The United States Department of Justice ("DOJ") recently published a report titled "Cryptocurrency: An Enforcement Framework"1 (the "Enforcement Framework"). The lengthy report provides an overview of the cryptocurrency space, the current U.S. laws and regulations that apply to the space, the enforcement challenges and response strategies, and case studies of the muscular approach adopted by the DOJ. This article summarizes the DOJ's position on its expansive jurisdiction and certain business models and activities that it believes have a greater potential to facilitate criminal activity.
Broad Jurisdiction
The DOJ committed to continue its multi-agency "all-tools approach" to conduct "aggressive investigation and prosecution" of actors who use cryptocurrencies to commit, facilitate, or conceal their crimes. Notably, the report asserts the DOJ's expansive view of the US' jurisdiction over crimes involving cryptoassets. Essentially, if a virtual asset transaction touches financial, data storage or other computer systems within the U.S or if cryptocurrency is used to import illegal goods and provide illegal services to defraud or steal from U.S residents, it will come within DOJ's jurisdiction.2
As a result, cryptocurrency exchanges, including foreign located exchanges, that do business "wholly or in substantial part" in the United States must register with the Financial Crimes Enforcement Network ("FinCEN") and have an agent physically present in the U.S for Bank Secrecy Act ("BSA") reporting.3 Even peer-to peer exchanges, essentially individuals who facilitate transfers of value such as cryptocurrency, must register with FinCEN, although, according to the DOJ, many do not. In addition, cryptocurrency kiosk operators (i.e. bitcoin ATM operators) are also considered money services businesses ("MSBs") and must register with FinCEN.
Money service businesses that conduct money transmissions in virtual currencies must meet the same anti-money laundering standards as other money service businesses under the BSA. This includes registering with FinCEN, establishing an anti-money laundering program that is "reasonably designed to prevent money laundering and terrorist financing." They must also meet certain record keeping and reporting obligations. Importantly, FinCEN's requirements apply equally to domestic and foreign located money service businesses.
The DOJ also noted that virtual currency casinos would also typically be subject to similar requirements by virtue of either being casinos or MSBs under the BSA.
Privacy Coins High-Risk
The DOJ noted that anonymity enhanced cryptocurrencies ("AECs"), i.e. privacy coins, such as Monero, Dash, and Zcash, should be considered high-risk from an anti-money laundering ("AML") / counter-terrorist financing perspective and may be indicative of possible criminal activity. The DOJ advised that companies that offer these products should consider this heightened risk and whether this risk can be adequately addressed.
Mixers / Tumblers Beware
The DOJ was particularly critical of mixers and tumblers, entities that assist in concealing the source or owner of particular units of cryptocurrency. The DOJ views them to be high risk for facilitating criminal activity.4 This is consistent with the recent indictment in the U.S. of bitcoin mixer Helix.
Websites or companies offering mixing or tumbling services are engaged in money transmission, and therefore are MSBs subject to the relevant regulations. In addition to facing liability for failing to register, conduct AML procedures, or collect customer identification, operators of these services can be criminally liable for money laundering because, according to the DOJ, these mixers and tumblers are designed specifically to "conceal or disguise the nature, the location, the source, the ownership, or the control" of a financial transaction.
Chain-Hopping Will be Scrutinized
Chain-hopping is the exchange of one cryptocurrency to another, often in rapid succession. Chain-hopping will be scrutinized closely because the DOJ views it as a potential way to obfuscate the trail of virtual currency by shifting the trail of transactions from the blockchain of one virtual currency to the blockchain of another virtual currency.
Jurisdictional Arbitrage
The DOJ noted the risk of jurisdictional arbitrage in this space, given that some jurisdictions have laxer standards and enforcement, and indicated that it will continue to encourage other jurisdictions to adopt similar requirements and take a similar position on enforcement to prevent such arbitrage.
Takeaways
- The DOJ and its regulatory partners remain focussed on investigating and prosecuting actors involved in the illegal uses of cryptocurrency, irrespective of where the impugned actor is located.
- The DOJ and its regulatory partners take a very dim view of jurisdictional arbitrage and will, consistent with the respective mandates, likely assert jurisdiction over impugned activity that harms US citizens and touches on "financial, data storage, or other computer systems within the United States".
- Individuals and money service businesses that engage in cryptocurrency transactions that might fall within the jurisdiction of US regulations should seek legal advice and, where appropriate, take precautions to ensure they are in compliance with all applicable laws.
- There are no yet enforcement cases in Canada involving mixers / tumblers and chain-hopping, but the DOJ's suspicious view of such entities and practices will likely be shared by Canadian law enforcement and regulators, particularly given the view expressed by the DOJ on jurisdictional arbitrage in the Enforcement Framework.
Footnotes
1. The United States Department of Justice, News Release, 20-1069, "Attorney General William P. Barr Announces Publication of Cryptocurrency Enforcement Framework" (8 October 2020), online: DOJ https://www.justice.gov/opa/pr/attorney-general-william-p-barr-announces-publication-cryptocurrency-enforcement-framework.
2. Supra note 4, at page 45.
3. US, Department of the Treasury Financial Crimes Enforcement Network, Foreign-Located Money Services Businesses (FIN-2012-A001) (Washington D.C.: Department of Treasury Financial Crimes Enforcement Network, 2012) online: https://www.fincen.gov/sites/default/files/advisory/FIN-2012-A001.pdf.
4. Supra note 4, at page 41.
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