Building off a 2018 alert outlining cyber threats generally, and following the federal indictment for money laundering of the founders of the offshore cryptocurrency exchange BitMEX, on Oct. 8, 2020, the U.S. Department of Justice (DOJ) released an 83-page report1 that recognizes both the "breathtaking possibilities" that distributed ledger technologies present for society and the important role that "technology already plays ... in many of the most significant criminal and national security threats our nation faces." The report begins with a discussion of several categories of illicit cryptocurrency use, discusses the many legal and regulatory tools available to confront the threats posed by illicit cryptocurrency use, particularly through the development of interagency partnerships, and concludes with an overview of ongoing enforcement challenges in regulating certain business models and cryptocurrency market activity.
Although the report says cryptocurrency "holds great promise for legitimate use," it also details how bad actors have exploited cryptocurrencies to fund illicit transactions, including on the dark web or in the sale of drugs and/or weapons; launder money and shield legitimate activity from tax and legal reporting requirements; and perpetrate more common fraud and theft against cryptocurrency users. Particularly in the wake of the COVID-19 pandemic and the resulting economic uncertainty, DOJ has warned the public about extortion and fraud using cryptocurrency. The report highlights a number of recent and significant DOJ indictments involving illicit cryptocurrency use, including the November 2018 indictment of two Iranian men alleged to have perpetuated the SamSam ransomware attack that encrypted the data of more than 200 victims, demanded payment in bitcoin to restore the data, and caused more than $30 million in damages.
Many of the tools that DOJ uses to prosecute cryptocurrency crimes are regularly used in other prosecutions, including those under wire fraud, mail fraud, money laundering and computer fraud statutes. The report, however, also notes the importance of the Bank Secrecy Act (BSA), primarily administered by the Financial Crimes Enforcement Network (FinCEN), in regulating money services businesses (MSBs) that facilitate currency transfers. It also explains how DOJ partners with the Office of Foreign Assets Control, the Commodity Futures Trading Commission, the Internal Revenue Service and other federal regulators for comprehensive enforcement. State authorities, including New York's attorney general, who is conducting a Virtual Markets Integrity Initiative to assess the policies and practices used to trade cryptocurrencies, are also an important part of DOJ's cryptocurrency enforcement arsenal.
Despite the wealth of legal and regulatory tools available to combat illicit cryptocurrency use, the report focuses on the many enforcement challenges DOJ and other U.S. and international regulators face in prosecuting cryptocurrency crimes. Certain business models, including cryptocurrency exchanges, peer-to-peer exchanges, cryptocurrency kiosks and virtual currency casinos, by their nature are more conducive to illicit use and more often fail to comply with the BSA and other legal requirements. The report emphasizes that these types of businesses have a heightened responsibility to protect themselves from exploitation and protect customer transactional data. These safeguards include registering with FinCEN and submitting suspicious activity reports, conducting and recording Know Your Customer due diligence, and complying with BSA requirements that are crucial to DOJ's enforcement efforts. Further, "anonymity enhanced cryptocurrencies," which use nonpublic blockchains, and "mixers," "tumblers" and "chain hopping" methods employed to intentionally disguise the source, ownership or location of a financial transaction, can significantly frustrate enforcement efforts. Operators of entities using these methods are engaged in money transmission, and therefore are MSBs subject to the BSA and can face criminal liability for concealing illicit conduct.
The report makes clear that DOJ seeks to increase law enforcement awareness and expertise in the cryptocurrency field and build partnerships to aggressively investigate and prosecute bad actors making illicit use of cryptocurrencies. The report and the numerous successful investigations and prosecutions it outlines make clear that DOJ has a large number of prosecutorial tools for combating the misuse of cryptocurrencies and is committed to an "all-tools" approach with its regulatory partners to maximize its impact in safeguarding the financial system.
1. U.S. Dep't of Justice, Report of the Attorney General's Cyber Digital Task Force: Cryptocurrency Enforcement Framework (October 2020), view here.
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