Law Enforcement in the Digital Assets Space: Department of Justice Issues Report Pursuant to White House Executive Order
On September 16, 2022, the U.S. Department of Justice (“DoJ”) issued a report on The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets (the “Report”), which will have a significant and wide-ranging impact on the U.S. government’s ability to investigate, prosecute, and disrupt crimes involving digital assets. The Report announces an expansion of DoJ’s enforcement capabilities through the establishment of a national network of prosecutors dedicated to investigating and prosecuting criminal activity involving digital assets. The Report also provides recommended regulatory and legislative actions, in order of priority, which DoJ believes would help it enforce criminal violations involving digital assets.
The Report was one of several U.S. governmental reports that were issued on September 16, 2022, including reports by the U.S. Department of the Treasury, the White House Office of Science and Technology Policy, and the U.S. Department of Commerce. These reports were issued in coordination with the White House’s announcement of it first-ever proposed comprehensive framework for crypto regulation in the United States (“Framework”). The reports and Framework responded to President Biden’s March 9, 2022 Executive Order (“EO 14067”) on Ensuring Responsible Development of Digital Assets, which called for a coordinated, inter-agency strategy to harness the potential benefits of digital assets while addressing their inherent risks. We have written previously on EO 14067.
EO 14067 specifically sought input from numerous federal agencies on the following six topics:
Consumer and investor protection
Promoting financial stability
Countering illicit finance
U.S. leadership in the global financial system and economic competitiveness
The Framework fact sheet noted that President Biden has received nine reports to-date, “reflect[ing] the input and expertise of diverse stakeholders across government, industry, academia, and civil society.”
The DoJ’s Report updates its prior October 2020 Cryptocurrency Enforcement Framework in several ways, including by addressing new technologies, new digital assets, and new categories of criminal activity. In this blog post we address two notable areas of the Report that will impact law enforcement efforts in the digital assets area for years to come: (1) the establishment of a national network of prosecutors focused on digital assets; and (2) regulatory and legislative recommendations to strengthen law enforcement efforts in this space.
Establishment of the Nationwide Digital Asset Coordinator Network
In the Report, DoJ announced that its Criminal Division has launched the Digital Asset Coordinator (“DAC”) Network, which will serve as the centralized forum for prosecutors to receive training and guidance on the investigation and prosecution of criminal activity related to digital assets. The DAC Network will be led by the National Cryptocurrency Enforcement Team (“NCET”) and will comprise over 150 federal prosecutors from various U.S. Attorneys’ Offices and DoJ litigation departments. Each DAC member will function as a subject matter expert on digital assets. They will provide practical guidance on drafting search and seizure warrants, restraining orders, criminal and civil forfeiture actions, indictments, and other pleadings. They will also serve as a source of information for new digital asset technologies, such as DeFi (decentralized finance), smart contracts, and token-based platforms, and will counsel on the unique international considerations of the crypto markets, including the benefits of working with foreign counterparties to address the challenges of cross-border crypto investigations.
We can expect the DAC Network and NCET to bring additional capacity and technical expertise to the DoJ’s prosecution of crypto crimes. DoJ is signaling a commitment to augment the knowledge that federal prosecutors and law enforcement agents have about the digital assets industry, and the DAC Network’s launch likely foreshadows increased criminal prosecutions in this area in the near future.
The final section of the Report is dedicated to a discussion of DoJ’s legislative and regulatory recommendations, which are divided into five categories and begin with the highest priority proposals. The three priority proposals “that are integral to the continued success of prosecutions and other disruptions in the digital assets space” are set out below.
Noting a gap in the non-disclosure framework of asset-related investigations, DoJ recommends expanding the definition of “financial institutions” to include virtual asset service providers (“VASPs”) to prohibit agents and officers of such institutions from notifying customers whose records are sought by grand jury subpoenas or certain other types of subpoenas. VASPs currently avoid these prohibitions. DoJ further recommends expanding 18 U.S.C. § 1510(b), one such anti-tip-off statute, to generally include all of the offenses covered in Title 18, Title 21, and Chapter 53 of Title 31, instead of the more limited list of violations it currently enumerates.
Operating an Unlicensed Money Transmitting Business
DoJ recommends increasing the statutory maximum sentence from five years to 10 and adding an enhanced penalty provision (doubling individual criminal fines and tripling corporate criminal fines) for operating an unlicensed money transmitting business in violation of 18 U.S.C. § 1960. DoJ further recommends clarifying § 1960 to confirm that it applies to platforms providing services that enable the transfer of digital assets in a manner analogous to traditional money transmitting businesses. This is in response to some crypto firms that have declared that their operations are not subject to the compliance and reporting requirements of the Bank Secrecy Act (“BSA”) because they do not take custody over, or assume control of, the exchanged funds.
Limitations Period for Crypto-Related Crimes
Crypto-related investigations can take years to resolve because of their complexity and, often, their cross-border nature. These delays can make it difficult to identify offenders and bring charges within the standard five-year statute of limitations under 18 U.S.C. § 3282, even in light of the tolling of the statute of limitations during the pendency of a request for mutual legal assistance from a foreign government. DoJ therefore recommends amending 18 U.S.C. § 3293 so that its extended 10-year statute of limitations for certain enumerated offenses would apply to all crimes that involve the transfer of digital assets. DoJ further recommends amending 18 U.S.C. § 3292 to increase the tolling period while waiting to obtain foreign evidence related to an offense involving a digital asset.
DoJ’s report included numerous other legislative and regulatory proposals, including:
Mechanisms to facilitate evidence gathering and to ensure appropriate venue
The strengthening of penalties, including an expansion of criminal and civil asset forfeiture to ill-gotten gains from criminal activity involving commodities
Increasing the monetary limit of administrative forfeiture actions because of the regular high dollar value of crypto investigations
Increasing the sentencing guidelines for BSA/AML violations as the dollar value increases
Applying BSA/AML requirements to non-fungible token (“NFT”) platforms
Ensuring the adequate funding of law enforcement operations
The White House’s new digital assets Framework and the various reports issued pursuant to EO 14067 reflect the seriousness with which the U.S. government is treating the expansion of digital assets markets and concomitant regulatory regime. Based on the recommendations contained in the DoJ’s Report and establishment of the DAC Network, we can expect to see digital asset investigations more adequately staffed with attorneys and law enforcement personnel who have deep subject matter knowledge on digital assets and for federal prosecutors to pursue these types of cases with increased tenacity and sophistication.
Finally, it is important to note that other U.S. regulatory agencies have the authority to investigate and enforce potential violations of law and regulations that involve crypto-related practices. Indeed, in the Framework fact sheet, the White House encouraged the Consumer Financial Protection Bureau and the Federal Trade Commission to redouble their efforts to monitor consumer complaints relating to digital assets and to enforce against unfair, deceptive or abusive practices. In addition, the White House also encouraged the Securities and Exchange Commission and Commodity Futures Trading Commission to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.”