Post Authored By: Kasim Carbide, Esq.
With the recent spike in cryptocurrency trading and Bitcoin reaching a new all time high, the cryptocurrency and compliance industries continue to hold their breath for a uniform regulatory framework. Cryptocurrency continues to differ from federal to state law, and the industry looks to the US Department of Justice (the “DOJ”) and Securities and Exchange Commission (the “SEC”) for meaningful guidance and regulation. While the US encourages cryptocurrencies to flourish, it is taking a slow approach to cryptocurrency regulation while other countries like China have flat out banned cryptocurrency trading within its borders due to the criminal activity and potential fraud risks.[i]
Most anticipate that heavy taxation and regulation are inevitable given recent regulatory actions, like the DOJ’s launch of the National Cryptocurrency Enforcement Team (“NCET”). [ii] The NCET is now tasked with investigating and prosecuting crimes involving cryptocurrency, and tracing lost assets due to cryptocurrency crime.[iii] NCET’s goal is to “deter, disrupt, investigate and prosecute criminal misuse of cryptocurrency,” and will likely lead to the prosecution of many crypto-related crimes and scams flooding the market today.[iv]
The DOJ’s Chairman, Gary Gensler, commented on the criminal activity and scams plaguing the cryptocurrency industry, comparing the cryptocurrency industry to the “Wild West.”[v] It appears that the DOJ is leaning toward the position that cryptocurrencies are regulated securities, and thus contemplating a framework laid forth by the SEC.
Giants like Coinbase found themselves in the SEC’s cross hairs. Coinbase recently dropped a new lending initiative after receiving pressure from US regulators viewing the new asset as an unregulated security, which could have led to legal action.[vi] With all the red tape and grey area surrounding the cryptocurrency industry, more and more exchanges and operators are seeking meaningful legal guidance. It has also led to an increase in hiring as exchangers and operators anticipate the forthcoming regulatory scheme.[vii]
While some cryptocurrencies are experiencing an incredible growth in their value, the darker side of cryptocurrency continues to concern the Office of Foreign Asset Control (“OFAC”). Many outside the industry are not familiar with the numerous ransomware attacks, money laundering, and scams that often drive cryptocurrency as a quasi-anonymous financial technology and payment method.[viii]
OFAC continues to calibrate its approach to cryptocurrency compliance regulation by not only requiring transparency when it comes to beneficial ownership of US companies, but by providing a compliance guide and guidance on sanctions in response to the increase in ransomware attacks. Now would be the best time for cryptocurrency exchanges and financial technology companies involved in the industry to tighten their Know Your Customer and Anti-Money Laundering policies and procedures to brace for the inevitable enforcement actions that loom ahead. As the shadow of the DOJ and SEC loom over the cryptocurrency industry, it would behoove most in the industry to beef up their compliance policies and stay abreast of new updates as everyone braces for a new regulatory scheme.
[i] Alun John, Samuel Shen and Tom Wilson, China’s top regulators ban crypto trading and minding, sending bitcoin tumbling, Reuters (Sep. 24, 2021), https://www.reuters.com/world/china/china-central-bank-vows-crackdown-cryptocurrency-trading-2021-09-24/.
[ii] Department of Justice, Deputy Attorney General Lisa O. Monaco Announces National Cryptocurrency Enforcement Team (Oct. 6, 2021), https://www.justice.gov/opa/pr/deputy-attorney-general-lisa-o-monaco-announces-national-cryptocurrency-enforcement-team.
[v] Pippa Stevens and Jordan Smith, SEC chair Gary Gensler wants to crack down on the ‘wild west’ of crypto: CNBC After Hours, CNBC (Sep. 14, 2021), https://www.cnbc.com/2021/09/14/sec-chair-gary-gensler-wants-to-crack-down-on-the-wild-west-of-crypto.html.
[vi] Paul Grewal, The SEC has told us it wants to sue us over Lend. We don’t know why, The Coinbase Blog (Sep. 7, 2021), https://blog.coinbase.com/the-sec-has-told-us-it-wants-to-sue-us-over-lend-we-have-no-idea-why-a3a1b6507009.
[vii] Mengqi Sun, Crypto Firms Beef Up Compliance Hiring as Regulatory Scrutiny Mounts, The Wall Street Journal (Sep. 30, 2021), https://www.wsj.com/articles/crypto-firms-beef-up-compliance-hiring-as-regulatory-scrutiny-mounts-11632994202?page=1.
[viii] Shannon Williams, Crypto romance scam targeting iPhone users raking in millions, Security Brief New Zealand (Oct. 18, 2021), https://securitybrief.co.nz/story/crypto-romance-scam-targeting-iphone-users-raking-in-millions.
About the Author:
Kasim Carbide concentrates his practice in Corporate Law, Bank Secrecy Act/Anti-Money Laundering Compliance, and counseling FinTech startups. When he is not reading or billing, Kasim enjoys cooking, watching the Office, and playing Catan with family and friends.