A U.S. Department of Justice (DOJ) report released on September 16, 2022, will have a significant impact on the U.S. Government's ability to investigate and prosecute offenses involving digital assets.
Titled "The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets" (Report), the Report was released in response to President Biden's March 9, 2022, Executive Order 14067.1 In the Report, DOJ announced that its Criminal Division has established the Digital Asset Coordinators (DAC) Network, which is composed of over 150 designated federal prosecutors from U.S. Attorney's Offices nationwide and DOJ litigation departments, and will be led by the National Cryptocurrency Enforcement Team (NCET). The NCET was created in October 2021 as part of DOJ's Criminal Division, combining the Department's cyber, intellectual property and money laundering and asset recovery enforcement expertise to investigate and prosecute crimes involving digital assets.
The members of the DAC Network will be tasked with becoming legal and technical specialists in investigating and prosecuting alleged digital asset and cryptocurrency criminal activity. The DAC Network will also serve as the DOJ's primary forum for prosecutors to receive the necessary specialized training and subject matter expertise to effectively assist with prosecuting crypto crimes. We can anticipate the DAC Network and NCET will bring additional capacity and technical expertise to the DOJ's prosecution of digital assets crimes .
The Report also provides recommended regulatory and legislative actions, in order of priority, that the Department believes would help with enforcement efforts to keep up with rapidly changing technology in the digital assets space.
The Report is another major step in the government's efforts to make it clear that DOJ and multiple law enforcement agencies, along with international, regulatory, and private sector partners, plan to coordinate cryptocurrency investigations and have stepped up their enforcement efforts by developing and deploying subject matter expertise to prosecute and disrupt the illicit uses of digital assets.
The Report discusses the categories of illicit uses of digital assets, case studies of successful law enforcement efforts to combat digital asset crime, the challenges that digital assets pose to criminal investigations, and several initiatives that DOJ and other law enforcement agencies already established to curtail digital assets crime. It categorizes three principal categories of illicit uses of digital assets: (1) cryptocurrency as a means of payment for, or manner of, facilitating criminal activity; (2) concealing illicit financial activity; and (3) crimes involving or undermining the digital asset ecosystem.
Below are some notable aspects and key action items from the Report, focusing on regulatory and legislative recommendations, which aim to provide the DOJ with substantially greater ability to investigate and prosecute offenses involving digital assets and cryptocurrencies.
Regulatory and Legislative Recommendations
The Report identifies wide-ranging recommendations in its regulatory and legislative section to aid prosecutions and investigations, expand penalties for cryptocurrency-related crimes, and expand the resources available for government employees.
The Report begins with the three legislative priorities for Congress, which alone provide DOJ with substantially more power in investigating and prosecuting digital asset crimes. It appears the first three priority recommendations discussed below create a discrete anti-money laundering (AML) prism through which the federal government will view digital asset fraud .
- 1. DOJ calls for inclusion of digit asset crime in the anti-tip-off provisions of 18 U.S.C. § 1510(b), which would expand the laws prohibiting employees of financial institutions from tipping off suspects whose records are sought via grand jury subpoena to apply to virtual asset services providers (VASPs) acting as money services businesses (MSBs) under the Bank Secrecy Act (BSA), and expand the anti-tip off prohibition to include all criminal offenses under Title 18, Title 21, Chapter 53 of Title 31, in light of the increasing use of digital assets across a broad range of criminal activities.
- 2. The Report emphasizes the need for strengthening the laws criminalizing the operation of unlicensed money transmitting businesses. DOJ proposes amendments to 18 U.S.C. § 1960, which criminalizes the operation of unlicensed money transmitting businesses, in an effort 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. According to the Report, if a money transmitter fails to register with FinCEN, or fails to obtain the requisite state licensing, or promotes or supports illicit activity, it may be subject to criminal prosecution under 18 U.S.C. § 1960.
- 3. DOJ also proposes amendments to the limitations period for crypto-related crimes. Specifically, DOJ proposes amending 18 U.S.C. § 3293 to extend the general federal criminal statute of limitations from five years to ten years for offenses related to the transfer of digital assets. The Report suggests this proposal would achieve an "adequate balance" between the necessary time required to thoroughly investigate potential criminal conduct related to digital assets and the interest of the investigated party. Because digital assets -related investigations are cross-border in nature and are oftentimes complex, DOJ emphasizes that it would be unfeasible to identify the offender within the standard five-year limitations period.
- 4. The Report calls for regulatory and legislative changes to facilitate evidence gathering along with international-cooperation initiatives. The Report explains the changes would include "laws requiring record preservation or enhanced penalties for non-compliance with legal process."
- 5. The Report recommends an amendment to the venue provisions in Title 18 to ensure a suitable venue for prosecution of digital assets-related crimes exists so that American victims can avoid unnecessary hardship in bringing digital assets charges.
- 6. Next, the Report calls for a proposal to strengthen penalties relating to forfeiture laws to discourage the targeted illicit activities involving commodities. The Report suggests creating criminal and civil forfeiture authority for commodities-related violations of 18 U.S.C. § 1348, which covers both securities and commodities fraud and 7 U.S.C. § 13(a)(2) (Commodity Exchange Act), making such violations predicate offenses for money laundering charges.
- 7. The Report recommends lifting the monetary cap of $500,000 on administrative forfeitures involving digital assets. DOJ proposes this can be accomplished by the Treasury exercising its authority to define cryptocurrency as a monetary instrument2 not subject to the $500,000 cap on administrative forfeiture. DOJ is open to amending Section 1607 to lift the $500,000 cap for cryptocurrency and other digital assets if the Treasury does not exercise its authority.
- 8. DOJ proposes to enhance the U.S. Sentencing Guidelines for BSA violations by recommending that the Sentencing Commission amend U.S.S.G. § 2S1.3 to precisely capture the severity of BSA violations that facilitate money laundering and other illegal activity related to digital assets. The Report suggests the Sentencing Commission may propose the addition of specific offense characteristics to be included to the scope of the BSA violations to determine a "suitable metric" connecting the base offense level to the amount of funds in question or associated with the BSA violation.
- 9. DOJ encourages supporting FinCEN in issuing a final rule relating to recordkeeping and Travel Rule regulations under the BSA relating to transfer or transmission of certain digital assets. Moreover, due to increased trade in NFTs and its substantial money-laundering risks, including a conduct called self-laundering, the DOJ is calling to clarify existing laws relating to NFT platforms to ensure that NFT platforms are under the purview of AML/CFT and suspicious-activity-reporting requirements of the BSA.
- 10. And lastly, the Report calls for increased funding of law enforcement operations to ensure there are enough resources for digital asset investigations as well as additional resources for maintaining DOJ's expertise in detecting and prosecuting crimes related to digital assets.
The Report also emphasizes the need for resources to train and retain prosecutors, skilled agents, and analysts to combat emerging threats relating to digital assets. The Report recommends that the President should request funding from Congress for additional tools and technical equipment that can effectively support investigations and search-and-seizure operations, including blockchain analytical tools and technical infrastructure. Additionally , the Report proposes that DOJ and other government agencies consider encouraging "technology-oriented personnel" to join the federal service.
The DOJ Report is just one facet of the Biden Administration's plan to regulate and prosecute the rapidly developing digital asset space and to ensure responsible development is followed through .
For more information about another important action taken by the federal government focusing on illicit activities related to digital assets, please see our blog post on the U.S. Treasury Department Action Plan to Address Illicit Financing Risks of Digital Assets.
1 President Biden charged DOJ, in consultation with the Departments of State, Treasury, and Homeland Security, to submit a report on how to strengthen international law enforcement cooperation for detecting, investigating, and prosecuting criminal activity related to digital assets pursuant to Section 5(b)(iii) of the Executive Order.
2 Section 6102(d) of the National Defense Authorization Act for Fiscal year 2021 amended the scope of "monetary instruments" definition to include "values that substitutes for any monetary instrument."