U.S. Department of Justice Curtails “Regulation by Prosecution” in Digital Asset Enforcement

What the New Policy Says
Under the Deputy AG’s Memorandum, DOJ will prioritize investigations and prosecutions involving defendants who (a) cause financial harm to digital asset investors and consumers; and/or (b) use digital assets in furtherance of other criminal conduct, “such as fentanyl trafficking, terrorism, cartels, organized crime, and human trafficking and smuggling.”

However, DOJ prosecutors are instructed not to charge “regulatory violations” involving digital assets—including unlicensed money transmitting, Bank Secrecy Act (BSA) violations, unregistered securities offerings, unregistered broker-dealer violations and Commodity Exchange Act registration violations—unless there is evidence that the defendant “knew of the licensing or registration requirement at issue and violated such a requirement willfully.”

Prosecutors are also directed not to charge violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the Commodity Exchange Act or any implementing regulations—at least when (a) the prosecution would require DOJ to litigate whether a digital asset is a “security” or “commodity,” and (b) there is an adequate alternative criminal charge available, such as mail or wire fraud.

Accordingly, DOJ “will no longer target virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or unwitting violations of regulations,” unless the prosecution satisfies the foregoing criteria. The Memorandum explains that the Office of the Deputy AG will work with DOJ’s Criminal Division and the Executive Office for United States Attorneys (EOUSA) to review ongoing cases for consistency with the new policy and close any ongoing investigations that are inconsistent with it.

Finally, and consistent with what the Deputy AG describes as a “narrowing” of the DOJ’s enforcement policy relating to digital assets, the Memorandum (1) requires the Market Integrity and Major Frauds (MIMF) Unit in the Criminal Division’s Fraud Section to cease cryptocurrency enforcement and (2) disbands the National Cryptocurrency Enforcement Team (NCET). However, the Memorandum provides that the Criminal Division’s Computer Crime and Intellectual Property Section (CCIPS) will continue to provide guidance and training to DOJ personnel and serve as liaisons to the digital asset industry.

The New Policy in Context
According to the Memorandum, the new policy means that DOJ “will stop participating in regulation by prosecution in this space.” But it not yet clear what practical effect the Memorandum will have on the criminal prosecution of digital asset platforms and their principals.

While—as a matter of prosecutorial discretion—the Memorandum instructs prosecutors not to charge violations of 18 U.S.C. § 1960 or the BSA absent evidence that the defendant had knowledge of the relevant requirements and willfully violated them, recent criminal enforcement actions involving digital assets that predated the Memorandum may have already met that standard. For example:

• In United States v. Binance Holdings Ltd. d/b/a Binance.com, the world’s largest cryptocurrency exchange pleaded guilty to conspiracy, conducting an unlicensed money transmitting business and violating U.S. sanctions, and its CEO—who told employees it was “better to ask forgiveness than permission” with respect to compliance—pleaded guilty to violating the BSA. As disclosed in the statement of facts, there was evidence showing employees knew that lax compliance controls would attract criminal activity, including drug trafficking and money laundering specifically. Binance also admitted knowing that its algorithm would cause U.S. users to transact with users in sanctioned jurisdictions, including Iran. The company ultimately paid $4.3 billion in penalties as part of its resolution with DOJ, and its CEO was sentenced to four months in prison.
• In United States v. Anatoly Legkodymov, the defendant was a senior executive and majority shareholder of Bitzlato, a Hong Kong cryptocurrency exchange that operated globally and marketed itself as requiring minimal identification from users. Evidence showed the defendant continued to operate the platform even after he was repeatedly warned that it was being used for illicit activity. Due to Bitzlato’s deficient compliance, it moved more than $700 million for Hydra Market, one of the largest online marketplaces for drugs, stolen financial information and money laundering services. The defendant ultimately pleaded guilty to operating an unlicensed money transmitting business.
• In United States v. Roman Sterlingov, the defendant—who operated Bitcoin Fog, the darknet’s longest-running cryptocurrency mixer—was convicted after a one-month jury trial of conspiracy to launder monetary instruments, money laundering and operating an unlicensed money transmitting business. Bitcoin Fog processed transactions involving approximately $400 million of cryptocurrency proceeds from darknet marketplaces that facilitated illegal narcotics, computer crime, identity theft and child sexual abuse material. At trial, DOJ introduced evidence demonstrating that the defendant was well aware of, and flouted, his obligations to comply with know-your-customer (KYC) and anti-money laundering (AML) requirements. The defendant ultimately was sentenced to 12 years and six months in prison.

In sum, it is not obvious that the Memorandum would have affected DOJ’s ability to bring these prosecutions, or others like them.

It is also unclear whether fewer prosecutions will be brought as a result of the Memorandum’s directive not to charge violations of the Securities Act, the Securities Exchange Act or the Commodity Exchange Act when there is an adequate alternative criminal charge available. By definition, when there are alternative charges available, the Memorandum authorizes prosecutors to pursue cases involving the same underlying conduct. But this may not represent a new practice.

In fact, in recent cases predating the Memorandum, DOJ has charged conduct relating to digital assets using only “alternative charges,” such as wire fraud and money laundering. For example:

• In United States v. Ishan Wahi, the defendant was a product manager at a virtual currency exchange who provided confidential information about upcoming crypto asset listings to his brother and friend so that they could place profitable trades ahead of the listing announcements. For what was said to be the first-ever cryptocurrency insider trading scheme, the defendant was charged only with two counts of wire fraud conspiracy and two counts of wire fraud. The defendant ultimately pleaded guilty to the two conspiracy counts and was sentenced to two years in prison.
• In United States v. Nathanial Chastain, the defendant was a product manager at a non-fungible token (NFT) marketplace who traded on confidential information about which NFTs would be featured on the marketplace’s homepage. For what was said to be the first-ever NFT insider trading scheme, the defendant was charged only with wire fraud and money laundering, and a jury later convicted the defendant on both counts.

The new policy announced in the Memorandum, then, may represent a codification of existing practices rather than a new constraint on bringing prosecutions.

Finally, the Memorandum directs the MIMF Unit to cease cryptocurrency enforcement and orders the NCET to be disbanded. The practical effects here, too, are uncertain.

The NCET consisted of prosecutors serving details from across the Department and did not have its own set of dedicated resources. With NCET being disbanded, these attorneys will return to their home offices or components, where they can use their expertise to continue prosecuting cases that fit within the policy. Moreover, the NCET and MIMF Unit were not the only DOJ entities engaged in criminal enforcement with respect to digital assets. For example, prosecutors in CCIPS—to which the Memorandum assigns responsibility for leading DOJ’s digital asset strategy—have substantial experience in criminal enforcement involving digital assets. And, while not mentioned in the Memorandum, prosecutors in the Bank Integrity Unit in the Criminal Division’s Money Laundering and Asset Recovery Section likewise have significant expertise prosecuting digital asset providers and their executives—as do prosecutors in U.S. Attorney’s Offices around the country.

Criminal Digital Asset Enforcement Is Unlikely to Disappear
The Deputy AG’s Memorandum articulates a change in DOJ’s approach to criminal enforcement in the digital assets space, but the practical effect may be limited. Many of DOJ’s high-profile digital asset enforcement actions in recent years appear to meet the Memorandum’s requirements. And the Memorandum underscores that DOJ will continue to prioritize cases involving crypto fraud and the use of digital assets to facilitate other crimes. In some ways, then, the Memorandum confirms or clarifies—rather than narrows—DOJ’s approach to criminal enforcement in the crypto markets.

Accordingly, market participants should interpret this development not as a retreat from enforcement, but as a more precise articulation of the practical boundaries within which DOJ appeared to operate already. Digital asset service providers should continue to invest in strong compliance programs and take their KYC and AML requirements seriously. DOJ will continue to bring criminal prosecutions against service providers (and other crypto market participants) who engage in fraud or willfully violate their regulatory obligations to avoid facilitating other crimes like terrorism, drug trafficking, sanctions evasion and computer crime. And market participants should continue to pay close attention as the regulatory landscape evolves under the Trump administration, particularly as the Senate continues to consider nominations to lead key financial regulators.