Crypto Platforms Under Scrutiny by Various U.S. Agencies

Martha M. Leon Fernandez
Associate Editor
Loyola University Chicago School of Law, JD 2024

Since the beginning of 2023, the cryptocurrency market has faced legal action from multiple U.S. agencies in efforts to control a sector that, until recently, mostly operated beyond the bounds of conventional financial regulation. As a result of the executive order issued by the Biden Administration in March 2022, various federal agencies examined the risk and benefits of cryptocurrencies and have issued official reports. These reports have led to coordinated action against the crypto market. The administration aims to “ensure that cryptocurrencies cannot undermine financial stability, to protect investors, and to hold bad actors accountable.” In their attempts to promote regulation, the Securities and Exchange Commission (SEC), the Department of Justice (DOJ), and the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, have acted against the crypto market on several fronts, frightening off bank allies, suing crypto firms for violating investor protection laws, and targeting exchanges connected to money laundering.

Why is the U.S. government cracking down on crypto?

In the last eighteen months, the crypto industry has suffered tremendously. There have been multiple implosions of cryptocurrency, some crypto lenders have unilaterally frozen all account withdrawals citing “extreme market conditions” and countless bankruptcies within the industry. Young investors and people of color are particularly affected, as they have suffered significant losses due to the crypto sector crisis.

The Biden Administration is committed to safeguarding investors, holding illicit actors accountable, and preventing the cryptocurrency turmoil from damaging the nation’s financial stability. The criminal underbelly of the crypto market is prevalent. It has allowed non-compliant Russian-based exchanges to thrive and facilitate ransomware attacks and other darknet activity, including buying and selling illegal drugs, stolen financial information, and hacking services. Additionally, many of these crypto markets are advertising themselves as requiring minimal identification, which raises money laundering concerns and blatantly disregards financial regulations and risk practices. In October 2021, the Justice Department launched a National Cryptocurrency Enforcement Team (NCET) devised to prevent, disrupt, scrutinize, and prosecute illegal usage of cryptocurrencies and retrieve unlawful proceeds of those crimes.

What regulatory action has been taken?

The DOJ’s NCET, along with Treasury Department’s FinCEN branch, have collaborated to take action against Bitzlato, a cryptocurrency exchange notorious for aiding criminals in their efforts to make money via drug and ransomware assaults with almost no anti-money laundering (AML) controls. NCET has investigated Bitzlato’s crimes, and the DOJ has since arrested and charged the exchange’s founder, Russian national Anatoly Legkodymov, with transferring illegal monies without adhering to U.S. regulatory protections, such as AML procedures. The National Defense Authorization Act for Fiscal Year 2022 gave the FinCEN, an AML agency, new authority for fighting Russian cybercrime. Pursuant to section 9714(a) of the Combating Russian Money Laundering Act, FinCEN has the authority to prohibit certain transmittals of funds by any covered financial institution involving Bitzlato, the power to punish through orders, and the ability to make the punishment last for an indeterminate amount of time.

The purpose is to identify and cut off foreign entities involved in money laundering within the US financial system. The hope is to completely inhibit these services that allow criminals to convert the illicitly generated crypto into cash, disincentivizing them from committing said crimes. FinCEN’s money-laundering charge against Bitzlato is a rarely used sanction, mainly used against American banks. However, this sends a powerful message that there are repercussions for non-compliance to those using crypto tools to help Russians circumvent sanctions. The U.S. reiterated that along with their international allies, they will take action against anyone who abuses their financial system, and “whether you break our laws from China or Europe—or abuse our financial system from a tropical island—you can expect to answer for your crimes inside a United States courtroom.”

How has the SEC been regulating?

Although the SEC has been one of the crypto market’s most prominent regulators from the beginning, since the collapse of FTX, it has stepped up its enforcement of crypto markets and blocked the platform’s access to crucial goods and services (lending and staking). The third-largest stablecoin in the world, Binance, BUSD, has been shut down by New York regulators. The SEC has issued BUSD a “Wells Notice,” which informs the company that the agency may seek enforcement action against them, citing violation of investor protection laws. More recently, it sued Genesis and Gemini, two crypto firms, for violating investor protection laws by not registering their crypto lending scheme or requiring clients to provide detailed financial disclosures. Genesis has since filed for Chapter 11 bankruptcy. The SEC fined Kraken and ordered it to cease its staking services to American investors, which allows them to earn a percentage by temporarily transferring their crypto tokens to an intermediary or a cryptocurrency network.

Following the collapse of FTX, banks are hesitant to entangle themselves with crypto. The SEC’s aggressive regulation has alarmed the banking industry and led bankers to re-evaluate any exposure to the crypto sector. Earlier this year, a few prominent bank regulators published a statement expressing doubt that financial institutions could securely hold digital assets. Within a week, Metropolitan Commercial Bank, which had opened itself to crypto, closed out that business venture. Although regulators do not tell banks whom they should do business with, the banks often decide that these customers are not worth the regulatory scrutiny.

How is the regulation impacting the crypto market?

Crypto stocks jumped despite the looming threat from regulators, with some investment officers citing that regulation is good for any industry. Meanwhile, the Coinbase CEO tweeted that he would fight against the SEC if the agency attacked how Coinbase offers staking.

Some critics claim that the U.S. is quietly trying to ban the crypto market, others believe it is imposing its entire Wall Street rulebook on the industry, and others believe digital currency poses a danger. It is hard to believe that the market will be entirely annihilated. However, given the money laundering risks it poses, the industry needs to be as heavily regulated as banks and Wall Street if it wants to enjoy the benefits of operating in the U.S.

1 thought on “Crypto Platforms Under Scrutiny by Various U.S. Agencies”
  1. I found this post on crypto platforms very informative and valuable. The article provides a comprehensive overview of the regulatory concerns around cryptocurrency exchanges and the measures being taken by various U.S. agencies to mitigate the risks.

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