On September 16, the United States Department of Justice ("DOJ") released a report on the Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets pursuant to President Biden's Executive Order on Ensuring Responsible Development of Digital Assets (the "E.O."). In its press release, the DOJ also announced the Criminal Division's launch of the nationwide Digital Asset Coordinators Network ("DAC") composed of designated federal prosecutors from U.S. Attorneys' Offices nationwide to act as a go-to source for legal and technical matters relating to prosecutions of crimes involving digital assets.
On March 9, 2022, President Biden issued the E.O., which recognizes the dramatic growth in markets and technology for digital assets and the need to regulate and mitigate its potential risks. The E.O. directed various agencies, including the DOJ, to assess potential issues arising in the digital asset ecosystem and issue appropriate recommendations on regulatory or legislative actions. A deeper discussion of the E.O. can be found here.
Key Aspects of the Report
Issued pursuant to the E.O., the DOJ's report discusses how illicit actors are exploiting digital asset technologies, the steps law enforcement has taken to combat digital asset crimes, and recommendations to better improve law enforcement's ability to address them.
The report identifies three main categories of illicit uses of digital assets: (1) cryptocurrency as a means of payment for, or manner of, facilitating criminal activity; (2) the use of digital assets as a means of concealing illicit financial activity; and (3) crimes involving or undermining the digital asset ecosystem.
The report proceeds to illustrate successful law enforcement actions, such as prosecuting cryptocurrency fraud and tax evasion stemming from cryptocurrency investment schemes. It also highlights how DOJ has coordinated with other regulatory agencies such as the Office of Foreign Assets Control to prosecute those who use digital assets to evade sanctions.
Importantly for those keeping track of regulatory developments that may apply to the world of virtual currencies and digital assets, the report concludes by identifying certain regulatory and legislative recommendations DOJ asserts would help combat criminal activity in the digital asset ecosystem. The three main priority proposals include:
- Expanding the Anti-Tip Off Provision to Virtual Asset Service Providers. One recommendation would expand the anti-tip off provision, which criminalizes officers or agents of financial institutions notifying customers when their records are sought via subpoenas, to apply to virtual asset service providers that operate as money services businesses. This would mean when such a company receives a third-party subpoena, for example, the company would not be able to notify the customer or user regarding the request for information.
- Broadening Statute that Criminalizes Operation of Unlicensed Money Transmitter. Another proposal recommends amending 18 U.S.C. §1960, the statute which criminalizes the operation of an unlicensed money transmitting business among others, to include platforms providing services that enable users to transfer digital assets in a manner analogous to traditional money-transmitting businesses (including peer-to-peer platforms that profit by connecting buyers and sellers of cryptocurrencies). DOJ also recommends increasing the statutory maximum sentence from five years to ten years for violating 18 U.S.C. § 1960 and enhancing penalties such that individual criminal fines would double and corporate criminal fines would triple for violations involving a money transmitter's business of more than $1 million in a 12 month period. This would likely impact many platforms that currently view themselves as outside the scope of the definition of "money transmitter" because such platforms do not actually "touch" the money (i.e., do not take custody).
- Extending Statute of Limitations. Another recommendation proposes extending the statute of limitations for all crimes that involve the transfer of digital assists from five years to ten years because of the complexity of investigating potential crimes involving digital assets.
Other proposals include amending venue provisions to allow for prosecution in any district where the victim of a digital assets-related offense or other cybercrime is found, expanding forfeiture powers, enhancing sentencing guidelines, and applying recordkeeping and travel rule regulations under the Bank Secrecy Act to transactions involving convertible virtual currency and digital assets.
While there is obviously no certainty or timeline as to whether and when any of the outlined recommendations will actually come to fruition, the proposals help us to understand in concrete terms where policymakers are headed in regulating digital assets.
The Digital Asset Coordinators Network
In conjunction with the release of the report, the DOJ also announced the Criminal Division's launch of the nationwide Digital Asset Coordinators Network. The National Cryptocurrency Enforcement Team, tasked with tackling complex investigations and prosecutions of criminal misuses of digital assets, will lead the DAC. The DAC is composed of designated federal prosecutors across U.S. Attorneys' Offices nationwide who will act as their office's subject-matter expert on digital assets. The DOJ will equip these prosecutors with the tools necessary to apply existing authorities and laws to digital assets and teach best practices in combating criminal activity in the digital asset space. Each DAC will serve as a go-to source for legal and technical matters related to digital assets.
- Understanding How New Potential Regulatory and Legislative Recommendations Might Affect You: In light of these recommendations, and the possibility of congressional action, it is important to review these changes and consider how they may impact you or your business. This might include assessing compliance plans and potential touchpoints to assure that you are well-positioned to address areas of concern identified by the DOJ as it is asking for, and appears willing to impose, steeper criminal penalties for violations.
- Increased Law Enforcement Scrutiny and Coordination: Additionally, the DOJ's announcement of the DAC is another step towards its commitment in combatting digital asset criminal activity. It builds upon the creation of the National Cryptocurrency Enforcement Team and foreshadows increased enforcement efforts to root out bad actors.
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