On February 8, 2022, two New York-based individuals, Ilya Lichtenstein and Heather Morgan, were arrested and charged with conspiracy to commit money laundering and to defraud the US in connection with alleged laundering of $4.5 billion of cryptocurrency that was stolen during a 2016 hack of Bitfinex, a virtual currency exchange. The Department of Justice (DOJ) seized over $3.6 billion in cryptocurrency, which, according to Deputy Attorney General Lisa Monaco, is the DOJ’s largest financial seizure in history.
We have previously written about enforcement actions relating to cryptocurrency brought by the Securities Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN). This arrest and large financial seizure demonstrate DOJ’s focus on money laundering risks through cryptocurrency and make good on DOJ’s recent promises of an increase in enforcement in this space.
Arrests Signal DOJ’s Efforts to “Evolve” to Tackle Crypto Crimes
In October 2021, DOJ announced the creation of the National Cryptocurrency Enforcement Team (NCET). Deputy Attorney General Monaco explained that the DOJ would “evolve” so that it could leverage “money laundering expertise” across DOJ sections and “strengthen [its] capacity to dismantle the financial entities that enable criminal actors to flourish … from abusing cryptocurrency platforms.” In remarks on February 8, 2022, Monaco called the arrests “emblematic” of the “approach the Department is taking to the growing threat of the illicit use of cryptocurrency.” Additionally, on February 17, 2022, DOJ appointed Eun Young Choi the first director of the NCET. During her introductory remarks, Director Choi reiterated that combatting cryptocurrency crimes is an “important priority” for DOJ and reaffirmed that DOJ plans to “accelerate and expand its efforts” to combat the illicit use of digital asset technology.
The criminal complaint against Mr. Lichtenstein and Ms. Morgan allege that they engaged in a complex web of transactions intended to obscure the source of the cryptocurrency stolen from Bitfinex. The complaint further alleges that a hacker sent 119,754 stolen Bitcoin from Bitfinex to a digital wallet that was under Mr. Lichtenstein’s control. Over the last five years, about 25,000 of those Bitcoin were allegedly transferred out of Mr. Lichtenstein’s wallet through a complicated series of transactions. Some of those funds were allegedly deposited into financial accounts controlled by Mr. Lichtenstein and Ms. Morgan.
Mr. Lichtenstein and Ms. Morgan also allegedly conspired to defraud the US by purportedly providing false information to virtual currency exchanges, thereby preventing the filing of Suspicious Activity Reports as required under the Bank Secrecy Act (BSA). Ms. Morgan has been released on $3 million bond; Mr. Lichtenstein has been ordered detained pending trial.
SEC, CFTC, and FinCEN Prepare for More Enforcement Actions in the Future
As Freshfields explained in a recent white paper, the DOJ is only the latest enforcement agency seeking to assert its jurisdiction in this space. The SEC, CFTC, Federal Reserve, Office of the Comptroller of Currency, and FinCEN have all previously expressed their desire to regulate cryptocurrency. In recent months, the SEC, CFTC, and FinCEN have been particularly active in their efforts to bring cryptocurrency markets under existing securities, commodities, and banking laws.
SEC Chairman Gary Gensler has likened cryptocurrency markets to the “Wild West.” According to a recent report, the SEC brought 20 cryptocurrency-related litigations and administrative proceedings during 2021, including a $539 million settlement with three media companies in September in connection with allegedly offering unregistered digital assets to investors. And on February 14, 2022, the SEC reached a $100 million resolution with BlockFi Lending LLC of the SEC’s first-ever charge against a cryptocurrency lender for failing to register it’s a cryptocurrency lending product under the Investment Company Act of 1940.
In Senate testimony on February 9, 2022, CFTC Chairman Rostin Behnam emphasized that the CFTC also intends to “aggressively address the many risks of digital assets.” In the last six months, the CFTC has resolved enforcement actions with Kraken, Bitfinex, and Tether, which are among the largest players in the cryptocurrency markets. The Tether resolution included a $41 million fine related to allegations that Tether misrepresented that it held one-to-one fiat reserves for its stablecoin at all times. In early January 2022, the CFTC also announced a resolution with Polymarket, which included an obligation that Polymarket wind down its digital betting markets, which the CFTC alleged were unregistered swaps.
FinCEN has also identified “virtual currencies” as one of its top priorities because they have reportedly become “the currency of preference in a wide variety of online illicit activity.” As we have previously reported, FinCEN and the CFTC reached a $100 million resolution with BitMEX, a cryptocurrency exchange and futures commission merchant, in August 2021. FinCEN has since signaled its intent to expand its regulatory role. In late January 2022, it proposed a new rule that would “require banks and money service businesses to submit reports, keep records, and verify the identity of customers” involved in cryptocurrency transactions.
As we have previously noted in several blog posts on this topic, US regulators such as the SEC, CFTC, and FinCEN consider cryptocurrency to fall within the jurisdiction of existing laws, including the BSA and securities laws. The recent arrest of Mr. Lichtenstein and Ms. Morgan shows that the DOJ is also focused on cryptocurrency in its anti-money laundering enforcement efforts. In the future, we anticipate the White House and executive agencies to further prioritize cryptocurrency, including a possible forthcoming executive action that charges federal agencies with regulating digital assets as a matter of national security. Companies and financial institutions that work directly and indirectly with cryptocurrency will want to monitor developments in this fast-changing enforcement space during the coming year.