
Mixers / Tumblers
Mixers and tumblers are companies that help keep private or conceal the source or owner of particular units of cryptocurrency. Federal law enforcement considers them to present a high risk of facilitating criminal activity. Indeed, the DOJ recently indicted a US-based bitcoin mixer named Helix.
The DOJ has clarified that websites or companies offering mixing or tumbling services must follow the regulations applicable to money services businesses. Due to their business, these companies face criminal liability for failing to register, conduct AML procedures, or collect customer identification.
Mixers and tumblers can be charged with money laundering because they are in the business of concealing or disguising the nature, the location, the source, the ownership, or the control of a financial transaction.
Chain-Hopping
Chain-hopping is the rapid exchange of one cryptocurrency to another. Chain-hopping is getting closely scrutinized as a method by which people obfuscate the trail of crypto transactions by shifting the trail of transactions from the blockchain of one cryptocurrency to the blockchain of another.
Key Takeaways
- The DOJ and the law enforcement agencies that it cooperates with remain focused on investigating and prosecuting businesses and people involved in the illegal uses of cryptocurrency, regardless of where they are located.
- If a cryptocurrency operator’s activity harms US citizens or touches US computers systems, data storage, or financials, the DOJ will assert that it has the power to go after it.
- Money service businesses and individuals engaging in cryptocurrency transactions that may fall within the broad powers of the DOJ should seek legal counsel and take every precaution to comply fully with federal laws.
- Chain-hopping, anonymity-enhanced cryptocurrencies or privacy coins, tumbling, and mixing are tools cryptocurrency launderers use to obscure the movement of illegal funds and complicate law enforcement investigations. As such, they are under special watch.
- The new Task Force NCET will be under intense pressure to bring cases.
CONCLUSION
The recent creation of the NCET highly increases the federal government’s involvement and commitment to cryptocurrency regulation and criminal prosecution. Deterring would-be bad actors in the cryptocurrency space is a crucial DOJ goal at this time.
After rolling out such high-profile initiatives, the federal government will be on the hunt and anxious to show success in identifying and prosecuting criminal behavior.
The DOJ’s appetite for locating and prosecuting anyone involved in crypto-related crimes has never been higher. They believe that to deter misconduct they need to be bringing in significant numbers of criminal cases, civil actions, and regulatory remedies.
Businesses and individuals involved in the cryptocurrency space must be especially proactive to avoid a run-in with the law.
