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How is Crypto Fraud Investigated and Prosecuted?

On Behalf of | Jun 13, 2022 | Bitcoin Fraud, Crypto Fraud, Cryptocurrency Fraud |

Crypto Fraud

As cryptocurrencies continue to grow in market cap and influence, cryptocurrency (“crypto”) fraud has become more common.  Along with the increase in crypto fraud, federal prosecutions are on the rise. There are different ways crypto fraud can be prosecuted by the Department of Justice, depending on the agency involved in the investigation and the nature of the fraudulent scheme.

If you’re being investigated or charged with crypto fraud, it is important to hire an attorney who understands this newly emerging field to properly defend your case.

 What do I need to know about cryptocurrencies?

A “virtual currency,” also known as a “cryptocurrency,” is a currency circulated over the Internet as a form of value.  There are different types of cryptocurrency; the most commonly traded, including bitcoin, is digital money that is not backed by any government. It uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of currency is carried out collectively by the network.

Bitcoin is one form of cryptocurrency, which was created in 2009 and is the world’s largest cryptocurrency by market-capitalization. The term “bitcoin” describes both the network and the currency for the network.  Bitcoin is an open source; its design is public, nobody owns or controls bitcoin, and everyone can take part.

A “cryptocurrency wallet,” also known as a “digital wallet,” is an application that allows cryptocurrency users to store and retrieve their digital assets. Digital wallets could hold multiple cryptocurrencies. Each digital wallet has a unique cryptographic address, which is used to facilitate transactions.

Cryptocurrencies maintain ledgers, which tracks the amount of each cryptocurrency held by any given user. Within that network, users can conduct cryptocurrency transactions amongst themselves in a secure, traceable manner. A “blockchain” is a shared public ledger that records all transactions in the network in unchangeable, digitally-recorded data packages called blocks. Each block contains a batch of records of transactions, including a timestamp and reference to the previous block, linking the blocks together in a chain. The blockchain includes encrypted transactions to keep identity private.  It is a decentralized ledger, meaning that it is public and is not controlled by an entity such as a bank.  Once a transaction is recorded on the public ledger it can never be changed or removed.

A virtual currency exchange (“VCE”), also known as a “cryptocurrency exchange,” is a business that allows customers to buy, sell, or trade virtual currency.  Virtual currency exchanges can be brick-and-mortar businesses (exchanging traditional payment methods and virtual currencies) or online businesses (exchanging electronically transferred money and virtual currencies). VCEs doing business in the United States are regulated by the U.S. Department of Treasury and are required to establish anti-money laundering programs.  If a VCE trades bitcoin and other cryptocurrencies, it may be subject to securities regulation but can avoid regulation by only buying, not selling or trading.

Non-fungible tokens (“NFTs”) are blockchain-based digital units used to transfer or validate ownership of unique items, such as artwork.  An NFT creates a permanent registration of ownership to a piece of work, art, music, paper, or other similar item, and are used, in part, to fight against counterfeits and fakes.

How are cases involving crypto fraud investigated and prosecuted?

Securities Fraud: The Securities of Exchange Commission (SEC) defines cryptocurrency as a “virtual currency” and not a security.  Thus, federal securities laws only apply to a cryptocurrency if: 1) there is an investment of money; 2) there is an expectation of profits from the investment; 3) the investment of money is in a common enterprise; and, 4) any profit comes from the efforts of a promoter or third party.

Wire Fraud: The Commodity Futures Trading Commission (CFTC) focuses on enforcement actions regarding fraudulent schemes, unregulated commodities exchanges, and price manipulation.  They have stated that digital assets such as bitcoin are included in the legal definition of “commodity” – thereby giving the CFTC jurisdiction over crypto fraud.  Therefore, the majority of “crypto fraud” cases, including Ponzi schemes, begin with a CFTC investigation.

Tax Fraud: The IRS has stated that bitcoin is a virtual currency taxed as property.  When an individual sells cryptocurrencies, it becomes a taxable event that the IRS tracks through information requests to all major VCEs where the cryptocurrency is bought, sold, and traded.

Money Laundering: The Financial Crimes Enforcement Center (FinCEN), a division of the U.S. Treasury Department, defines bitcoin as a convertible virtual currency that requires businesses that transfer bitcoin to register as a Money Service Business (MSB) under federal law.  By registering as a MSB, its users are subjected to “Know Your Customer” and “Anti-Money Laundering” requirements, and allows financial institutions that transfer cryptocurrencies to freeze funds or accounts on suspicion that the accounts are being used for illegal activity.  FinCEN can then collaborate with the Department of Justice to prosecute cases for money laundering.