Breaking Down the DOJ’s Crypto Enforcement Memo: An In-Depth Analysis
Earlier this month, the Department of Justice disbanded its National Cryptocurrency Enforcement Team and stated they would no longer pursue what Deputy Attorney General Todd Blanche described as “regulation by prosecution.”
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The message
A 4-page memo signed by Deputy Attorney General Todd Blanche on April 7 announced that the U.S. Department of Justice “will no longer undertake legal action or enforcement measures that impose regulatory frameworks on digital assets.” Instead, the memo indicated that regulatory agencies would be responsible for developing their frameworks to oversee the sector. In essence, the memo conveyed that the DOJ would cease “regulation by prosecution.”
Why it is important
The DOJ’s memo has raised concerns that criminal activities within the crypto sector may not be prosecuted, or if they are, not as vigorously as in previous years. This is evident from the disbanding of the National Cryptocurrency Enforcement Team (NCET) and the realignment of its priorities.
Analysis
While the memo serves as internal guidance, it may not be a legally binding document. Several attorneys have interpreted the memo to mean that the DOJ will still pursue cases involving fraud or other criminal activities related to crypto but will try to avoid cases where determining whether a digital asset is a security or commodity falls under the DOJ’s jurisdiction.
Josh Naftalis, a partner at Pallas Partners LLP and former prosecutor at the U.S. Attorney’s office for the Southern District of New York, emphasized that “fraud is still fraud,” indicating that the memo does not suggest the DOJ will overlook fraud in the crypto space.
Despite this, the memo has raised concerns among prominent Democrats, including Senators Elizabeth Warren, Mazie Hirono, Richard Durbin, Sheldon Whitehouse, Christopher Coons, and Richard Blumenthal. These senators wrote a letter to Blanche expressing their apprehensions that the DOJ’s actions may enable criminal conduct, including money laundering, drug trafficking, scams, and child exploitation.
New York Attorney General Letitia James also penned an open letter to Senate leaders, urging them to pass legislation to address cryptocurrency risks, although she did not specifically reference Blanche’s memo but outlined potential ways to enhance oversight of the sector through legislation.
Katherine Reilly, a partner at Pryor Cashman and former prosecutor at the U.S. Attorney’s Office for the Southern District of New York, indicated that most major crypto cases prosecuted by the DOJ in recent years would likely not have been impacted by this guidance. She noted that the 2020 BitMEX case, where the DOJ and Commodity Futures Trading Commission pressed charges against the platform, is one instance that might not have been pursued under this new guidance.
The DOJ’s decision to pardon BitMEX, its founders, and a senior employee in late March, just two weeks before the memo was released, hints at the DOJ’s intention to scale back its regulatory involvement in the crypto industry. Naftalis noted that the DOJ will continue to pursue charges related to drug trafficking, terrorism, or other illicit financial activities despite the guidance provided in the memo.
One specific section of the memo instructs prosecutors not to pursue violations of the Bank Secrecy Act, unregistered securities offerings, unregistered broker-dealer violations, or other Commodity Exchange Act registration breaches unless there is evidence that the defendant knowingly violated the licensing or registration requirement in question.
Carla Reyes, an Associate Professor of Law at SMU Dedman School of Law, suggested that this section may be aimed at addressing cases where developers unknowingly engage in unlicensed money transmitting activities and subsequently face charges. She highlighted the importance of intent in criminal statutes, indicating that the severity of charges is typically tied to the level of intentionality in committing a crime.
The memo underscores the DOJ’s shift away from interpreting how securities or commodities laws apply to digital assets. Prosecutors are advised not to bring charges under specific acts unless they have to litigate the nature of a digital asset as a security or commodity, as long as alternative criminal charges like mail or wire fraud are available.
By adopting this approach, the DOJ aims to avoid defining industry regulations through enforcement actions, a practice frequently criticized by the crypto industry. The memo signals a move towards focusing on prosecuting cases where investors are victimized rather than establishing broad regulatory boundaries for the industry.
Steve Segal, a shareholder at Buchalter, pointed out that the memo’s new direction implies that crypto exchange executives may not be held liable for their customers’ illicit activities if they can demonstrate that their platforms are operating legitimately. This stands in contrast to cases like FTX, where executives faced charges related to fraud.
Reilly cautioned against assuming that the memo means a reduction in crypto-related cases or that the DOJ is stepping back from regulating the industry entirely. She emphasized that while future cases may be framed differently, it is premature to conclude that the DOJ will significantly lessen its involvement in the crypto sector.
While the memo provides internal guidance on prosecutorial discretion, it does not carry the weight of law. Reyes emphasized that it would inform internal decision-making on which cases to prioritize and the strategies employed in those prosecutions.
Given the need for further clarification on how this memo aligns with Trump’s executive order concerning the strategic bitcoin reserve, Segal highlighted that details on victim compensation and the handling of seized funds in various scenarios, such as FTX, would need to be clarified further.
Reilly stressed that the memo leaves room for prosecutors to pursue cases involving regulatory violations, despite the intent to limit the DOJ’s regulatory role in the crypto industry. She cautioned that the industry must await further developments to understand the full implications of the memo on future cases.
Monday
The Securities and Exchange Commission and Binance were set to file a joint status… (continue reading)
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