DOJ Releases Cryptocurrency Enforcement Framework

Practical Law Legal Update w-028-0038 (Approx. 7 pages)

DOJ Releases Cryptocurrency Enforcement Framework

by Practical Law Finance

Part I

The CEF begins by defining virtual currency (VC) as a digital representation of value that functions as a medium of exchange, is separate and distinct from digital representations of traditional currencies, securities, and other traditional financial assets, and does not have legal tender status. Cryptocurrency is defined as a specific type of VC that:

Is, in most cases, decentralized and lacks a central administrator to issue currency and maintain payment ledgers and instead relies on cryptography for security.
Can be exchanged directly person to person through a cryptocurrency exchange or other intermediary.
Varies in degree of anonymity.

The CEF lauds the many legitimate uses and advantages of cryptocurrency and then lists examples of illicit uses of cryptocurrency. According to the CEF, most illicit uses of cryptocurrency fall into the following three categories:

Use of cryptocurrency directly to commit crimes or support terrorism.
Use of cryptocurrency to hide financial activities.
Crimes committed within the cryptocurrency marketplace itself.

Part II

In Part II of the CEF, DOJ explains that it has broad authority to investigate misconduct involving cryptocurrency and that it works closely and cooperatively with many regulatory agencies to identify and enforce regulations regarding misuse of cryptocurrency for illicit purposes including:

Financial Crimes Enforcement Network (FinCEN).
Office of Foreign Assets Control (OFAC).
Office of the Comptroller of the Currency (OCC).
Securities and Exchange Commission (SEC).
Commodity Futures Trading Commission (CFTC).
Internal Revenue Service (IRS).
State authorities.
International regulators such as the Financial Action Task Force (FATF).

According to the CEF, a variety of federal charges can be brought in response to criminal activity involving cryptocurrency including:

Mail fraud under 18 U.S.C. § 1341.
Securities fraud under 15 U.S.C. §§ 78j and 78ff.
Access device fraud under 18 U.S.C. § 1029.
Identity theft and fraud under 18 U.S.C. § 1028.
Fraud and intrusions in connection with computers under 18 U.S.C. § 1030.
Illegal sale and possession of firearms under 18 U.S.C. § 921 et seq.
Possession and distribution of counterfeit items under 18 U.S.C. § 2320.
Child exploitation activities under 18 U.S.C. § 2251 et seq.
Possession and distribution of controlled substances under 21 U.S.C. § 841 et seq.
Money laundering under 18 U.S.C. § 1956 et seq.
Transactions involving proceeds of illegal activity under 18 U.S.C. § 1957.
Operation of an unlicensed money transmitting business under 18 U.S.C. § 1960.
Failure to comply with Bank Secrecy Act requirements under 31 U.S.C. § 5331 et seq.
Criminal forfeiture under 18 U.S.C. § 982; 21 U.S.C. § 853.
Civil forfeiture under 18 U.S.C. § 981.

Part III

Part III of the CEF describes ongoing challenges as well as DOJ strategies for addressing emerging threats to the safe and effective operation of the cryptocurrency marketplace. Some challenges include:

Failure of industry participants to fully comply with legal requirements and responsibilities to safeguard their platforms from exploitation.
The acceptance of anonymity enhanced cryptocurrencies (AECs). AECs use non-public or private blockchains, and therefore the use of these cryptocurrencies may undermine regulators efforts to prevent money laundering and combat the financing of terrorism.
Attempts to obfuscate the source or owner of particular units of cryptocurrency by mixing the cryptocurrency of several users prior to delivery of the units.
Absence of consistent regulation and supervision in the global market, which impedes law enforcement's ability to investigate, prosecute, and prevent criminal activity involving or facilitated by virtual assets.

Despite these and other challenges, according to Part III of the CEF, DOJ remains committed to aggressively investigating and prosecuting actors who use cryptocurrency to commit, facilitate, or conceal their crimes by:

Continuing to collaborate with regulatory partners to address the misuse and abuse of cryptocurrency by malicious actors.
Promoting law enforcement awareness and expertise in the complex field of cryptocurrency.
Working with law enforcement agencies to develop further strategic guidance on the use of available legal tools to investigate and prosecute cryptocurrency-related offenses.
Fostering cooperation with state authorities.
Encouraging enhanced international cooperation and promoting comprehensive and consistent international regulation.
Conducting private sector education and outreach.

Part III of the CEF also states that DOJ has authority to prosecute virtual asset service providers (VASPs) and other entities that violate US law even when they are not located in the US, as long as the virtual asset transactions "touch financial, data storage or other computer systems within the US."

The CEF provides the following examples of activities that would enable DOJ prosecution:

Use of virtual assets to import illegal products to the US.
Use of a US-located VASP or financial institution for money laundering.
Conduct involving cryptocurrency that provides material support to a designated foreign terrorist organization.

Additionally, the CEF warns that DOJ has brought, and will continue to bring, "actions against individuals and companies that failed to meet their legal obligation to counter illicit activities" involving cryptocurrency.

DOJ Releases Cryptocurrency Enforcement Framework | Practical Law