DOJ Expands Cryptocurrency Application With Formation Of Prosecutor Network | Dechert LLP

Key takeaway

  • 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 criminal activities of digital assets and cryptocurrencies.
  • The DOJ simultaneously published a report with priority legislative and regulatory objectives for crimes against digital assets, including strengthening sanctions, increasing statute of limitations and expanding the anti-tip-off provision, which make it an offense for officers or agents of financial institutions to alert clients when their records are being sued.
  • These latest developments further strengthen the Biden administration’s continued commitment to increase regulatory and enforcement oversight of the digital assets industry.
  • Participants in the digital asset market should continue to monitor announcements made by US regulators and law enforcement agencies and be proactive in preparing for more government scrutiny.

On September 16, 2022, the United States Department of Justice (the “DOJ”) announced the establishment of the National Digital Asset Coordinator Network (the “DAC”) of federal prosecutors.1 As we have discussed in several recent OnPoints2, this is the latest in a series of US law enforcement actions to increase the ability to prosecute alleged criminal activity in the digital assets and cryptocurrency space. DAC members aim to act as subject matter experts in their digital assets office and develop best practices for investigating suspected digital asset offenses. The DAC will include more than 150 federal prosecutors in the US attorney’s 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 Executive Order of March 9, 2022 on Ensuring Responsible Development of Digital Assets,4 we wrote about at the time.5 The executive order noted astronomical growth in the digital assets market, from a market capitalization of $ 14 billion in November 2016 to a market capitalization of $ 3 trillion in November 2021, and recognized the need for coordination in law enforcement and market regulation protect consumers and combat illicit finance.6 It gave the Attorney General 180 days to report to the president on the role of law enforcement in prosecuting criminal activities related to digital assets, including cryptocurrencies, stablecoins and other digital currencies.

In a report published alongside the DAC announcement, the DOJ said the network “will be a crucial part of the Department’s efforts to continue addressing the evolving challenges posed by the illicit use of digital assets.[.]”7 The DAC is modeled on other coordination programs established by the DOJ: Computer Hacking and Intellectual Property Network and 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 that focuses on virtual currency exchanges and related entities.8 NCET is currently involved in the investigations and prosecutions of Hydra, Bitfinex, Helix and BitMex.9

DOJ report and priority legislative and legislative proposals

The report also covered the categories of illicit uses of digital assets, case studies of law enforcement’s successful efforts to reduce digital asset crime, the initiatives the DOJ and other agencies have established to stop digital asset crime. and recommendations on adequate regulatory and legislative actions. The DOJ has targeted three priority legislative and regulatory proposals to combat alleged cryptocurrency crime: (1) by including digital asset crime in the anti-tip-off provision of 18 USC § 1510 (b), making it a crime for financial officers or agents to notify clients when their records are requested via certain types of subpoenas; (2) modify the criminal law for the exercise of an unlicensed money transmission business to strengthen the sanctioning provisions of the law and reach digital assets; and (3) changing the limitation period to 10 years for all offenses involving the transfer of digital assets.10 These priority proposals alone would give the DOJ substantially greater power in the investigation and prosecution of crimes against digital assets. Furthermore, the proposals would exercise additional control and risk for financial institutions involved in the transmission of digital assets.

The White House publishes a fact sheet on inter-agency responses to the executive order

On the same day the Justice Department announced the DAC and released its Report, the White House released a fact sheet summarizing the government agencies’ response to the Executive Order of March 9, 2022.11 The White House in total has received nine reports under the executive order detailing what the Biden administration describes as a framework for digital asset development. The fact sheet described the risks posed by digital assets to consumers, investors and businesses, including price volatility and the risk of fraud outright, noting that reported monetary losses from digital asset scams were nearly 600% higher in the year. 2021 compared to the previous year.

White House priority for regulating the digital assets sector

In addition to the formation of the DAC, the White House has outlined further steps for regulation and enforcement in the digital assets sector, including:

  • Encourage the SEC and CFTC to aggressively pursue investigations and enforcement actions against alleged illegal practices in the digital asset space;
  • Encourage the CFPB and the FTC to redouble their efforts to monitor consumer complaints and to enforce alleged unfair, deceptive or abusive practices regarding digital assets;
  • Through the Treasury, identify, track and analyze risks related to digital asset markets; And
  • Completion of an illicit finance risk assessment on decentralized finance by the end of February 2023 and a non-fungible token assessment by July 2023.

Thoughts of separation

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

  • Creation and / or updating of policies or procedures relating to compliance with applicable laws and regulations relating to cryptocurrency;
  • Update and improve existing risk-based anti-money laundering (“AML”), Know Your Customer (“KYC”) and financial crime compliance programs to include cryptocurrency screening, monitoring and reporting; And
  • For companies that have invested in digital assets, conduct additional diligence to understand service provider compliance programs related to cryptocurrencies and the function and use of the digital asset they hold.

Footnotes:

  1. Press release, The Department of Justice announces the report on digital assets and launches the national networkUnited States 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 Lawsuit To SDNY Criminal Indictment (August 15, 2022), https://www.dechert.com/knowledge/onpoint/2022/8/sec-brings-first-ever-insider-trading-action-involving-digital-a.html; The SEC reported adding 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; T.Cryptocurrency Market: Prepare for a surge 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, The Department of Justice forms a national network of prosecutors focused on crypto crimesWall 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 press release from the Department of Justice; Executive order to ensure the responsible development of digital resourcesThe White House (March 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital -risorse /.
  5. Biden Executive Order to Ensure Responsible Development of Digital Assets: A Critical Opportunity to Shape Policy on Blockchain and Cryptocurrencies (April 5, 2022), https://www.dechert.com/knowledge/onpoint/2022/4/biden-executive-order-on-ensure-responsible-development-of-dig.html.
  6. Id.
  7. The Attorney General’s Report under Section 5 (b) (iii) of Executive Order 14067: The Role of Law Enforcement in the Detection, Investigation and Prosecution of Criminal Activities Related to Digital AssetsUnited States Department of Justice (September 6, 2022), https://www.justice.gov/ag/page/file/1535236/download [hereinafter, the “DOJ Report”].
  8. Press release, The Department of Justice announces the first director of the National Cryptocurrency Enforcement TeamUnited States Department of Justice (February 17, 2022), https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team.
  9. Kim Crystal, Treasury and justice reports address crypto crimeAxios (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: The White House publishes the first ever comprehensive framework for responsible digital asset developmentThe White House (September 16, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/16/fact-sheet-white-house-releases-first-ever-comprehensive-pane -for-the-responsible-development-of-digital-resources /.

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