National Cryptocurrency Enforcement Team Turns Up the Crypto Heat

Wilson Sonsini Goodrich & Rosati

Wilson Sonsini Goodrich & Rosati

Earlier this month, the U.S. Department of Justice (DOJ) announced the creation of a National Cryptocurrency Enforcement Team (NCET) to "tackle complex investigations and prosecutions of criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors." According to the DOJ, the NCET will primarily draw team members from the DOJ Criminal Division's Money Laundering and Asset Recovery Section (MLARS), Computer Crime and Intellectual Property Section (CCIPS), and detailees from U.S. Attorneys' Offices.

Among other things, the NCET will:

  1. Investigate and prosecute cryptocurrency cases;
  2. Develop strategic priorities for investigations and prosecutions involving cryptocurrency;
  3. Identify areas for increased investigative and prosecutorial focus, including professional money launderers, ransomware schemes, and financial institutions working with cryptocurrency;
  4. Develop and maintain relationships with federal, state, local, and international law enforcement agencies that investigate and prosecute cryptocurrency cases;
  5. Train and advise federal prosecutors and law enforcement agencies in developing investigative and prosecutorial strategies; and
  6. Collaborate and build relationships with private sector actors with expertise in cryptocurrency matters to further the criminal enforcement mission.

Federal regulators are already actively pursuing cryptocurrency companies, as illustrated by a few recent matters:

In August 2021, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) assessed a $100 million civil money penalty against BitMEX. BitMEX is a convertible virtual currency derivatives exchange that operated as a futures commission merchant and that provided money transmission services. FinCEN determined that BitMEX willfully "(i) failed to implement and maintain a compliant anti-money laundering program, (ii) failed to implement and maintain a compliant customer identification program (CIP); and (iii) failed to report certain suspicious activity."

Then, on September 1, 2021, the U.S. Securities and Exchange Commission (SEC) filed a complaint against the cryptocurrency lending platform, BitConnect, Satish Kumbhani (founder), Glenn Arcaro (promoter), and Future Money LTD (Arcaro's company), expanding a civil case announced by the SEC in May. BitConnect provided a lending platform, where users could lend the value of virtual currency and receive investment payments in return. The SEC alleged BitConnect, among other things, "conducted a fraudulent and unregistered offering and sale of securities in the form of investments in BitConnect's purported 'Lending Program.'" The defendants allegedly convinced investors to deposit money in its "Lending Program," which would use a proprietary "volatility software trading bot" that would generate returns as high as 40 percent per month. BitConnect and its founder posted fake returns on its website. The SEC alleged that BitConnect engaged in securities fraud, the unregistered sale and offer to sell securities, and violations of the Exchange Act. The SEC seeks to impose fines, recoup ill-gotten gains, and more. The same day the SEC complaint was filed, Arcaro pleaded guilty to criminal charges brought by the DOJ. Sentencing is scheduled for November 15, 2021.1

The creation of NCET is a signal that the federal government is turning up the heat on illicit uses of cryptocurrency and virtual currency exchanges. If you're in the virtual currency business, FinCEN released an Advisory on Illicit Activity Involving Convertible Virtual Currency to help financial institutions identify and report suspicious activity involving convertible virtual currency. This is particularly important for money services businesses (MSBs) because many virtual currency businesses operate as money transmitters (a type of MSB). "As money transmitters, persons accepting and transmitting [convertible virtual currency] are required… to register with FinCEN as MSBs and comply with anti-money laundering/countering the financing of terrorism program, recordkeeping and reporting requirements." If you operate a virtual currency business and are not sure if you are an MSB, read our advisory, "MSB or Not MSB? That Is the Question (for Determining Applicability of Anti-Money Laundering Rules)."

It is important to determine whether you need to have a regulatory compliance program in place to detect and identify criminal misuses of cryptocurrency, and to fulfill any applicable regulatory obligations to reduce legal exposure and mitigate risk.

[1] There are yet additional recent regulatory actions demonstrating federal and state concern about misuse of cryptocurrency. For example, on September 17, 2021, Coinbase Global Inc. (Coinbase) canceled the launch of its crypto lending program, Lend, which reportedly would have allowed users to earn four percent interest on cryptocurrency holdings. The SEC indicated it would consider the Lend product a security and pursue an enforcement action against Coinbase if it launched the Lend product. Various state regulators have also been active in this space. Also on September 17, 2021, the New Jersey Bureau of Securities sent a cease and desist order to Celsius Network, LLC (Celsius) regarding its “Earn Rewards” product because Celsius was offering and selling unregistered securities. Celsius would “solicit investors to invest in Earn Rewards accounts by depositing certain cryptocurrencies into the investors’ accounts at Celsius.” Celsius would place the funds in “income generating activities, including lending operations and proprietary trading,” and investors would earn a variable interest rate on their investment. The New Jersey Bureau of Securities considered the Earn Rewards accounts to be unregistered securities. The Texas State Securities Board has launched an administrative hearing against Celsius on similar grounds. Alabama, New Jersey, and Texas have all also pursued cease and desist orders against BlockFi Inc. based on its crypto lending business model.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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