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Digital Firestorm: Cryptocurrency Traders Must Brace for Prosecutorial Reckoning
Traders Magazine Online News, January 31, 2018
There is a gathering storm in the cryptocurrency universe, and traders must attune themselves to the risks. Until recently, many traders had operated under the assumption that digital currency trading was beyond the reach of U.S. regulators. This mindset, in turn, precipitated a virtual free-for-all on certain digital currency exchanges, with various traders deploying strategies that would never pass muster in more-established markets. But the view perpetuated by some traders of the digital currency arena as an outlaw paradise was always wrong. While strong jurisdictional defenses may be available for traders and purveyors of initial coin offerings in enforcement actions brought by the U.S. Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission (SEC), respectively, the same cannot be said for U.S. Department of Justice (DOJ) criminal actions.
The CTFC and SEC Assert Jurisdiction
It had previously been predicted that the unprecedented interest in cryptocurrency investment and trading would produce a regulatory scrum, with the CFTC and SEC jockeying for jurisdictional supremacy. And, by now, most sophisticated traders are aware that the CFTC has classified digital currency as a commodity and purported to assert broad anti-fraud jurisdiction over cryptocurrency transactions on that basis. Likewise, the SEC signaled in the now-notorious DAO report and other contexts, including recent enforcement actions, that digital currency offerings will, in many instances, be regarded as subject to U.S. securities laws and SEC jurisdiction. These regulatory stances are expected to be the subject of litigation this year — indeed, our firm is presently involved in two matters concerning the scope of the CFTC’s jurisdiction over commodity transactions outside the realm of derivatives.
Enter the DOJ?
While many commentators and practitioners are understandably focused on whether— and if so, to what degree — the CFTC and SEC would assert jurisdiction over cryptocurrency enterprises, a much graver threat looms for traders who pressed the envelope on digital currency exchanges: criminal prosecution. Given the pervasive public interest in and, according to many reports, rampant misconduct rippling through cryptocurrency exchanges, it is only a matter of time before the DOJ pursues indictments and extraditions, much as it did last year against BTC-e and Alexander Vinnik. And when it does, the type of jurisdictional defenses against CFTC and SEC enforcement actions may be of little help: the DOJ’s anti-fraud authority is not constrained to any particular subset of financial instruments or the laws that traditionally govern the securities and derivatives markets. Nor would limiting trading to extraterritorial or offshore exchanges provide a reliable safe harbor. To ground jurisdiction, the DOJ need only identify a sufficient U.S. nexus, such as a U.S.-based victim or effects on U.S. commerce. And while various foreign exchanges have sought to mitigate the risk of DOJ scrutiny by purporting to bar U.S.-based parties, given the anonymous trading regimes in place at many digital exchanges, foreign traders may not be able to reliably exclude the risk of dealing with U.S. counterparties.
Traders in the Crosshairs
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