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This is the ninth post in this year\u2019s series examining important trends in white collar law and investigations. Our <\/em>previous post<\/em><\/a> discussed trends in SEC enforcement of ESG priorities. Up next:<\/em> Looking at the Landscape of Congressional Investigations in 2022<\/em>.<\/em><\/p>\n In 2021, various federal entities took steps toward establishing and exerting their enforcement authority against businesses and individuals transacting in cryptocurrency (or \u201ccrypto\u201d), a digital asset that allows for decentralized transactions (i.e., no bank).\u00a0 As market participation continues to surge in this new asset class, big questions remain:\u00a0 What are the rules? Who is enforcing them?\u00a0 The combination of regulatory ambiguity, increased governmental scrutiny, and the multitude of different government actors that have staked out territory in crypto regulation is likely to yield a high level of cryptocurrency enforcement in 2022.<\/p>\n Key takeaways:<\/p>\n SEC and CFTC: the Lead Crypto Regulators<\/u><\/strong><\/p>\n The key question in crypto enforcements is whether a cryptocurrency product or technology is a security (regulated by the SEC), a commodity (regulated by the CFTC), a currency (regulated by the Treasury Department), or something else.<\/p>\n Independent federal agencies have played the most active role in crypto enforcement.\u00a0 The U.S. Securities and Exchange Commission (SEC) has for years brought enforcement actions<\/a> against entities making initial coin offerings or engaging in other cryptocurrency transactions based on theories of fraud or failure to register with the SEC.\u00a0 SEC Chair Gary Gensler, as we recently noted<\/a>, has repeatedly highlighted cryptocurrency as an enforcement priority based on his views that the crypto market is rife with fraud and lacking in investor protection.<\/p>\n In 2022, the SEC will continue to crack down on crypto entities that it considers to be dealing in securities, rather than using crypto technology for some other purpose, such as a medium of exchange.\u00a0 Chair Gensler has insisted<\/a> that \u201ceach token\u2019s legal status depends on its own facts and circumstances\u201d based on a test devised by the U.S. Supreme Court for determining what counts as an \u201cinvestment contract.\u201d\u00a0 See SEC v. Howey Co.<\/em>, 328 U.S. 293 (1946).\u00a0 The SEC\u2019s application of this 76-year-old test risks unpredictability and poses other challenges to cryptocurrency businesses looking for concrete guidance on how to achieve regulatory compliance.<\/p>\n Consider Coinbase, the cryptocurrency exchange that cancelled the launch of a crypto lending product in September after the SEC threatened the company with litigation.\u00a0 Or Ripple Labs, the payment technology company that the SEC sued<\/a> in 2020 for selling cryptocurrency in what allegedly constituted an unregistered securities offering.\u00a0 This lawsuit, considered a test case for the SEC\u2019s expansive classification of cryptocurrencies as securities, is expected to conclude in 2022.<\/p>\n The Commodity Futures Trading Commission (CFTC) has also been targeting cryptocurrency businesses since deciding in 2015 (here<\/a> and here<\/a>) that virtual currencies are commodities and therefore subject to CFTC jurisdiction.<\/p>\n The CFTC will continue targeting platforms offering cryptocurrency derivatives based on theories that those companies have engaged in unlawful commodity transactions or failed to register with the CFTC.\u00a0 In September, the CFTC announced a settlement order<\/a> with Kraken, one of the largest cryptocurrency exchanges in the United States, for offering retail commodity transactions in Bitcoin and other cryptocurrencies, and for its failure to register as a futures commission merchant (a broker, essentially).\u00a0 The following day, the CFTC announced that it had initiated administrative proceedings<\/a> against an additional 14 entities, most of which it claimed did not register as futures commission merchants.\u00a0 More settlement orders<\/a> followed in October, as the CFTC collected over $42 million from Tether, which offers a cryptocurrency backed by the U.S. dollar (a \u201cstablecoin\u201d) and Bitfinex, a cryptocurrency trading platform.<\/p>\n The CFTC wants more.\u00a0 Last month, CFTC Chairman Rostin Behnam, in testimony before the Senate Agriculture Committee, suggested that Congress should expand the agency\u2019s jurisdiction and increase its budget by $100 million to allow it to play a more key role in crypto enforcement.<\/p>\n Law Enforcement by Executive Departments<\/u><\/strong><\/p>\n Regardless of whether a crypto product is treated as a security or a commodity, it may be subject to enforcement by various executive agencies, in particular, the U.S. Department of Justice (DOJ).\u00a0 In October of 2021, the DOJ announced<\/a> the creation of the National Cryptocurrency Enforcement Team (NCET), a group including cybersecurity and money laundering prosecutors tasked with targeting \u201ccriminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors.\u201d\u00a0 The NCET\u2019s first Director, Eun Young Choi, has experience with cyber, fraud, and money laundering crimes, including those involving cryptocurrency.<\/p>\n Crypto-related enforcement is not new territory for the DOJ, which (as we recently noted in our tax post<\/a>) last month announced<\/a> a record-breaking seizure of over $3.6 billion of Bitcoin and the indictment of a married couple for their alleged role in laundering cryptocurrency stolen during the 2016 hack of the cryptocurrency exchange Bitfinex.\u00a0 The NCET, however, consolidates and organizes the DOJ\u2019s crypto expertise into one unit that will pursue its own cases while supporting cryptocurrency investigations and prosecutions across the entire Criminal Division, and at the state and local levels.\u00a0 We expect that in 2022 (and beyond) the DOJ will flex this new enforcement group, leading to an increase in investigative activity against potential targets and witnesses in alleged crimes involving cryptocurrency.\u00a0 And with the DOJ\u2019s recent announcement<\/a> that the Federal Bureau of Investigations is also creating a specialized crypto team (the Virtual Asset Exploitation Unit), the DOJ will be even more equipped to step up its crypto prosecutions.<\/p>\n The U.S. Department of the Treasury, though historically not very involved in cryptocurrency regulation, is now attempting to bring some order to the growing use of this digital asset in foreign and international transactions.\u00a0 Its Office of Foreign Asset Controls (OFAC) has been primarily concerned by the prospect of entities or individuals using cryptocurrency to circumvent sanctions.\u00a0 As we explained<\/a> in November, OFAC published guidance to assist the cryptocurrency community with OFAC compliance in the wake of cryptocurrency-related enforcement actions by the agency, which included adding a cryptocurrency exchange<\/a> to its list of Specially Designated Nationals and Blocked Persons.\u00a0 On March 1, 2022, the Treasury Department issued a report<\/a> in which it notes that cryptocurrency exchanges must follow the same Bank Secrecy Act rules as banks, which include registering with the Financial Crimes Enforcement Network (FinCEN) and having a chief compliance officer.<\/p>\n There is pressure on the Treasury Department to step up its enforcement.\u00a0 On March 2, 2022, several U.S. Senators sent a letter<\/a> to the Treasury Department expressing concern that OFAC\u2019s current crypto enforcement procedures do not adequately prevent bad actors from using cryptocurrency-tools to evade sanctions.\u00a0 The Senators emphasized the urgency of this issue, citing reports<\/a> of Russia\u2019s plans to soften the blow of U.S. sanctions by resorting to cryptocurrency transactions, which do not run through banks.\u00a0 The Senators concluded the letter by posing various questions to the Treasury Department to be answered no later than March 23.<\/p>\n Also within the Treasury Department, the Office of the Comptroller of the Currency (OCC) has recently focused on the increasingly popular stablecoins, the value of which is pegged to a national currency or a particular commodity, like gold.\u00a0 The Treasury Department seems to view this less volatile form of cryptocurrency with cautious optimism.\u00a0 As noted in a November report<\/a> from the President\u2019s Working Group on Financial Markets, \u201c[i]f well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options.\u201d\u00a0 Finally, last year FinCEN announced the addition of its first Chief Digital Currency Advisor<\/a>, as this bureau of the Treasury Department continues to focus on the prevention and detection of illicit financial transactions.<\/p>\n Some Lawmaking by Congress<\/u><\/strong><\/p>\n In addition to this frenzy of crypto activity from the Executive Branch, Congress recently enacted legislation that will apply reporting requirements to certain cryptocurrency transactions.\u00a0 Contained in the 1,039-page Infrastructure Investment and Jobs Act, signed into law by President Biden on November 15, 2021, are three pages of law that extend to digital asset transactions the existing reporting requirements (and tax collections) that apply to cash transactions over $10,000 and transactions involving a broker.\u00a0 These new reporting requirements, which will not take effect until 2024, may have the unintended consequence of deterring certain consumers and businesses from transacting in cryptocurrency.\u00a0 In the meantime, the U.S. Secretary of Treasury and the Internal Revenue Service have an opportunity to issue regulations to clarify the scope of these requirements.<\/p>\n Lingering Confusion<\/u><\/strong><\/p>\n Despite these developments, Congress and regulators continue to draw criticism from the industry and government officials for failing to provide clear guidance to those wishing to engage in lawful cryptocurrency transactions.\u00a0 Some say the current regime looks more like regulation by enforcement.\u00a0 One outspoken critic of cryptocurrency\u2019s regulatory ambiguity is Dawn Stump, a CFTC Commissioner who, through concurring statements (like this one<\/a>, this one<\/a>, and this one<\/a>) and interviews, has discouraged the CFTC and the SEC from bringing enforcement actions against cryptocurrency businesses without first providing them with a clear regulatory framework.<\/p>\n Even members of Congress have criticized the regulatory void in which agencies are bringing enforcement actions.\u00a0 In a hearing<\/a> before the Senate Banking Committee in September, Senator Pat Toomey (R-PA) expressed frustration to Chair Gensler regarding \u201cthe lack of helpful SEC public guidance\u201d to determine which cryptocurrencies are securities and thus subject to the SEC\u2019s jurisdiction.<\/p>\n\n