DOJ’s New Crypto Crime Guidance Muddies the Prosecutorial Waters

The Department of Justice’s new approach to criminal investigations and prosecutions involving digital assets is being hailed by some crypto industry advocacy groups and companies, but it might not provide the clarity some sought.

The new approach announced April 7 included disbanding the national cryptocurrency enforcement team, closing investigations that are inconsistent with the new policy, and reviewing ongoing cases for compliance with the new policy. According to the memo by Deputy Attorney General Todd Blanche, the DOJ is “not a digital assets regulator” and will instead let “actual regulators” do the work of constituting a regulatory framework on digital assets.

Two objectives in the new directive are seemingly at odds with each other.

The DOJ, according to the memo, no longer will target “exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or unwitting violations of regulations—except to the extent that the investigation is consistent with the priorities.”

To that end, the memo states that prosecutors shouldn’t charge regulatory violations in cases involving digital assets, such as unlicensed money transmitting, Bank Secrecy Act violations, unregistered securities offerings or broker-dealer activity, and Commodities Act registration violations unless the defendant knew of the regulatory requirement and violated it willfully.

Meanwhile, the memo also directs the DOJ to prioritize investigations and prosecutions of conduct that victimizes investors, including embezzlement and misappropriation of customers’ funds on digital-asset exchanges, common offering frauds, hacking, and “exploiting vulnerabilities in smart contracts.” It further directs prosecutors to prioritize cases where digital assets are used in unlawful conduct by cartels, international criminal organizations, and terrorism.

One reason for focusing on these cases, according to the memo, is to “restore stolen funds” to victims and build investor confidence in digital-asset markets. But the first directive to not charge firms for regulatory violations seemingly undermines these goals.

For example, Bank Secrecy Act reports have been an important source for law enforcement to detect and investigate money-laundering activity associated with the conduct the memo purports to prioritize. Considering the de-prioritization of regulatory violations, firms may assign lower priority to their anti-money laundering obligations, which may affect the ability of prosecutors (and regulators) to successfully investigate and prosecute the wrongful activity on which the DOJ plans to focus.

A careful reading of the memo indicates that firms should be cautious before cutting back on, abandoning, or failing to establish anti-money laundering compliance programs. The memo’s admonition that regulatory violations will be charged criminally only when a defendant willfully violates a regulatory requirement is nothing new.

Willfulness has always been a required element for such criminal charges. For example, a strict reading of the memo means a prosecutor following the memo’s guidance might bring the same charges against crypto exchange Binance Holdings Ltd. and its CEO, both of which entered guilty pleas in November 2023 under prior DOJ guidance.

The conduct there included willfully violating the Bank Secrecy Act by failing to implement and maintain an effective anti-money laundering program and otherwise willfully disregarding or seeking to circumvent known regulatory requirements, allowing Binance’s customers to conduct transactions with users in sanctioned countries.

The memo contains another carveout from the seeming grace it provides from regulatory-based prosecutions. Even while stating that prosecutors shouldn’t charge firms for the acts of their end users or for “unwitting” violations, it exempts from this directive various frauds victimizing investors and the use of digital assets to facilitate organized crime, terrorism, and cartels.

But, as in the Binance example above, most—if not all—criminal regulatory prosecutions in prior administrations focused on conduct that allowed organized crime, terrorist organizations, or cartels to exploit certain firms’ failures to follow regulatory requirements, thus facilitating their criminal activity.

Notwithstanding the memo’s implication that prior prosecutions were “ill-conceived and poorly executed,” it’s difficult to identify which of those prosecutions would be precluded under the new policy.

Actions by the Trump administration appear to contradict the priorities set forth in the memo, such as the pardon of Ross Ulbricht, the founder of the darknet marketplace Silk Road, who was convicted by a jury of engaging in the sale of narcotics and malicious hacking software and laundering hundreds of millions of dollars and the pardon of three co-founders of BitMEX, who pleaded guilty to facilitating the laundering of proceeds from a cryptocurrency hack and allowing users in sanctioned countries to transact on the platform.

Taken together, perhaps aside from an implied leniency, there may be little comfort from the memo for firms and their counsel seeking more concrete guidance about what exactly has changed and what conduct may lead to criminal investigations and prosecutions.

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

Sharon L. McCarthy is a partner at Kostelanetz with extensive experience in white-collar criminal matters, civil and criminal tax controversies, and complex commercial litigation.

Victor Suthammanont is a partner at Kostelanetz who served as enforcement counsel to former US Securities and Exchange Commission chair Gary Gensler.

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