How Governments Are Planning to Crackdown on Money Laundering, Fraud, and Tax Evasion in the Crypto Space

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How Governments Are Planning to Crackdown on Money Laundering, Fraud, and Tax Evasion in the Crypto Space

The highs and lows in the crypto industry displayed the polylithic nature of crypto to individuals and the government. From raising over $1 billion as a covid fund to relief India and over  $60 million to the Ukraine war, cryptocurrency entered the mainstream and caught the attention of the global governments. 

The year was not without notable crimes in the crypto industry, from the $100M Horizon bridge money laundering scam, the $321M Wormhole Bridge exploit, and the $190M Nomad Bridge Exploit. The total amount of money stolen through cryptocurrency in disclosed hacks in 2022 only amounted to $3.5 billion. 

The presence of cryptocurrency in the mainstream has also brought about the growth of new crime. The possibility of anonymous transfer of funds, near-instant transfer, has made it easy for existing and new crimes to thrive. These crypto crime scenarios making headlines are why governments have tightened their reigns in offering market security in cryptocurrency and banks. 

Why Does the Government Want To Regulate Cryptocurrencies?

The ability to transfer cryptocurrency worth large amounts of money without requiring government or banks has caught the attention of the legislators. The U.S. government has therefore identified the need for infrastructure governing financial transactions, protecting the public from fraud, and insulating the economy against erratic financial activities. 

The Senate proposed that crypto brokers report tax data to the IRS, like other brokers. The lawmakers could not create a middle ground for crypto miners, software developers, and transaction validators; hence the proposal could not go through. The U.S. Securities and Exchange Commission (SEC) has advocated for cryptocurrency government regulation through its chair, Gary Gensler.

The Role of SEC in Crypto Laws

SEC chair Gensler raised concerns over the longevity of the cryptocurrency industry without regulation. Gensler further stated that the SEC would keep an eye on token sales, trading and lending platforms, crypto derivatives, stable value coins, and custody of crypto assets, among other regulations. The organization works with the following government bodies to handle cryptocurrency cases and any overlapping jurisdictions in the crypto markets:

  • The US Commodity Futures Trading Commission
  • the Federal Reserve
  • Department of Treasury
  • Office of the Comptroller of the Currency
  • Members of the President’s Working Group on Financial Markets

Laws Governing Cryptocurrency

There are few consumer protection regulations in the cryptocurrency industry. The Commodities Futures Exchange Commission (CFTC)  modulates cryptocurrency trading futures and spot markets, and the Securities and Exchange Commission (SEC) observes emerging cryptocurrency and initial coin offerings (ICOs).

Legislators have proposed regulating the cryptocurrency industry based on the Bank Secrecy Act (BSA) of 1970 and the Patriot Act. The lawmakers also identified three areas that raised concern in the industry, including:

  • Direct use of cryptocurrency to fund crime and terrorism
  • Use of cryptocurrency to evade taxes and get into money laundering
  • Investment fraud and cryptocurrency fraud

Despite the lack of a stable federal and international cryptocurrency regulating framework, some crypto laws apply in the USA, including:

  • Anyone making a profit off crypto investment must pay taxes to the Internal Revenue Service(IRS).
  • The US Commodity Futures Trading Commission has limited purview over bitcoin and other crypto assets but has control over derivatives with underlying cryptocurrency assets or otherwise.
  • All commercial and nonprofit entities trading and/or holding crypto require BitLicense to operate in New York. 
  • Louisiana and New York passed the Virtual Currency Business Act that requires crypto dealers to acquire licenses to hold or trade.
  • Wyoming has greatly embraced cryptocurrency and has implemented over 20 laws, including 2019’s HB584, which isolates crypto assets from most local securities laws. 

Besides the individual laws, different organizations and acts adopted by the U.S. government work to keep the public safe from crypto crimes and protect investors.

The US International Cryptocurrency Enforcement Action

The United States Department of Justice announced the creation of a National Cryptocurrency Enforcement Team (NCET), with the responsibility to handle investigations and prosecution of complex misuses of cryptocurrency. The team was particularly mandated with tackling crimes committed through mixing and tumbling services, virtual currency exchanges, and money laundering infrastructure actors.

NCET works with the Computer Crime and Intellectual Property Section (CCIPS), the Department of Justice Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), and other sections of the Department of Justice. The combined forces of these teams work to race and recover assets lost through extortion and fraud, including cryptocurrency payments to malicious software.

The team is dedicated to exploiting the Department of Justice’s cyber and money laundering expertise to strengthen its ability to demolish the financial figures that allow criminals to flourish by abusing the cryptocurrency market.

 NCET builds on the Criminal Division’s ability to investigate and prosecute criminal cryptocurrency users for dealing with illegal laundering, fraudulent misuse, and other criminal activities involving cryptocurrencies.

The head of the NCET reports to the Assistant Attorney General in the Criminal Division. It leads the team of attorneys from CCIPS, MLARS, and Assistant U.S. Attorneys (AUSAs) detailed from U.S. Attorneys’ Offices across the country.

NCET and the teamwork by identifying, investigating, supporting, and pursuing cryptocurrency exchanges, infrastructure providers, and other entities that are enabling cryptocurrency misuse and related products to facilitate or commit criminal activity. The team also works to recover illegal proceeds of crypto crime and fosters the development of blockchain and cryptocurrency technologies to curb money laundering, the use of cryptocurrency in the dark market, and fraud practices.

NCET works with associated teams to realize the government’s plans to crack down on money laundering, fraud, and tax evasion in the crypto space in the following ways:

  • Nurture relationships of crypto-focused attorneys and prosecutors with other Department of Justice departments to pursue crypto-related investigations and prosecutions
  • Identify areas to focus their investigations on, including money laundering, human and drug trafficking, and financial institutions working with illicit crypto transfers.
  • Developing strategic plans to help department components, USAOs, and investigative agencies dealing with cryptocurrency investigations
  • Implement passed bills regarding crypto investigations, prosecutions, and other regulations in the industry.
  • Collaborate with the private sector to curb crypto crime

Emerging Issues

The federal government, through the Department of Justice, and other bodies are working on reviewing the set cryptocurrency laws and developing new ones as the need arises. Notable crypto crime occurrences are attracting attention from the FBI, Department of Justice, and other powerful bodies and leading to the formulation of new guidelines every day. 

The development of better communication avenues and technologies is leading to new litigations. For example, several banks that failed to observe employees’ communications on messaging apps were fined close to $2 billion.

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