Comprehensive Guide to White-Collar Criminal Defense: Crypto-Assets

A guide to crypto enforcement (criminal and regulatory)

The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are the two primary federal agencies (with an assist from the CFTC) that have been tackling crypto-enforcement and regulation in the United States. DOJ, of course, has been focused on criminal prosecutions, while the SEC has gone after crypto companies and individuals with civil law suits. This guide highlights some of the most significant cases prosecuted by the DOJ and the SEC, with a focus on recent developments and predictions for how the agencies will “behave” in 2025.

1. Crypto Market Manipulation Cases Charged in the District of Massachusetts

The DOJ has recently gone after, in a significant way, what they believe to be unscrupulous market manipulation of various alt and meme coins. Effectively, the DOJ is targeting market makers who allegedly manipulate new coins through match or wash trading to “juice” the volume of various coins.

In October, 2024, the District of Massachusetts has emerged as a key venue for tackling this issue, charging 17 individuals with crypto-related crimes allegedly relating to the use of bots and other forms of market manipulation to increase volume for various coins.. Recent DOJ charges highlight its pivotal role in combatting market manipulation.

2. The “Celsius” Crypto-Lending Case

The collapse of the Celsius Network, once a prominent cryptocurrency lending platform, marked one of the most high-profile failures in the crypto space and caused billions in losses. The DOJ pursued criminal charges against two Celsius executives, alleging that they engaged in fraudulent practices that misled investors and customers

One of the primary allegations involves the misrepresentation of the company’s financial health and the safety of customer funds. Executives were accused, effectively, of operating a Ponzi-like scheme, using new deposits to cover withdrawal requests while falsely claiming robust reserves. Additionally, Celsius’s leadership faces charges of market manipulation, including artificially inflating the value of the platform’s native token to attract more users and investments. This case was prosecuted in the Southern District of New York, and Alex Mashinsky, the former CEO of Celsius, recently pled guilty to various fraud charges. Notably, and in a unique twist, he pled guilty to both securities fraud and commodities fraud (apparently the DOJ was hedging its bets on this one).

3. Broader DOJ Enforcement Actions Across Jurisdictions

In addition to the two cases mentioned above, both of which Dynamis has clients, the DOJ has filed a wide-range of other crypto-related cases across multiple jurisdictions. It is impossible to detail all the cases, but a sampling of important cases is set forth below:

• BitMEX Executives (Southern District of New York): The DOJ secured guilty pleas from top executives of the BitMEX cryptocurrency exchange for failing to implement anti-money laundering (AML) protocols in violation of the Bank Secrecy Act (BSA).

• Silk Road (Southern District of New York): The DOJ found and arrested Ross Ulbrecht for operating an illegal market for various goods (narcotics primarily), and he was later convicted at trial and sentenced to life imprisonment.

• OneCoin Ponzi Scheme (Southern District of New York): The DOJ successfully prosecuted key figures behind the OneCoin Ponzi scheme, which defrauded investors out of billions of dollars.

• Mango Markets Exploitation (District of Puerto Rico): In a significant case involved alleged market manipulation, the DOJ charged a trader with exploiting vulnerabilities in Mango Markets, a decentralized finance (DeFi) platform, to siphon millions of dollars. The trader, Avraham Eisenberg, was later convicted of fraud at trial.

• Tornado Cash Sanctions Evasion (Southern District of New York): The DOJ charged individuals behind Tornado Cash, a cryptocurrency mixing service, with facilitating money laundering activities, including transactions involving sanctioned entities.

4. Emerging Areas of Enforcement

The DOJ’s crypto enforcement efforts are not limited to fraud and market manipulation. Recent cases signal a growing focus on other areas:

• Tax Evasion: The Western District of Texas brought charges against an individuals who failed to report cryptocurrency gains on his tax returns. This area promises to be a growing activity for upcoming federal enforcement. The reason is because the ability to trace crypto-asset transactions is growing with each passing year, and there is a 5-year statute of limitations for tax cases, which begins when the return is filed. For example, if you file your 2023 return on October 15, 2024, the statute of limitations will usually expire in October 2029. That is a long-time for investigators to build a case against you.

• Ransomware Payments: The Eastern District of Virginia prosecuted cases involving the use of cryptocurrency to facilitate ransomware payments. By targeting both the perpetrators and intermediaries who launder these funds, the DOJ aims to disrupt the financial infrastructure of cybercriminals. Ransomware is a major issue that can shut down companies overnight. The DOJ takes these cases very seriously.

• Initial Coin Offering (ICO) Fraud: The District of New Jersey recently charged promoters of fraudulent ICOs who misled investors with false claims about the utility and value of their tokens. ICO cases have not been the bread and butter of DOJ white-collar enforcement, but expect them to increase. The reason why is that there are fewer ICOs than in the ICO peak of 2017, making it easier to go after bad actors, and the ability of investigators to trace ICO proceeds and promotion budgets has also gotten much better as the years have increased.

• Pig-butchering scams: Dynamis has significant experience tackling “pig-butchering” scams (generally, a person feigns interest in a “mark” and steals their crypto through various social-engineering tactics) from the civil side. The DOJ and other federal agencies have finally awoken to the major problem that pig-butchering scams present, and are now actively proceeding against these criminals. Expect more enforcement in the near future.

5. Key Takeaways for Investors and Industry Participants

The DOJ’s recent cases underscore the following key points:

• Regulatory Compliance is Critical: Firms operating in the cryptocurrency space must prioritize compliance with federal laws, including AML and Know-Your-Customer (KYC) regulations. This is true even when “fraud” is not directly involved. Failure to do so can result in severe penalties and reputational damage.

• Increased Scrutiny of Market Practices: The DOJ’s focus on market manipulation and fraud demonstrates a commitment to cracking down on forms of fraud traditionally found in “regular” stock markets. Industry participants must adopt robust internal controls to detect and prevent misconduct.

• Importance of Investor Vigilance: Retail and institutional investors should exercise caution when engaging with crypto platforms. Conducting thorough due diligence can help mitigate risks and avoid falling victim to fraudulent schemes.

• Collaboration Across Jurisdictions: Many of these cases reflect the DOJ’s collaboration with international law enforcement agencies. This global approach enhances the ability to track and recover illicit funds, particularly in cross-border schemes.

The SEC regulates securities (only)

As noted, the SEC can only file “civil” charges, meaning that they do not send people to jail (although they frequently work with the DOJ to do so). Rather, they wield authority by filing civil enforcement actions.

In order to assert authority over a particular financial instrument, the SEC must first prove that the instrument in question is a “security.” Whether a crypto-asset qualifies a security is always a critical question in cases brought by the SEC, as it determines whether federal laws like the Securities Act of 1933 and the Securities Exchange Act of 1934 apply.

The most prevalent test as to whether an asset is a “security” is the Howey Test, a legal standard developed by the Supreme Court in 1946. This test evaluates whether an asset meets four criteria:

1. An Investment of Money: Investors must contribute capital, expecting to receive some return. For cryptocurrencies, this often happens during Initial Coin Offerings (ICOs) or through secondary market purchases.

2. In a Common Enterprise: The fortunes of investors are pooled together, meaning their outcomes depend on the overall success of the project. This is often evident in crypto projects that raise funds to develop platforms or networks.

3. With an Expectation of Profits: Investors typically anticipate financial gains from the appreciation of the token’s value or from staking rewards. The SEC closely examines promotional materials and public statements to see if these expectations are emphasized.

4. Derived Primarily from the Efforts of Others: The success of the investment relies heavily on the efforts of a development team or key promoters, such as achieving technological milestones or securing partnerships.

While the Howey Test provides a relatively straightforward framework, applying it to decentralized assets like crypto is complex and often a contentious part of any litigation.

Once courts determine that the crypto in question is a “security,” the nation’s securities laws then apply. The critical ones are set forth below:

• Securities Act of 1933:

  • Section 5 requires registration of securities offerings to ensure transparency.

  • Section 17(a) prohibits fraud in the offer or sale of securities.

• Securities Exchange Act of 1934:

  • Section 10(b) and Rule 10b-5 target fraudulent practices in securities transactions.

  • Regulation ATS governs alternative trading systems like crypto exchanges.

• Investment Advisers Act of 1940:

  • Applies to crypto funds and staking programs offering investment advice or managing pooled assets, requiring fiduciary compliance and registration.

The SEC’s regulatory focus on crypto spans several areas:

• Initial Coin Offerings (ICOs): The SEC views ICOs as analogous to traditional securities offerings and has pursued enforcement against unregistered sales. Companies conducting ICOs must register with the SEC or qualify for an exemption to avoid penalties.

• Cryptocurrency Exchanges: Many platforms that facilitate crypto trading may qualify as securities exchanges under the Exchange Act. The SEC has emphasized that such platforms must register as exchanges or alternative trading systems (ATS).

• Staking and Yield Programs: Staking services and yield-generating products often fall under the SEC’s definition of investment contracts. The agency scrutinizes these programs to ensure compliance with securities laws.

• Fraud in offering crypto-assets: The SEC has taken a very aggressive approach to any and all crypto instruments that they view are really just old-time fraud dressed up as “crypto.” As examples, the SEC has tackled crypto Ponzi schemes, crypto rug pulls, and crypto that just does not exist.

Recent SEC Enforcement Actions involving crypto-assets

The SEC has been very aggressive under (soon-to-be-former) Chairman Gary Gensler. Below are some of the SEC’s cases filed in recent years:

• SEC v. Ripple Labs, Inc.: The SEC alleged that Ripple’s XRP token was sold as an unregistered security in violation of Section 5 of the 1933 Act. Ripple argued that XRP is a currency, not a security. This case has had wide-reaching implications for how cryptocurrencies are classified.

• SEC v. Coinbase, Inc.: The SEC claimed that Coinbase operated as an unregistered securities exchange and broker by offering tokens deemed to be securities. This case will have widespread implications as to whether the SEC will be able to hold large, publicly traded exchanges accountable.

• SEC v. Binance Holdings Ltd.: Binance, one of the largest crypto exchanges, was accused of unregistered securities trading and mishandling customer funds. This case demonstrates the SEC’s commitment to going after all crypto exchanges, including those residing far outside the US’s borders.

• Gemini Earn Program: Gemini faced charges for offering an unregistered securities product through its Earn program, focusing on yield-generating crypto assets. Gemini settled the case for $21 million.

• Ponzi-Like Schemes in Crypto: The SEC has pursued multiple Ponzi schemes disguised as crypto investments (see example here and here), which promised guaranteed returns through fake trading algorithms.

• Fraudulent ICOs: The SEC has primarily targeted Initial Coin Offerings (ICOs) that have been alleged to be defrauding investors, such as those here and here.

• Fake Crypto Exchanges and Rug Pulls: The SEC has cracked down on fraudulent platforms or projects that steal with investor funds, leaving behind worthless tokens.

Dynamis is one of the most experienced law firms in the nation when it comes to regulatory issues with respect to crypto assets. If you are an organization or individual facing a situation requiring an aggressive, robust response to a government inquiry or even an active case, contact attorneys at Dynamis LLP or email whitecollar@dynamisllp.com today.