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How Far Can the DoJ Really Go in Prosecuting Foreign Actors?

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In early October, the U.S. Department of Justice revealed its Cryptocurrency Enforcement Framework, a report laying bare the government’s vision for emerging threats and enforcement strategies in the cryptocurrency space. The document is an important source of insight into how the laws governing digital finance will be soon implemented on the ground.

One of the fundamental principles that the government asserts in the document is its broad extraterritorial jurisdiction over foreign-based actors who use virtual assets in ways that harm U.S. residents or businesses. The guidance sets an extremely low bar for perpetrators of cross-border crime to clear before they face prosecution.

According to the framework, it can be enough for a crypto transaction to “touch financial, data storage, or other computer systems within the United States” to provoke enforcement action. Is the stringency of this approach unprecedented across other domains of financial crimes enforcement? What actual tools does the U.S. government have to counter criminals acting from overseas?

Business as usual

The idea that U.S. law enforcement is justified in prosecuting criminal actors beyond the nation’s borders if their activity has adversely affected individuals, companies, or infrastructure at home is nothing new, especially when it comes to cyber and financial crimes.

Arlo Devlin-Brown, a partner in the white-collar practice of law firm Covington & Burling, commented to Cointelegraph:

“The DOJ has consistently taken the position that U.S. criminal jurisdiction extends to activity with minimal ties to the U.S., and U.S. courts have in many cases embraced the DOJ’s expansive interpretation of its authority. Cryptocurrency businesses that operate outside the U.S. but have any ties to this country — bank accounts, customers, marketing activity — are at risk of enforcement action.”

Dan Newcomb, attorney at law firm Shearman & Sterling, said that there is nothing particularly extraordinary about the extraterritorial approach enshrined in the Cryptocurrency Enforcement Guidelines, as the DoJ has previously used a “wide variety of tools to hold foreign-based actors responsible for crimes punishable under U.S. law.”

The authors of the report note that the U.S. has used anti-money laundering measures against foreign actors dealing in fiat currencies for decades. Asserting similar jurisdiction over those who use digital currencies appears to be a defensible extension of the principle already at work.

Not new for crypto, either

The U.S. government has, on many occasions, gone after foreign persons and entities implicated in cryptocurrency-related crimes. Gail Fuller, a vice president at K2 Intelligence Financial Integrity Network, said that she considers the extensive extraterritorial jurisdiction asserted in the DoJ framework as “broadly consistent with the overall U.S. financial crimes compliance regime,” which is designed to protect the integrity of the U.S. financial system. Fuller commented:

“We’ve seen U.S. enforcement actions for sanctions violations and money laundering that have targeted foreign individuals or entities in cases in which their transactions touched the United States or its banks. In fact, we’ve already seen it in the cryptocurrency context, including with the 2017 indictment of foreign cryptocurrency exchange BTC-e and its Russian executive, Alexander Vinnik.”

In Fuller’s view, the BTC-e case is particularly interesting because on top of money laundering charges, the Department of Justice charged the exchange platform with failing to register as a money services provider in the United States, based on the volume of U.S.-connected transactions it facilitated.

James Farrell, deputy general counsel at trading solutions provider Apifiny, sees the enforcement guidelines as the reminder to the crypto industry about something that has been well-known to the traditional finance for over a decade: If an act of financial misconduct has a substantial effect in the U.S., the SEC and DoJ can and will go after those responsible. “Stating that a single U.S. server is enough just highlights how thin a reed the DOJ needs to assert jurisdiction,” Farrell added.

To Farrell, the novel – and striking – part of the report is invocation of “protective jurisdiction” – effectively worldwide criminal enforcement power – if the DOJ believes that the activity involving crypto may have national security implications. Farrell said:

“You see this concept enshrined in international treaties related to the taking of hostages, terrorist bombings and financing of terrorism. To hear that the same basis may be applied to the cryptocurrency industry was jarring and a marker of how seriously the DOJ is taking potential criminal misuse of this transformative and developing technology.”

Enforcement tools at DoJ’s service

Proclaiming jurisdiction over persons and entities that may be physically located thousands of miles away from U.S. shores is merely a symbolic move if there are no actual means for holding them accountable. U.S. law enforcement, however, commands quite an arsenal.

One heavy weapon is the degree of control that the United States’ financial authorities exercise over the traditional global monetary system. Shearman & Sterling’s Dan Newcomb observed to Cointelegraph:

“The key enforcement tool the U.S. has is the dominant role the U.S. dollar plays in international commerce and the fear conventional financial institutions have of being excluded from U.S. dollar transactions. Most holders of digital assets still need and want to convert those assets at some point into conventional currencies at financial institutions. Barring a digital player from access to conventional financial institutions is a powerful tool.”

Covington & Burling’s Devlin-Brown said that the Justice Department can rely on a number of powerful statutes that can be used to prosecute foreign-based cryptocurrency actors:

“For example, the U.S. money laundering statute can reach almost any dollar-denominated transaction that U.S. authorities can establish as linked to many types of criminal activity. Even a dollar-denominated payment from, say, Germany to Argentina is covered because the transaction would likely involve a U.S. bank as an intermediary.”

Michael Yaeger, a white-collar crime attorney at law firm Carlton Fields and formerly an assistant U.S. attorney for the Eastern District of New York, told Cointelegraph that the DoJ report does not reveal any new instruments for prosecuting foreign-based actors. However, Yaeger noted, the collection of past cases showcased in the document provides “useful examples of its powers, and perhaps signals which instruments will be used more in the future.”

One thing that caught Yaeger’s eye is the fact that the report seems to mention forfeiture efforts more than past DoJ reports on cyber crime:

“When forfeiture is combined with pre-judgment seizure of assets it is not only a powerful remedy, but an unusually fast one. The US has multiple cooperation agreements with other countries including data sharing agreements with foreign law enforcement and intelligence agencies, and has entered specific agreements related to forfeiture and the sharing of financial information.”

There is little doubt that the government is poised to leverage these and other international agreements in enacting its newly itemized enforcement strategy. Promoting cooperation with foreign governments and intergovernmental organizations like the FATF is listed among the crypto framework’s focal points.

The DoJ framework’s language on extraterritorial jurisdiction and cross-border enforcement may sound harsh to some. Yet, in fact the government is not articulating any principles dramatically different from those that are already being invoked in some high-profile crypto-related cases. Stating that these standards will be applied more systematically is only logical considering the expansion and maturation of the borderless realm of digital finance.



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Regulation

Expert explains why Britain needs a digital pound

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The United Kingdom Chancellor of the Exchequer announced the launch of a CBDC task force this week, bringing together the Bank of England and Her Majesty’s Treasury to coordinate the exploration of a potential central bank digital currency.

Depending on the feedback received from various areas of industry, academia, and civil society, the task force will advise the Bank of England on the future rollout (or not) of what would be a digital version of the pound.

Antony Welfare, executive director of enterprise at NEM, is a member of the Whitechapel Think Tank and the Finance Payments Working Group, both of which provided preliminary research to the Bank of England in the formation of its CBDC taskforce. Welfare contributed to a report titled The Impact of Digital Currency on the Future of Payments, which was commissioned by the Bank of England, and published in December 2020.

The task force will consider the implementation of a CBDC from every available angle, but speaking to Cointelegraph, Welfare said one of the biggest boons offered by a digital pound could be financial inclusion, citing the ubiquity of mobile devices and their commonplace use among the population:

“A CBDC can help significantly in building financial inclusion. The overwhelming majority of citizens today have access to mobile devices, the potential benefits of access to state digital currency literally in the palm of one’s hand is incredible.”

Welfare noted the utility a digital system would have provided amid the COVID-19 lockdown, particularly in helping the government issue unemployment payments to laid-off citizens.

“In terms of a crisis, for example if the government wishes to send stimulus payments, currency could be issued immediately to millions of citizens — as has recently been tested in China with the digital yuan,” Welfare added.

The 74-page report published by Whitechapel Think Tank and Finance Payments Working Group highlighted six key policy considerations relevant to the implementation of a CBDC in the U.K. These include broadly addressed issues such as regulation, international cooperation, encouraging innovation, and the need for new universal standards for security and privacy which will be forced by the arrival of new technology.

But as Welfare notes, the potential for misunderstanding will still remain among those in government, banking, and beyond. He believes the education process should form part of the roadmap of any potential CBDC rollout.

“As roadmaps towards CBDC implementation accelerate, there will be a great deal of misunderstanding of the fundamentals of a CBDC by many stakeholders, even today, many governments and banks do not fully understand the benefits of a CBDC — educating these stakeholders should be a fundamental part of every state’s CBDC roadmap,” said Welfare.

The transparency enabled by the use of blockchain technology is usually perceived as a benefit to be desired, but according to Welfare, this might be one of the sticking points that stops privacy-conscious entities from getting on board with a CBDC.

“The biggest challenge may lie in privacy issues. Blockchain is inherently secure and provides excellent data protection, that said it can be architected and controlled in a way which may not be as privacy enabling as citizens or businesses want,” Welfare said.

China’s accelerated progress towards the launch of its own CBDC — the digital yuan — could also be a deciding factor in whether the U.K. launches a digital pound, says Welfare, who warned that a “CBDC gap” could undermine the British pound as it exists now.

“In the long term, one of the biggest drivers for adopting a digital pound, could lie in the area of international trade,” said Welfare, adding, “Countries with CBDCs may be able to demand payment in their own native CBDC i.e digital yuan, digital dollar etc, which would be a politically sensitive negotiating issue and could potentially undermine the value of the GBP.”