Asset Seizures and Arrests Mark Recent Federal Virtual Currency Enforcement Actions Federal authorities have initiated several recent enforcement actions that are indicative of continuing regulatory changes in the virtual currency industry. First, on May 14, 2013, the Department of Homeland Security initiated a seizure of the Dwolla account belonging to a leading Japanese-based Bitcoin exchange company, Mt. Gox, taking the position that Mt. Gox's U.S. subsidiary, Mutum Sigillum LLC, operated as an unlicensed money transmitter in violation of 18 U.S.C. § 1960. Second, a joint investigation conducted by the Department of Justice, the Secret Service, the Internal Revenue Service and Homeland Security ended with an indictment charging a Costa Rican company called Liberty Reservewith laundering more than $6 billion in the last seven years.

The states’ approaches to this issue are important because they have implications beyond merely the burdens imposed by state laws for obtaining a money transmitter license. It is a federal crime under 18 U.S.C. § 1960 to operate as an unlicensed money transmitter business, which is defined in part as a business “operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable.” Thus, a state law violation can become a federal violation.

of his guilty plea, the CEO admitted that he knew the Company was subject to U.S. registration and regulatory requirements due to the substantial number of U.S. users on the platform.In particular, the DOJ alleged that the Company failed to implement an effective know your customer (“KYC”) protocol and did not systematically monitor transactions. The DOJ noted that, even with the Company’s high-trading volume, it never filed a single suspicious activity report with FinCEN. After supplying an email address, users allegedly had unfettered ability to open accounts and trade without providing additional KYC identifying information. The Company allegedly did not begin requiring KYC information from new users until August 2021, and it was not until sometime after May 2022 that existing users were required to provide identifying information to trade on the platform.Accordingly, the DOJ charged the Company with violations related to (i) conspiracy to conduct an unlicensed MTB (in violation of 18 U.S.C. §§ 1960(a), 1960(b)(1)(B)) and failure to maintain an effective anti-money laundering program (in violation of 31 U.S.C. §§ 5318(h), 5322) in violation of 18 U.S.C. § 371; (ii) failure to register itself as a MTB in violation of 18 U.S.C. §§ 1960(a), 1960(b)(1)(B); and (iii) violation of the International Emergency Economic Powers Act (“IEEPA”) in violation of 50 U.S.C. § 1705 and 31 C.F.R. § 560 et seq. The CEO admitted to violating the BSA by willfully failing to maintain an effective AML program.To resolve the DOJ’s investigation, the Company pled guilty and agreed to pay $1.8 billion as a criminal fine and forfeit $2.5 billion as disgorgement, resulting in a substantial penalty of $4.3 billion. In addition to the criminal fine, the Company must retain an independent compliance monitor for a three-year period and implement the monitor’s recommendations within a specified time. The DOJ did not provide the Company with any benefit for voluntarily disclosing its misconduct, noting that the Compa

Anatoly Legkodymov, Russian founder of Hong Kong-registered cryptocurrency exchange Bitzlato Limited ("Bitzlato"), was arrested on January 17 based on an Amended Complaint filed by the Department of Justice ("DOJ") charging him with conducting an unlicensed money transmitting business that ignored anti-money laundering laws and facilitated illicit fund transmissions. The Amended Complaint against Legkodymov alleges that a substantial part of Bizlato's business has been conducted in the United States, such as knowingly servicing U.S. customers, conducting transactions with U.S.-based exchanges, using a U.S. online infrastructure, and, for some period, being managed by Legkodymov while he was in the U.S. According to the Amended Complaint, these alleged activities and further U.S. connections brought Bitzlato under the scope of U.S. state and federal money transmission laws, such as 18 U.S.C. § 1960, which criminalizes the operation of an unlicensed money transmitting business. In addition, Bitzlato was designated as a so-called "primary money laundering concern" in connection with Russian illicit finance, the first time such action was taken pursuant to section 9714(a) of the Combating Russian Money Laundering Act. We discuss below the actions that led to the charges and Bitzlato's designation and the implications for both Bitzlato and the wider cryptoasset industry.U.S. Registration and Licensing RequirementsBitzlato is a cryptocurrency exchange that was founded by Legkodymov in 2016. Bitzlato allows customers to purchase cryptocurrencies with cash, exchange cryptocurrencies for other cryptocurrencies, and send cryptocurrency to other users' wallets. According to the Amended Complaint, since May of 2018, Bitzlato has processed approximately $4.58 billion worth of cryptocurrency transactions, a large portion of which allegedly constitutes the proceeds of crime or funds intended

SeeU.S. v. Harmon, Case 1:19-cr-00395-BAH (D.D.C. Jul. 24, 2020).The Defendant moved to dismiss the second and third counts on the grounds that bitcoin is not “money” under the MTA and, therefore: (1) he was not engaging in the business of money transmission without a license; and (2) in turn, he did not violate 18 U.S.C. § 1960(b)(1)(B) by operating an “unlicensed money transmitting business.”The Court’s Ruling and Its ImplicationsAlmost all U.S. states regulate money transmitters under state-specific licensing regimes, and statutory definitions of money transmission are quite broad and can cover any entity that receives money for transmission.

This registration delay was the basis of the charges relating to the defendants’ virtual currency business. The defendants were charged in an indictment with conspiring to operate an unlicensed money service business (“MSB”), in violation of 18 U.S.C. § 371 and 18 U.S.C. § 1960, as well as 13 other offenses associated with the operation of their bitcoin business. Further, the last count in the indictment charged the son (but not the father) with participating in a separate conspiracy to distribute the drug Xanax through a “darknet” website.

The Report posits that there are three principal categories of illicit uses of digital assets: 1) cryptocurrency as a means of payment for or manner of facilitating criminal activity; 2) the use of digital assets as a means of concealing illicit financial activity; and 3) crimes involving or undermining the digital asset ecosystem.The Report’s most interesting aspect is its recommended regulatory and legislative steps, which are as potentially significant as they are numerous:Expanding the laws prohibiting employees of “financial institutions” from tipping off suspects whose records are sought via grand jury subpoena to apply to virtual asset service providers acting as money services businesses (“MSBs”) under the BSA, and expanding the anti-tip off prohibition to include all criminal offenses under Title 18 (the general federal criminal code), Title 21 (the drug laws), and the BSA.Amending 18 U.S.C. § 1960, which criminalizes the operation of unlicensed money transmitting businesses, in order to increase its statutory maximum penalty from five years to ten years of imprisonment, and doubling its maximum criminal fine from $500,000 to $1 million for certain offenses.Issuing regulations or other changes under Section 1960 to provide that peer-to-peer platforms that purportedly do not take custody or assume control over the digital asset being exchanged are MSBs covered by Section 1960(b)(1)(B), which requires MSBs to register with FinCEN.Extending the general federal criminal statute of limitations of five years to ten years for offenses involving the transfer of digital assets, “to account for the complexities of digital assets investigations.”

In United States v. Harmon, a case also being prosecuted in the District of Columbia, the defendant has similarly been charged for his alleged role in operating Helix, a bitcoin mixer that sent more than $300 million in bitcoin to designated recipients.Both Harmon and Sterlingov have been charged with, among other offenses, (i) violating 18 U.S.C. § 1960(b)(1)(A), for operating a money transmitting business without an appropriate money transmitting license in the District of Columbia, (ii) 18 U.S.C. §1960(b)(1)(B) for failing to comply with the money transmitting business registration requirements of the Bank Secrecy Act (“BSA”), and (iii) by engaging, without a license, in the business of money transmission in violation of the District of Columbia’s Money Transmitters Act (“MTA”).Harmon IRecent decisions in the Harmon case regarding the applicability of those statutes to crypto-mixing operations strengthens significantly the government’s case against Sterlingov.

This is the first use of Section 311 authorities by Treasury against a virtual currency provider.The application of the FinCEN guidance on virtual currency was felt last month when U.S. Immigration and Customs Enforcement (“ICE”) seized funds held in an account by a Mutum Sigillum LLC for allegedly violating 18 U.S.C. 1960. Mutum Sigillum is a U.S. subsidiary of Mt. Gox, Bitcoin’s largest currency exchange, where Bitcoin users open and fund accounts with fiat currency.

Broadening Statute that Criminalizes Operation of Unlicensed Money Transmitter. Another proposal recommends amending 18 U.S.C. §1960, the statute which criminalizes the operation of an unlicensed money transmitting business among others, to include platforms providing services that enable users to transfer digital assets in a manner analogous to traditional money-transmitting businesses (including peer-to-peer platforms that profit by connecting buyers and sellers of cryptocurrencies). DOJ also recommends increasing the statutory maximum sentence from five years to ten years for violating 18 U.S.C. § 1960 and enhancing penalties such that individual criminal fines would double and corporate criminal fines would triple for violations involving a money transmitter’s business of more than $1 million in a 12 month period.