Cryptocurrency

DOJ Expands Cryptocurrency Enforcement with Formation of Prosecutors Network | Dechert LLP

Key Takeaways

  • In response to President Biden’s March 9, 2022 Executive Order on digital assets, the DOJ announced the formation of a new network of prosecutors tasked with becoming specialists in investigating and prosecuting alleged digital asset and cryptocurrency criminal activity.
  • DOJ simultaneously released a report with priority legislative and regulatory goals for digital asset crime, including strengthening penalties, increasing statute-of-limitations periods, and expanding the anti-tip-off provision, which make it a crime for officers or agents of financial institutions to notify customers when their records are subpoenaed.
  • These latest developments further reinforce the Biden Administration’s continued commitment to increasing regulatory and enforcement oversight of the digital asset industry.
  • Digital asset market participants should continue to monitor announcements made by U.S. regulators and law enforcement, and be proactive in preparing for increased government scrutiny.

The United States Department of Justice (the “DOJ”) announced the establishment of the nationwide Digital Asset Coordinator (the “DAC”) Network of federal prosecutors on September 16, 2022.1 As we have discussed in several recent OnPoints2, this is the latest in a series of actions by United States law enforcement to ramp up capacity for prosecuting alleged criminal activity in the digital asset and cryptocurrency space. Members of the DAC are intended to act as their Office’s subject-matter expert on digital assets and develop best practices for investigating suspected digital assets-related crimes. The DAC will comprise of more than 150 federal prosecutors in U.S. Attorney Offices and other special litigation divisions nationwide.3

President Biden’s March 2022 Executive Order on Digital Assets

The formation of the DAC is part of the DOJ’s response to President Biden’s March 9, 2022 Executive Order on Ensuring Responsible Development of Digital Assets,4 which we wrote about at the time.5 The Executive Order noted the astronomical growth in the digital asset market, from a market capitalization of US $14 billion in November 2016 to a market capitalization of US $3 trillion in November 2021, and recognized the need for coordination in enforcement action and regulation of the market to protect consumers and combat illicit finance.6 It gave the Attorney General 180 days to submit a report to the President on the role of law enforcement agencies in prosecuting criminal activity related to digital assets, including cryptocurrencies, stablecoins, and other digital currencies.

In a Report released alongside the announcement of the DAC, the DOJ stated that the network “will be a crucial part of the Department’s efforts to continue to address the ever-evolving challenges posed by the illicit use of digital assets[.]”7 The DAC is modeled on other coordinator programs established by the DOJ: the Computer Hacking and Intellectual Property Network and the National Security Cyber Specialist Network. It will work alongside and support the efforts of the National Cryptocurrency Enforcement Team (the “NCET”), an initiative established by the DOJ in February 2022 focused on virtual currency exchanges and related entities.8 The NCET is currently involved in investigations and prosecutions of Hydra, Bitfinex, Helix, and BitMex.9

DOJ Report and Priority Regulatory and Legislative Proposals

The Report also chronicled the categories of illicit uses of digital assets, case studies of successful law enforcement efforts to curtail digital asset crime, initiatives that the DOJ and other agencies have established to disrupt digital asset crime, and recommendations on appropriate regulatory and legislative actions. The DOJ targeted three priority regulatory and legislative proposals for combating alleged cryptocurrency crime: (1) including digital asset crime in the anti-tip-off provision of 18 U.S.C. § 1510(b), which makes it a crime for officers or agents of financial institutions to notify customers when their records are sought via certain types of law enforcement subpoenas; (2) amending the criminal law for operation of an unlicensed money transmitting business to strengthen the law’s penalty provisions and reach for digital assets; and (3) amending the limitations period to 10 years for all crimes that involve the transfer of digital assets.10 These priority proposals alone would give the DOJ substantially more power in investigating and prosecuting digital asset crime. In addition, the proposals would place additional scrutiny and risk on financial institutions involved in the transmission of digital assets.

White House Releases Fact Sheet on Inter-agency Responses to Executive Order

The same day that the DOJ announced the DAC and released its Report, the White House published a fact sheet summarizing the response of government agencies to the March 9, 2022 Executive Order.11 The White House in total received nine reports pursuant to the Executive Order detailing what the Biden Administration describes as a framework for digital asset development. The Fact Sheet described the risks posed to consumers, investors, and business by digital assets, including price volatility and the risk of outright fraud, noting that reported monetary losses from digital asset scams were nearly 600 percent higher in 2021 than the year before.

White House Priorities for Regulating the Digital Asset Industry

In addition to the formation of the DAC, the White House outlined additional steps for regulation and enforcement in the digital asset industry, including:

  • Encouraging the SEC and CFTC to aggressively pursue investigations and enforcement actions against alleged unlawful practices in the digital assets space;
  • Encouraging the CFPB and FTC to redouble their efforts to monitor consumer complaints and to enforce against alleged unfair, deceptive, or abusive practices concerning digital assets;
  • Through the Treasury, identifying, tracking, and analyzing risks related to digital asset markets; and
  • Completing an illicit finance risk assessment on decentralized finance by the end of February 2023 and an assessment on non-fungible tokens by July 2023.

Parting Thoughts

Based on the actions of the Biden Administration and the various government agencies, cryptocurrency and digital asset regulation and enforcement are here to stay. This is especially true with respect to the DOJ and its law enforcement partners, where they have set their sights on criminal activity in the digital asset space. The formation of the DAC and the NCET this year demonstrate a commitment to increasing the capacity of federal prosecutors and federal law enforcement agents to understand and police the digital asset industry. As we recommended in October 2021, there are a number of ways digital asset market participants can prepare for increased enforcement activity, including:

  • Creating and/or updating any policies or procedures regarding compliance with applicable cryptocurrency-related laws and regulations;
  • Updating and enhancing existing risk-based anti-money laundering (“AML”), Know Your Customer (“KYC”), and financial crimes compliance programs to include cryptocurrency screening, monitoring, and reporting; and
  • For companies invested in digital assets, conducting additional diligence to understand the compliance programs of cryptocurrency-related service providers and the function and use of the digital asset it is holding.

Footnotes:

  1. Press Release, Justice Department Announces Report on Digital Assets and Launches Nationwide Network, U.S. Department of Justice (September 16, 2022), https://www.justice.gov/opa/pr/justice-department-announces-report-digital-assets-and-launches-nationwide-network [hereinafter, the “DOJ Press Release”].
  2. SEC Brings First-Ever Insider Trading Action Involving Digital Assets in Parallel Civil Suit to SDNY’s Criminal Indictment (August 15, 2022), https://www.dechert.com/knowledge/onpoint/2022/8/sec-brings-first-ever-insider-trading-action-involving-digital-a.html; SEC Reported to Add Another Dimension to its Cryptocurrency Enforcement Push: Insider Trading (July 5, 2022), https://www.dechert.com/knowledge/onpoint/2022/7/cryptotracker-entry-re-sec-crypto-exchange-inquiry.html; The Cryptocurrency Market – Prepare for an Uptick in Enforcement Activity (October 20, 2021), https://www.dechert.com/knowledge/onpoint/2021/10/the-cryptocurrency-market—prepare-for-an-update-in-enforcement.html.
  3. Dustin Volz, Justice Department Forms National Network of Prosecutors Focused on Crypto Crime, Wall Street Journal (September 16, 2022), https://www.wsj.com/articles/justice-department-forms-national-network-of-prosecutors-focused-on-crypto-crime-11663322407?page=1.
  4. The DOJ Press Release; Executive Order on Ensuring Responsible Development of Digital Assets, The White House (March 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.
  5. Biden Executive Order on Ensuring Responsible Development of Digital Assets: A Critical Opportunity to Shape Blockchain & Cryptocurrency Policy (April 5, 2022), https://www.dechert.com/knowledge/onpoint/2022/4/biden-executive-order-on-ensuring-responsible-development-of-dig.html.
  6. Id.
  7. The Report of the Attorney General Pursuant to Section 5(b)(iii) of Executive Order 14067: The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets, U.S. Department of Justice (September 6, 2022), https://www.justice.gov/ag/page/file/1535236/download [hereinafter, the “DOJ Report”].
  8. Press Release, Justice Department Announces First Director of National Cryptocurrency Enforcement Team, U.S. Department of Justice (February 17, 2022), https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team.
  9. Crystal Kim, Treasury and Justice reports tackle crypto crime, Axios (September 19, 2022), https://www.axios.com/2022/09/19/treasury-justice-reports-crypto-crime-biden-framework.
  10. Id. at 37-39.
  11. FACT SHEET: White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets, The White House (September 16, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/16/fact-sheet-white-house-releases-first-ever-comprehensive-framework-for-responsible-development-of-digital-assets/.

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