On September 16, 2022, The U.S. Department of Justice (“DOJ”) publicly released a 66-page Report (“Report”) detailing the role of law enforcement in detecting, investigating, and prosecuting criminal activity related to digital assets pursuant to Section 5(b)(iii) of President Biden’s Executive Order on digital asset growth. The Report is a collaborative effort between the DOJ, Department of Treasury and the Department of Homeland Security in an effort to disrupt digital asset-related criminal activity.
The DOJ also established a Digital Asset Coordinator (“DAC”) Network to further combat the growing threat of illicit use of digital assets. According to the Press Release, “the DAC Network comprises over 150 designated federal prosecutors from U.S. Attorneys’ Offices and across the department’s litigating components, and will serve as the department’s primary forum for prosecutors to obtain and disseminate specialized training, technical expertise, and guidance about the investigation and prosecution of digital asset crimes.”
For our purposes, we will discuss the Reports’ information on fighting illicit finance, exploration of a U.S. Central Bank Digital Currency (“CBDC”) and, the formation of the DAC Network.
The Report
Fighting Illicit Finance
As the digital currency space has widely diversified, criminal exploitation may be divided into three categories according to the Press Release: “1) cryptocurrency as a means of payment for or manner of facilitating criminal activity; 2) the use of digital assets as a means of concealing illicit financial activity; and 3) crimes involving or undermining the digital asset ecosystem.”
1) Cryptocurrency as a means of payment for or manner of facilitating criminal activity.
- Dark markets are a primary focus for law enforcement as they transact using “privacy coins” in the sales of illegal firearms, drugs, child sexual abuse materials and more.
- Cryptocurrency theft has been used to raise funds and “in March 2022, Lazarus Group, a hacking group sponsored by the [ Democratic People’s Republic of Korea ] (“DPRK”), stole over $600 million from a blockchain project linked to an online gaming platform.”
- Cryptocurrency is the desired payment choice for ransomware and other extortion activities. The Report illustrates that in 2021, a ransomware attack on Colonial Pipeline led to a fuel shortage throughout the country including numerous airports with the attackers demanding payment in bitcoin.
- In 2020, cryptocurrency was used to raise terrorist financing funds in connection with a scheme to exploit the COVID-19 pandemic and by fraudulent websites selling personal protective materials (such as N95 masks).
2) The use of digital assets as a means of concealing illicit financial activity.
- “Criminals continue to use cryptocurrency and other digital assets for money laundering, facilitating tax evasion, and evading sanctions.”
- Criminals target non-compliant money transmitters (that do not comply with the Bank Secrecy Act (“BSA”) standards or Know Your Customer (“KYC”)/Anti-Money Laundering (“AML”) standards) and layer their laundering using new forms of digital assets such as nonfungible tokens (“NFTs”).
- Page 8 of the Report illustrates the following example from earlier this year:
3) Crimes involving or undermining the digital asset ecosystem.
- “Theft of digital assets remains an area of substantial concern. According to one estimate from a blockchain analysis company, more than $3.2 billion in cryptocurrency was stolen from individuals and services in 2021.”
- Romance scams requesting a transfer of cryptocurrency accounted for $139 million in 2021 alone according to the Federal Trade Commission (“FTC”).
- The Report shares that “the Consumer Financial Protection Bureau (“CFPB”) published 2,404 cryptocurrency related consumer complaints in its Consumer Complaint Database during 2021, and more than 1,000 cryptocurrency-related complaints during 2022 year-to-date.”
Further, the White House Fact Sheet tells us that “The President will evaluate whether to call upon Congress to amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers — including digital asset exchanges and [ NFT ] platforms. He will also consider urging Congress to raise the penalties for unlicensed money transmitting to match the penalties for similar crimes under other money-laundering statutes and to amend relevant federal statutes to let the Department of Justice prosecute digital asset crimes in any jurisdiction where a victim of those crimes is found.”
Importantly, the Report proposes action items to enhance law enforcement prioritizing: “1) expanding to virtual asset service providers the laws preventing employees of financial institutions from tipping off suspects to ongoing investigations [ in other words, expanding the parameters of the current anti-tip-off provisions to include additional service providers ]; 2) strengthening the law criminalizing the operation of unlicensed money transmitting businesses [ such as increasing statutory maximum sentences, additing enhanced penalties and increasing individual penalties ]; and 3) extending the statute of limitations of certain statutes to account for the complexities of digital assets investigations.”
A U.S. CBDC
According to the Fact Sheet, a digital form of the U.S. dollar, or a U.S. CBDC, “could foster economic growth and stability, protect against cyber and operational risks, safeguard the privacy of sensitive data, and minimize risks of illicit financial transactions.” Further, “a potential U.S. CBDC could also help preserve U.S. global financial leadership, and support the effectiveness of sanctions.”
The Administration has outlined that a U.S. CBDC should “protect consumers, promote economic growth, improve payment systems, provide interoperability with other platforms, advance financial inclusion, protect national security, respect human rights, and align with democratic values.”
Additional research and development is needed in considering potential implications and unintended consequences for such digital currency.
The DAC Network
As novel technologies have created new challenges for law enforcement, The DAC is tasked to disrupt crimes related to digital assets. The DAC will be led by the National Cryptocurrency Enforcement Team (“NCET”) under the direction of Eun Young Choi and according to the Press Release, will: “serve as a source of information and discussion addressing new digital asset issues, such as [ decentralized finance ] DeFi, smart contracts, and token-based platforms, and their use in criminal activity. The DAC Network will likewise raise awareness of the unique international considerations of the crypto ecosystem, including the benefits of leveraging foreign relationships and the challenges of cross-border digital asset investigations.”
