DOJ Clarifies Crypto Market Enforcement With Regulation Shift

The US Department of Justice brought much-needed clarity to enforcement boundaries, signaled a de-escalation of prosecution, and opened the door to a more predictable compliance environment by overhauling its approach to digital assets enforcement.

In a paradigm-shifting announcement, the DOJ distanced itself from its past practice of regulation-by-prosecution, declaring that it isn’t a “digital assets regulator.”

Legal advisers in the digital assets industry should applaud this sea change while cautioning clients to keep their guard up, watch who they are doing business with, and follow how regulations are changing.

Strategic Pivot

The DOJ said it will prioritize cases that cause investor harm (embezzlement, rug pulls, investment scams) and national security threats (financing terrorism, cartel activities, drug trafficking). This new priority calls on legal advisers to alter the way they counsel clients.

First, if a client is facing an ongoing investigation, help find “inconsistencies” to close the action. DOJ said ongoing investigations that are “inconsistent” with its new, discrete priorities should be closed. Advisers should take the initiative to get cases closed if prosecutors don’t immediately do so.

Second, if a client isn’t facing an ongoing investigation, help identify areas where financial harm may arise to the client’s investors and consumers with the goal of encouraging steps to prevent such harm. Legal advisers who know enforcement actions as well as a client’s business and internal structure are well positioned to determine the types of financial harm a client’s business may cause.

Clients can then allocate resources to improve their business structure and security measures to address vulnerabilities and prevent concrete harm to investors and customers.

Third, advise clients to strengthen know-your-customer procedures to monitor illicit activities. While the DOJ ended regulation-by-prosecution with the memo, it will continue to prosecute cases to address national security threats. So it’s essential to build and enhance KYC procedures and conduct customer due diligence on an ongoing basis.

Taking proactive measures in this regard will help your client build trust with prosecutors and regulators.

Lastly, keep a close eye on the developing regulatory landscape to help clients avoid a willful violation of regulations. The DOJ’s policy shift doesn’t mean the end of regulation because the Securities and Exchange Commission and the Commodity Futures Trading Commission will continue their roles as regulators.

Also, the memo leaves room for prosecutors to charge regulatory violations when the defendant “violated such a requirement willfully.”

The good news is that the industry is seeing more regulatory clarity. The SEC clarified its view that certain stablecoins and crypto mining activities don’t involve the offer and sale of securities. As the regulatory landscape changes, legal advisers should closely monitor developments to help clients proceed with more confidence.

Proactive Compliance

Even with DOJ’s policy shift in mind, compliance remains critical. Proactive compliance will help monitor investor harm and national security threats the client’s business may cause, further reducing enforcement exposure.

Also, records from proactive compliance will offer proof of good-faith efforts and strengthen the client’s position in any potential investigation or enforcement action.

As such, legal counsels should advise their clients to continue building and maintaining an effective compliance system, including:

Enhanced anti-money laundering frameworks. Establish and update AML frameworks tailored to the firm’s products, services, and customer base. Screening against sanctions lists should be frequent and automated.

Improved fraud detection and prevention systems. Implement and strengthen security safeguards to detect scams, rug pulls, and account takeovers. Firms should be proactive in monitoring for phishing and identity fraud—common tools in crypto-related crimes.

Clear escalation and reporting mechanisms. Designate skilled professionals to the compliance team and ensure they are empowered to report suspicious activities to the Financial Crimes Enforcement Network and other relevant authorities. Internal training should reinforce a culture of compliance at all levels.

Proactive compliance will help build trust with prosecutors, regulators, investors, and customers in a way that helps clients’ business in the long run. Help your client re-assess their risks considering the DOJ’s memo and advise them with risk-based compliance programs that effectively accomplish their goals.

The DOJ’s policy shift creates a new momentum for the digital assets industry. It will encourage more innovation and developments as the industry leaders get some breathing room with enforcement exposure.

In this changing enforcement and regulatory landscape, the role of legal advisers is more important than ever. And legal advisers who closely monitor developments can guide clients to grow their business while effectively complying with laws and regulations.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jeonghoon Ha is the founder of Ha Law PLLC, a law firm that specializes in blockchain and finance law.

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