The U.S. government has not been kind to the expanding crypto world. Federal agencies from the SEC and CFTC to the DOJ and IRS have taken a keen interest in companies using blockchain technology or offering cryptocurrencies to the public. Common examples of crypto fraud include crypto laundering; illegally layering crypto transactions into multiple wallets; illegal conversion of cryptos to fiat currencies; fraudulent ICOs, and fraudulent tax returns involving crypto activity. Thus, companies using blockchain technology, crypto exchanges, or those offering crypto as investments need to comply with the Bank Secrecy Act and its stringent AML/KYC regulations. These entities also need to make sure that their currencies are not “securities” and that their crypto transactions are being properly reported to the IRS. Failure to follow these requirements could lead to devastating consequences.
Over the past year alone, for instance, the DOJ has wasted no time initiating investigations and bringing charges for crypto fraud. In early September 2021, the United States Attorney for the Southern District of New York announced charges for crypto investment fraud against individuals who had started an alleged cryptocurrency investment fund that led to investor losses of more than $30 million. Rather than investing the investors’ funds in the investment club, Defendants stole about $9 million and used those contributions to purchase personal, lavish items. More recently, in mid-October 2021, the Acting U.S. Attorney for the Northern District of Texas announced a guilty plea by the founders of a crypto ICO for tax evasion from raising about $24 million from over 13,000 investors. Defendants had promoted the company’s cryptocurrencies as a way to make money fast and then used investor funds for personal expenses and purposely circumvented financial reporting requirements. Cryptocurrency fraud and tax evasion are likely the most common areas of focus for federal agencies.