The U.S. Governments Plan For Cryptocurrency Enforcement

Introduction to Cryptocurrency Enforcement

Innovation can drive a society forward. But innovation does not occur in a vacuum.

Public policy can establish background conditions that help the innovative spirit thrive—or create an environment in which that spirit is inhibited, or suppressed.

Even in societies where transformative scientific and technological advancements are achievable, public policy again plays a critical mediating role. In the wrong hands, or without appropriate safeguards and oversight, these advancements can facilitate great human suffering. Just ask the political enemies of authoritarian regimes that deploy surveillance tools Orwell never could have imagined. Or, closer to home, listen to the child victims of unspeakable sexual exploitation whose images and live-streamed abuse are so easily transmitted across the internet.

Technological innovation and human flourishing are complementary concepts, but the former does not guarantee the latter. Good public policy—and the fair  and equitable cryptocurrency enforcement of such policy—can help bring the two into alignment. And even as too much regulation undoubtedly stifles innovation (and human flourishing, too), the absence of law’s protections can endanger progress across both dimensions.

It takes careful consideration, and a deep and ongoing immersion in the facts, to understand when, and how, law should intervene. Once law’s empire has  established its root in a particular domain, it requires equally careful consideration (and humility on the part of government officials) to ensure that regulation goes no further than is required—that government action, in other words, reflects cryptocurrency enforcement only of “those wise restraints that make us free.”

This Cryptocurrency Enforcement Framework

In 2018, Attorney General Jeff Sessions established a Cyber-Digital Task Force within the U.S. Department of Justice to evaluate the impact that recent advances in technology have had on law enforcement’s ability to keep our citizens safe. Acknowledging the many ways in which technological advances “have enriched our lives and have driven our economy,” the Attorney General also noted that “the malign use of . . . technology harms our government, victimizes consumers and businesses, and endangers public safety and national security.”

The Task Force issued a comprehensive report later that year. That report identified particular threats currently confronting our society, ranging from transnational criminal enterprises’ sophisticated cyber-enabled schemes, to malign foreign influence operations, to efforts to compromise our nation’s critical infrastructure. The report also identified a number of emerging threats whose contours are still developing, and recommended further examination of their
potential impact. Specifically, the report recommended that “the Department should continue evaluating the emerging threats posed by rapidly developing cryptocurrencies that malicious cyber actors often use.” This Cryptocurrency Enforcement Framework represents the fruits of the Task Force’s efforts.

At the outset, it bears emphasizing that distributed ledger technology, upon which all cryptocurrencies build, raises breathtaking possibilities for human flourishing. These possibilities are rightly being explored around the globe, from within academia and industry, and from within governments—including our own.

It should be no surprise, for example, that researchers within the U.S. National Institute of Standards and Technology “have been investigating blockchain technologies at multiple levels: from use cases, applications and existing services, to protocols, security guarantees, and cryptographic mechanisms.” Or that the U.S. Department of Defense’s recently-issued Digital Modernization Strategy specifically identifies blockchain technology as having “promise to provide
increased effectiveness, efficiency, and security.” Or that the U.S. Food and Drug Administration recently released a detailed vision for how it plans to deploy blockchain for food safety-related purposes. Or that—in the cryptocurrency space specifically—“the Federal Reserve is active in conducting research and  experimentation related to distributed ledger technologies and the potential use cases for digital currencies,” including by partnering with the Massachusetts Institute of Technology to “build and test a hypothetical digital currency oriented to central bank uses.” Without doubt, cryptocurrency represents a transformative way to store and exchange value.

But as the following pages make clear [in the report below], despite its relatively brief existence, this technology already plays a role in many of the most
significant criminal and national security threats our nation faces. As the Task Force has found, illicit uses of cryptocurrency typically fall into three categories: (1) financial transactions associated with the commission of crimes; (2) money laundering and the shielding of legitimate activity from tax, reporting, or other legal requirements; or (3) crimes, such as theft, directly implicating the cryptocurrency marketplace itself. Part I of this Enforcement Framework examines in detail each of those categories.

Our society is not powerless in the face of these threats. As Part II demonstrates, the government has legal and regulatory tools available at its disposal to confront the threats posed by cryptocurrency’s illicit uses. Interagency partnership is critical for effectively leveraging those tools. The Department of Justice has built strong working relationships with its regulatory and enforcement partners in the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the U.S. Department of the Treasury (including FinCEN, OFAC, and the IRS), among others, to enforce federal law in both its civil and criminal aspects. We have actively participated in international regulatory and criminal enforcement efforts, as well.

Those efforts are paying off. The past year alone has witnessed the indictment and arrest of the alleged operator of the world’s largest online child sexual exploitation market, involving an enforcement action that was coordinated with the disruption of that darknet market, the rescue of over 20 child victims, and the seizure of hundreds of thousands of dollars worth of bitcoin; the largest-ever seizure of cryptocurrency in the terrorism context, stemming from the dismantling of terrorist financing campaigns running into the millions of dollars involving Hamas’s military wing, al-Qaeda, and ISIS; the first-ever imposition of economic sanctions for virtual-asset-related malicious cyber activity; and a novel (and successful) use of the federal securities laws to protect investors
in the cryptocurrency space, resulting in the disgorgement of over $1.2 billion in ill-gotten gains in a single case. We expect these enforcement trends to continue.

This report concludes in Part III with a discussion of the ongoing challenges the government faces in cryptocurrency enforcement—particularly with respect
to business models (employed by certain cryptocurrency exchanges, platforms, kiosks, and casinos), and to activity (like “mixing” and “tumbling,” “chain hopping,” and certain instances of jurisdictional arbitrage) that may facilitate criminal activity.

The Challenges We Face

Those challenges map neatly onto the broader set of challenges that many emerging technologies present to law enforcement.

Blockchain-related technologies are complex and are difficult to learn; for example, the methods for executing crimes like pump-and-dump schemes are changing, and require investigators to familiarize themselves with everything from how initial coin offerings (ICOs) are conducted to how technologically-savvy people communicate on specialized communications applications. Not only are these emerging technologies difficult to learn, but the relevant markets also rapidly evolve. The ICO boom from a few years ago has given way to the exponential growth of Decentralized Finance markets in recent months—with all the associated complexities and difficulties for enforcers seeking to stay ahead of the curve and keep investors safe.

The global nature of the blockchain ecosystem adds a further layer of complexity. Crime has been expanding beyond national borders for years, but blockchain takes this globalization to another level. Parties conduct transactions and transfers between continents in a matter of minutes, and the digital infrastructure
of the blockchain itself almost always transcends territorial boundaries. Adding to the difficulty, some of the largest crypto-asset exchanges operate outside of the United States, and many still require nothing more than an unverified email address before allowing an individual to begin trading.

Finally, decentralized platforms, peer-to-peer exchangers, and anonymity-enhanced cryptocurrencies that use non-public or private blockchains all can further obscure financial transactions from legitimate scrutiny. As this Cryptocurrency Enforcement Framework makes clear, the challenges are significant. But so, too, are the resources that the U.S. Department of Justice, as well as the U.S. government as a whole, are dedicating to the effort, in collaboration with our international
partners.

The Web 3.0

Technologists often talk about the Web 3.0, the next phase of the internet’s evolution. On this vision, humans will reclaim the internet, their data, and their anonymity from large outside forces, whether they be corporate firms or government entities.

Cryptocurrency—a medium of exchange defined, at its core, by a sense of private, individual control, and whose underlying blockchain technology already provides the backbone for applications outside the digital currency context—is central to this decentralized, anonymized, and still-being-defined notion of a future in which “a more semantically intelligent web” leverages data that “will be used by algorithms to improve user experience and make the web more
personalized and familiar,” and in which users will no longer have to “rely on network and cellular providers that surveil the information going through their systems.”

Ultimately, the Web 3.0 is a vision about the nature of data itself, foretelling a world in which information is diffuse and dynamic—present everywhere at once, and therefore beyond any outsider’s grasp.

Only time will tell how, and in what form, the Web 3.0 finally takes shape. To its proponents, this vision marries technological innovation with human flourishing. This Cryptocurrency Enforcement Framework suggests that, however liberating the emerging glimpses of the Web 3.0 might seem to be, that vision also can pose uniquely dangerous threats to public safety. Confronting and addressing those threats is what good public policy should do—and what the crypto ecosystem itself may have to do, if its vision of the future is ever fully to take hold. Meanwhile, federal authorities will continue vigorously enforcing the law as it exists, and pursuing justice on behalf of the American people.

Sujit Raman, Chair,
Attorney General’s Cyber-Digital Task Force 
United States Department of Justice
Washington, District of Columbia

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