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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.

If you’re being investigated or charged with crypto fraud, it is important to hire an attorney who understands this newly emerging field. Ann Fitz has represented clients charged in federal court with various forms of crypto fraud and has the knowledge and experience to properly defend your case.

What is bitcoin, blockchain, and NFTs?

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. “Cryptocurrency” is the umbrella term to include bitcoin and any other digital asset, like DogeCoin and Ethereum.

There are over 10,000 listed cryptocurrencies. Bitcoin has the largest share in terms of market capitalization, followed by Ethereum and Tether.  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.

“Blockchain” is a shared public ledger or record keeping of all transactions on the bitcoin network. 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”) is a business that allows customers to buy, sell, or trade virtual currency. 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 cryptocurrencies prosecuted?

Securities Fraud: The Securities of Exchange Commission (SEC) defines bitcoin 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 most crypto frauds. Therefore, most crypto fraud cases begin with a CFTC investigation.

Tax Fraud: The IRS has stated that bitcoin is a virtual currency taxed as property. When an individual sells bitcoin, it becomes a taxable event that the IRS tracks through information requests to all major VCEs where bitcoin 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) and financial institutions under federal law. By registering as a MSB, its users are subjected to “Know Your Customer” and “Anti-Money Laundering” requirements, allowing the financial institutions 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.