After over a decade of operating relatively regulation-free, the cryptocurrency industry faces an escalating amount of regulation in the U.S., both at the federal and state level. Increasing regulation means more employees will come forward with allegations about fraud and other legal violations.
Corporate whistleblower laws will likely provide protection from retaliation for these employees. Those insiders who blow the whistle to regulators on illegal activity may be eligible for substantial monetary awards if regulators take action based on the information provided.
Regulatory Regime Change
Over the past year, U.S. lawmakers and regulators have become increasingly vocal about what they believe to be illegal activity within the cryptocurrency industry.
Most recently, on Feb. 8, a husband and wife were arrested for allegedly attempting to launder $4.5 billion in stolen cryptocurrency.
In 2021, the Financial Crimes Enforcement Network (FinCEN) has enforced anti-money laundering and “know your customer” (AML/KYC) regulations to prevent the illicit use of cryptocurrencies.
The Securities and Exchange Commission has prioritized regulating cryptocurrency, including bringing 20 enforcement actions related to cryptocurrency in 2021 alone, according to a Cornerstone Research report.
The Commodities Futures Trading Commission (CFTC) has sanctioned crypto exchanges as unregistered derivatives brokers and marketplaces and has taken enforcement actions against companies that employ smart contracts, classifying them as a swap, which will have major ramifications for the future of decentralized finance (DeFi), an emerging cryptocurrency financial technology.
The Department of Treasury recommended that Congress prohibit non-banks from issuing stablecoins, a class of allegedly price-stable cryptocurrencies backed by reserve assets.
And even state regulators have started to actively police the cryptocurrency industry for reasons such as failing to register in the state before offering or selling securities or commodities.
Whistleblowers and Laws That Protect Them
While many in the cryptocurrency industry will work to come into compliance with expanding regulations, others will not. At those non-compliant firms, employees may blow the whistle on illegal conduct. For those that do, federal and state laws, including the Sarbanes-Oxley Act (SOX), the Dodd-Frank Act, the Commodities Exchange Act (CEA), and the Anti-Money Laundering Act of 2020 (AML Act), may protect them from retaliation.
Retaliation can take many forms, ranging from a hostile work environment, to demotion, to termination. While remedies vary, these statutes are designed to compensate an employee who has suffered harm from retaliation. The last decade’s many large corporate whistleblower jury verdicts have demonstrated that a retaliating employer can find itself liable for substantial sums of money, including punitive damages in the millions of dollars.
To be afforded these protections, however, an employee must blow the whistle in a way that is protected, which can vary substantially from statute to statute.
SOX primarily protects employees of public companies and their contractors who blow the whistle about securities violations and fraud, whether internally or to the SEC.
In contrast, Dodd-Frank protects all employees, even those of nonpublic companies, who report securities violations directly to the SEC.
The CEA only covers commodities and derivatives whistleblowing, and, while it applies to both public and nonpublic companies, the CEA requires reporting directly to the CFTC.
The AML Act protects employees who blow the whistle internally or to regulators about violations of AML/KYC laws or violations of any Treasury law, rule, or regulation.
State laws, such as New Jersey’s Conscientious Employee Protection Act and California’s Whistleblower Protection Act, may offer broader protections encompassing the internal and external reporting of any potentially illegal activity based on state or federal law.
To encourage employees to come forward with concerns, these laws generally protect whistleblowers from retaliation if they hold a “reasonable belief” a law was violated. That is, if they can show “that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated” the law. In other words, a whistleblower need not prove a law was violated.
This forgiving standard should be very helpful to crypto whistleblowers since the legal landscape for the cryptocurrency industry is rapidly evolving and at times heavily contested.
For whistleblowers willing to report alleged violations to regulators, they can also earn awards under the various federal whistleblower reward programs, provided the whistleblower properly filed a tip that contributed to a qualifying enforcement action.
The SEC and CFTC programs, and now the newly enhanced AML whistleblower program, can award whistleblowers up to 30% of an enforcement action of more than $1 million. These whistleblowers can shield their identity by filing tips anonymously through an attorney. The IRS whistleblower program can award whistleblowers as much as 30% of a government recovery of at least $2 million.
These programs have been very successful in enticing whistleblowers to come forward with quality information. In the almost 12 years since Congress created the SEC and CFTC reward programs, they have paid whistleblowers over $1 billion, including eye-popping awards of over $100 million. The IRS whistleblower program alone has awarded more than $1 billion to whistleblowers since 2007.
As the cryptocurrency industry adapts to this shifting regulatory landscape, it also needs to prepare itself for the expanded retaliation protections and rewards for whistleblowers accompanying this change. Lashing out at whistleblowers will only result in expensive legal battles and heightened regulatory scrutiny.
Potential crypto whistleblowers should seek legal advice as soon as possible so that they can best position themselves for protection from retaliation, protect their legal rights, and potentially avail themselves of reward programs.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Alexis Ronickher is a partner at Katz, Marshall & Banks LLP, a whistleblower and civil rights law firm in Washington, D.C. She specializes in representing whistleblowers.
Nicolas O’Connor is an associate at Katz, Marshall & Banks LLP.