The federal government is cracking down on the dark side of cryptocurrencies.
Two powerful extensions of the U.S. federal government – the Department of Justice and the SEC – are gearing up to counter the fraud, scams, and abuse that are the dark side of cryptocurrencies and emerging digital assets.
Lisa O. Monaco
Lisa O. Monaco, deputy Attorney General for Justice, launched the National Cryptocurrency Enforcement Team (NCET) this week while SEC Chair Gary Gensler said in testimony before the U.S. House of Representatives Committee on Financial Services that there are inadequate investor protections in crypto finance, issuance, trading, and lending.
The Justice Department describes the NCET as the way 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 official announcement.
The team will be supervised by Assistant Attorney General Kenneth A. Polite Jr. and will bring together experts from the Department of Justice Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), Computer Crime and Intellectual Property Section (CCIPS), and other sections in the division.
“The team will also assist in tracing and recovery of assets lost to fraud and extortion, including cryptocurrency payments to ransomware groups,” officials add.
The head of the NCET, who has yet to be chosen, will report to the Assistant Attorney General in the Criminal Division and will be hired after an application process seeking an individual with experience in complex criminal investigations and prosecutions, and knowledge of the technology underpinning cryptocurrencies and blockchain/distributed ledger technology (DLT).
Once selected, the team leader will oversee attorneys from MLARS, CCIPS, and Assistant U.S. Attorneys (AUSAs) recruited via U.S. Attorneys’ Offices across the country. The team will identify, investigate, support, and pursue cases against cryptocurrency exchanges, infrastructure providers, and other entities enabling the misuse of cryptocurrency and related products to commit or facilitate criminal activity.
The NCET has a broad mandate because cryptocurrencies are “the primary demand mechanism for ransomware payments,” and are often part of money laundering schemes, illegal operations or unregistered money services. Cryptocurrencies are “the preferred means of exchange of value on ‘dark markets’ for illegal drugs, weapons, malware, and other hacking tools,” according to Justice officials.
The NCET will foster “the development of expertise in cryptocurrency and blockchain technologies,” accoridng to the Justice Department. “The NCET will also play a critical support role for international, federal, state, local, tribal, and territorial law enforcement authorities grappling with these new technologies and new forms of criminal tradecraft.”
The NCET effort will advance MLARS’s Digital Currency Initiative and will leverage the Justice Department’s Cryptocurrency Enforcement Framework, which was released in October 2020, officials say.
In addition, the NCET will pursue more than its own cases, including “existing and future cases brought across the Criminal Division and in the U.S. Attorneys’ Offices across the country.”
The mission of the NCET will consist of:
- Investigating and prosecuting cryptocurrency cases, “comprising a central part of a nationwide enforcement effort to combat the use of cryptocurrency as an illicit tool;”
- Fostering strategic priorities for investigations and prosecutions involving cryptocurrency after consulting with the USAOs, Justice Department components, and investigative agencies involved in cryptocurrency cases;
- Identifying areas of interest for investigative and prosecutorial focus such as professional money launderers, ransomware schemes, human traffickers, narcotics traffickers, and financial institutions working with cryptocurrency;
- Improving relationships with cryptocurrency-focused AUSAs and prosecutors with other Justice Department litigation components and offices pursuing cryptocurrency investigations and prosecutions;
- Training and advising federal prosecutors and law enforcement agencies in formulating investigative and prosecutorial strategies. This will cover search and seizure warrants, restraining orders, criminal and civil forfeiture allegations, indictments, and other pleadings;
- Coordinating and sharing information and evidence among law enforcement offices to maximize the effectiveness of the Department’s investigations, prosecutions, and forfeitures involving cryptocurrency;
- Collaboration with “private sector actors with expertise in cryptocurrency matters to further the criminal enforcement mission;”
- And build relationships with federal, state, local, and international law enforcement agencies that investigate and prosecute cryptocurrency cases.
Overall, the NCET will work with other federal agencies, subject matter experts (SMEs), and law enforcement partners throughout the U.S. government, officials add.
“As the technology advances, so too must the Department evolve with it so that we’re poised to root out abuse on these platforms and ensure user confidence in these systems,” Monaco says via a prepared statement.
Gary Gensler
The SEC is moving ahead to do what it can to root out crypto abuse, according to Gensler’s recent testimony.
Gensler has been signaling since he became head of the SEC that regulation for cryptocurrencies and their related digital assets is high on his list of priorities.
“Right now, large parts of the field of crypto are sitting astride of — not operating within — regulatory frameworks that protect investors and consumers, guard against illicit activity, and ensure for financial stability,” Gensler says.
“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted,” Gensler says. “This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.”
Gensler says that he has asked SEC staff in conjunction with fellow regulators, to work along two tracks:
- “One, how can we work with other financial regulators under current authorities to best bring investor protection to these markets?”
- And “Two, what gaps are there that, with Congress’s assistance, we might fill?”
Gensler adds that, in the meantime, the SEC has several projects that cross over both tracks:
- The offer and sale of crypto tokens;
- Crypto trading and lending platforms;
- Stable value coins;
- Investment vehicles providing exposure to crypto assets or crypto derivatives;
- And custody of crypto assets.
