On April 7, the Deputy Attorney General (DAG) Todd Blanche issued a memorandum entitled “Ending Regulation By Prosecution,” detailing a significant shift in the US Department of Justice’s (DOJ) approach to digital assets.
This policy change aligns with Executive Order 14178. Under the Memorandum, DOJ “will no longer pursue litigation or enforcement actions that have the effect of superimposing regulatory frameworks on digital assets while President Trump’s actual regulators do this work outside the punitive criminal justice framework.” Instead, the Justice Department will focus on investigating and “prosecuting individuals who victimize digital asset investors, or those who use digital assets in furtherance of criminal offenses.”
Executive Order 14178
The Memorandum comes on the heels of Executive Order 14178, which announced:
The digital asset industry plays a crucial role in innovation and economic development in the United States, as well as our Nation’s international leadership. It is therefore the policy of my Administration to support the responsible growth and use of digital assets, blockchain technology, and related technologies across all sectors of the economy … .
According to Executive Order 14178, the Administration intends to protect and promote the use of the blockchain and digital assets while creating further regulatory clarity for emerging digital asset technologies. The Executive Order established a Working Group on Digital Asset Markets which included the DOJ, the US Department of Treasury and the US Securities and Exchange Commission. The Executive Order further directed that each agency submit to the chair of the Working Group recommendations as to the modification of or rescission of regulations, guidance documents, or orders satisfy the policies and goals of Executive Order 14178.
The DOJ will actively participate in President Trump’s Working Group on Digital Asset Markets. Senior leadership in the DOJ will designate attorneys within the Department to help prepare a report recommending regulatory and legislative proposals to advance the priorities of Executive Order 14178, as well as to implement any recommendations adopted by President Trump.
Key Takeaways
1. The DOJ has decided to shift its enforcement strategy when it comes to digital assets.
The DOJ has shifted its policy away from targeting virtual currency exchanges, missing and tumbling services and offline wallets for the actions of their end users. Rather, DOJ will focus on prosecuting individuals who fall into two categories: (1) individuals who have victimized digital asset investors through means such as embezzlement, misappropriation of customers’ funds on digital exchanges, digital asset investment scams, and hacking exchanges; and (2) individuals who use digital assets in furtherance of a criminal offense, such as fentanyl trafficking, terrorism, cartels, organized crime, human trafficking, and smuggling. The Memorandum advises that “Ongoing investigations that are inconsistent” with this guidance “should be closed.”
Going forward, the DOJ will not prosecute cases that exclusively involve regulatory violations pertaining to digital assets. Specifically, the DOJ has stated that, unless there is evidence that a defendant willfully violated a licensing or registration requirement, the Department will not prosecute:
- Unlicensed money transmitting under 18 U.S.C. 1960(b)(1A).
- Violations of the Bank Secrecy Act.
- Unregistered securities offering violations.
- Unregistered broker dealer violations.
- Other violations of the Commodity Exchange Act.
The Department also specifically stated that it will not prosecute violations of the Securities and Commodities laws if there is an alternative charge available, such as mail or wire fraud, or when the charge would require DOJ to prove that a digital asset is a security or commodity.
One of the reasons for implementing this change is the expectation that it will enhance the compensation of victims. In recent years, companies that have been prosecuted have entered bankruptcy. By prosecuting individuals, the DOJ hopes to increase the amounts available for victims through restitution and forfeiture.
2. Proposed Legislative and Regulatory Changes
The DOJ is considering implementing legislative and regulatory changes that will make it easier for victims to recover greater gains. The regulations currently in place generally only allow digital asset investor victims to recover the value of their assets at the time the fraud transpired; a valuation that was possibly much lower.
3. Reallocation of Resources
Consistent with the decision not to use criminal prosecutions as a regulatory mechanism for cryptocurrencies, the DOJ has reallocated resources from certain groups and limited the jurisdiction of others.
For example, the Memorandum disbanded the National Cryptocurrency Enforcement Team (NCET). The NCET was launched in February 2022 “to address the challenge posed by the criminal misuse of cryptocurrencies and digital assets” and to target platforms “that help criminals launder or hide their criminal proceeds.” Despite the immediate effect of the Memorandum, NCET’s page is still active on the DOJ’s website.
In addition, the Market Integrity and Major Frauds Unit will cease cryptocurrency enforcement. This unit was a “national leader in prosecuting fraud and market manipulation involving cryptocurrency” and since 2019 “has charged cryptocurrency fraud cases involving over $2 billion in intended financial losses to investors from around the world. This unit will continue to focus on securities and commodities fraud and other financial fraud and market manipulation. As with NCET, as of writing this article, the DOJ’s website continues to reflect that the group oversees cryptocurrency enforcement.
The Computer Crime and Intellectual Property Section (CCIPS) will continue to provide guidance.
Recent Cases Relying on the Memorandum
Since DAG Blanche’s memorandum, defendants being prosecuted on digital assets-related charges are arguing that the charges against them are precisely the type that DAG Blanche suggests should no longer be prosecuted.
- US v. Kwon: Do Hyeong Kwon, is alleged to have orchestrated a $40 billion scheme to defraud purchasers of cryptocurrencies issued by Terraform Labs PTE, Ltd.. Among other things, Kwon is alleged to have made false and misleading claims regarding the stability and efficacy of Terraform’s cryptocurrency stablecoin protocol, its use of blockchain technology, and its development of functioning and reliable financial technologies. The defense has stated that the Blanche memo could lead to pre-trial motions, questions of whether the cryptocurrencies involved in the case were securities or not could be relevant. Despite the DOJ memo’s directive, the prosecution stated that they have no charge of altering the charges against Terraform founder Do Kwon.
The case is US v. Kwon, case number 1:23-cr-00151.
- USA v. Karony et al: In the Eastern District of New York, Karony and SafeMoon co-founder Kyle Nagy were charged in 2023 with leading buyers to believe that parts of the purportedly decentralized assets were locked or otherwise inaccessible while they used the assets for their own interests. CEO Braden Karony has leveraged the DOJ Memorandum to seek dismissal of fraud charges, arguing that the prosecution should not proceed under the Securities Exchange Act or Commodity Exchange Act. Counsel for Karony urged the judge to consider the Memorandum as a supplemental authority for his motion to dismiss. The letter quoted directly from the Memorandum to highlight that DOJ will no longer act as a “digital assets regulator” and will not pursue litigation or enforcement that has the “effect of superimposing regulatory frameworks on digital assets.” The US Attorney’s Office responded that it had reviewed the Memorandum and intended to proceed to trial on all counts.
The case is USA v. Karony et al., case number 1:23-cr-00433.
- US v. Peraire-Bueno et al: The Peraire-Bueno brothers, charged with stealing $25 million in cryptocurrency, also cite the DOJ Memorandum in their defense. They argued that “The Department of Justice has publicly announced that it ‘is not a digital assets regulator,’ and will ‘no longer pursue litigation or enforcement actions that have the effect of superimposing regulatory frameworks on digital assets.’” The defense maintained that a count charging conspiracy to receive stolen property (i.e., cryptocurrency) conflicts with the the DOJ’s directive because the charge requires the government to identify whether cryptocurrency is a security or a commodity.
The case is US v. Peraire-Bueno et al., case number 1:24-cr-00293.
Implications
This policy shift underscores a new chapter in the regulation and enforcement of digital assets. Stakeholders should review their practices to align with this new enforcement landscape and prepare for increased collaboration with regulatory bodies. Companies should, however, be prepared for increased scrutiny on their practices that may harm investors or facilitate criminal activity.
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