Buyers, beware: U.S. Treasury announces largest-ever enforcement action against crypto
Summary
Amid speculation over which federal agency will ultimately take the lead in regulation of the virtual currency industry, the U.S. Department of the Treasury announced the largest-ever enforcement action of its kind against crypto exchange platform Bittrex, Inc. (“Bittrex”) on 11 October. As part of a settlement agreement, Bittrex will pay approximately $24 million and $29 million, respectively, to the Office of Foreign Assets Control (“OFAC”) and the Financial Crimes Enforcement Network (“FinCEN”)—though FinCEN will credit Bittrex for its payment to OFAC.
OFAC and FinCEN found that Bittrex had acted in violation of multiple sanctions programs for a total of 116,421 violations between 2014 and 2017, in addition to violating anti-money laundering (“AML”) program and suspicious activity reporting requirements of the Bank Secrecy Act from February 2014 through December 2018. Bittrex enhanced its sanctions compliance program after OFAC issued a subpoena to investigate potential violations in October 2017, notably including IP and address screening to detect customers and transactions related to sanctioned jurisdictions.
The actions come as the Biden Administration seeks to streamline digital asset policy and regulation across the U.S. federal government. Although the currently envisioned whole-of-government approach has yet to materialize, this first-ever joint enforcement action by OFAC and FinCEN in this space demonstrates the significance of increased coordination among agencies with different jurisdictional mandates—and puts the industry on notice of what is to come. For digital asset trading platforms and other crypto market participants, the message is clear: failure to comply with AML, “know-your-customer,” and sanctions requirements will not be tolerated, and many market practices will need to change.
Trendlines
The size and scope of Treasury’s action is notable, but it should not come as a surprise to virtual currency-industry watchers. Last December, OFAC issued specific guidance focused on sanctions compliance in this industry, and another major virtual currency exchange is reportedly under investigation for sanctions violations. The actions against Bittrex also follow additional measures by Treasury targeting other players in the virtual currency industry, including the recent sanctions against Tornado Cash and Blender.io earlier this year.1 In addition, Treasury is currently seeking public comments on the illicit finance and national security risks posed by digital assets.
Other federal agencies are also taking steps to implement the policy objectives of the Biden Administration outlined in the 9 March Executive Order on Ensuring Responsible Development of Digital Assets. The Department of Justice, which already had a National Cryptocurrency Enforcement Team (“NCET”), recently announced the creation of a Digital Asset Coordinators network involving over 150 federal prosecutors across the United States to specifically focus on investigating digital asset crimes. NCET Director Eun Young Choi also recently stated that so-called mixers (such as the now-sanctioned Tornado Cash) that seek to blend different sources of cryptocurrency remain in focus for NCET. The Securities and Exchange Commission, in addition to signaling its digital asset rule-making and enforcement priorities, has also made clear that AML compliance will be a focus in industry examinations going forward.
As a practical matter, within the digital asset space—including among the many market participants and platforms that purport to be decentralized or anonymous—AML, “know-your-customer,” and sanctions checks are deemed “not market” despite guidance from legal practitioners and regulators alike. But actions like those targeting Bittrex and Tornado Cash, coupled with strong public statements concerning regulatory enforcement goals, make clear that such market practices will need to change.
New actions, same toolkit
To date federal government actions and initiatives aimed at regulating the virtual currency industry have focused on utilizing existing laws and rule-making frameworks. The Administration’s March Executive Order and subsequently issued Framework for Responsible Development of Digital Assets demonstrate an effort at unifying regulatory and enforcement priorities across the federal government, but fall short of calling for new legislation that would create a new regulator or designate one agency as responsible.
These recent enforcement actions indicate that the virtual currency industry will not receive any special carve-outs or exceptions when it comes to U.S. national security and illicit finance policy priorities. Although greater legislative guidance and regulatory clarity may eventually be on the way, for now the industry must contend with the patchwork of federal agencies’ overlapping jurisdictional mandates. Congressional action is likely needed for any fundamental changes in agency oversight.
