On Friday, the Department of Justice (“DOJ”) announced two developments: First, the release of a 66-page report, The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets (the “Report”), issued under President Biden’s March 9, 2022 Executive Order on Ensuring Responsible Development of Digital Assets. Second, the establishment of the Digital Asset Coordinator (“DAC”) Network, a nationwide group of prosecutors designated as legal and technical experts in digital asset cases.
We focus here on the regulatory and legislative recommendations of the Report, which seek to expand significantly the ability of the DOJ to investigate and prosecute offenses involving digital assets. The recommendations include increasing criminal penalties, extending statutes of limitations, expanding venue provisions, enhancing the government’s forfeiture powers, and prohibiting virtual asset service providers from “tipping off” the subjects of grand jury subpoenas received by the providers. The recommendations also include making clear that the federal criminal law against maintaining an unlicensed money transmitter applies to peer-to-peer platforms that purportedly do not take custody or assume control over the digital asset being exchanged; ensuring that the Financial Crimes Enforcement Network (“FinCEN”) issues a final rule expanding the application of the Travel Rule under the Bank Secrecy Act (“BSA”) to digital asset transfers; and expanding or arguably clarifying that the BSA applies to platforms dealing in non-fungible tokens, or NFTs, including online auction houses and digital art galleries.
The government’s press release summarizes the Report as discussing “the manner in which illicit actors are exploiting digital asset technologies; the challenges that digital assets pose to criminal investigations; initiatives that the department and law enforcement agencies have established as part of whole-of-government efforts to more effectively detect, investigate, prosecute, and otherwise disrupt these crimes; and recommended regulatory and legislative actions to further enhance law enforcement’s ability to address digital asset crimes.” The Report posits that there are three principal 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’s most interesting aspect is its recommended regulatory and legislative steps, which are as potentially significant as they are numerous:
- Expanding the laws prohibiting employees of “financial institutions” from tipping off suspects whose records are sought via grand jury subpoena to apply to virtual asset service providers acting as money services businesses (“MSBs”) under the BSA, and expanding the anti-tip off prohibition to include all criminal offenses under Title 18 (the general federal criminal code), Title 21 (the drug laws), and the BSA.
- Amending 18 U.S.C. § 1960, which criminalizes the operation of unlicensed money transmitting businesses, in order to increase its statutory maximum penalty from five years to ten years of imprisonment, and doubling its maximum criminal fine from $500,000 to $1 million for certain offenses.
- Issuing regulations or other changes under Section 1960 to provide that peer-to-peer platforms that purportedly do not take custody or assume control over the digital asset being exchanged are MSBs covered by Section 1960(b)(1)(B), which requires MSBs to register with FinCEN.
- Extending the general federal criminal statute of limitations of five years to ten years for offenses involving the transfer of digital assets, “to account for the complexities of digital assets investigations.”
- Statutory or regulatory changes, and international-cooperation initiatives, “designed to address the challenges in gathering evidence of crimes related to digital assets[,]” including laws requiring record preservation or enhanced penalties for non-compliance with legal process.
- Amendments to the venue provision in Title 18, or the venue provisions of specific offenses, “that would permit prosecution in any district where the victim of a digital assets-related offense or other cybercrime is found.”
- Creating criminal and civil forfeiture authority for commodities-related violations, and making such violations predicate offenses, or “specified unlawful activity,” for money laundering charges.
- Lifting the $500,000 cap on administrative forfeitures involving cryptocurrencies (vs. civil or criminal forfeitures, which have no such cap).
- Enhancing the U.S. Sentencing Guidelines applicable to BSA violations, to prevent federal district courts from “viewing BSA offenses as mere technical or regulatory violations not meriting a substantial period of incarceration.”
- Supporting FinCEN in issuing a final rule amending the recordkeeping and Travel Rule regulations under the BSA as they apply to virtual currency transactions (we have blogged on the proposed rule here).
- Increased funding for technical resources specific to digital asset investigations, “including blockchain analytical tools and the technical infrastructure (e.g., server space or cloud access) needed to ingest and maintain potentially voluminous and complex data and to analyze that data.”
- Increased funding to “to hire and retain the skilled agents, analysts, prosecutors, and other attorneys essential to addressing existing and emerging threats relating to digital assets.”
Consistent with the last bullet point above – increased funding for digital-asset savvy law enforcement staff – the DOJ also announced the creation of the new DAC Network.
The DAC Network is led by the DOJ’s National Cryptocurrency Enforcement Team (NCET), and will serve as the DOJ’s “primary forum for prosecutors to obtain and disseminate specialized training, technical expertise, and guidance about the investigation and prosecution of digital asset crimes.” The DAC Network consists of over 150 designated federal prosecutors from U.S. Attorneys’ Offices nationwide and various offices of “Main Justice” based in Washington, D.C. These designated prosecutors will act as their office’s subject-matter expert on legal and technical issues relating to digital assets, and will receive training on investigating digital assets-related crimes, including drafting search and seizure warrants, restraining orders, criminal and civil forfeiture actions, indictments, and other pleadings. “The DAC Network will also serve as a source of information and discussion addressing new digital asset issues, such as DeFi, smart contracts, and token-based platforms, and their use in criminal activity.” The DAC Network also will stress international cooperation and navigating the challenges of cross-border investigations, consistent with a June 6, 2022 DOJ report, How to Strengthen International Law Enforcement Cooperation For Detecting, Investigating And Prosecuting Criminal Activity Related To Digital Assets.