Facts About Criminal Liability for Cryptocurrency

Last month, the Office of Foreign Asset Control (OFAC) placed sanctions on the cryptocurrency mixer “Tornado Cash” and associated wallets. This is part of a larger government effort to crack down on cryptocurrency money laundering and could raise additional avenues of criminal liability for those who use crypto currency in relation to other illegal activities. Not only will defendants be exposed to traditional money laundering offenses, but they could run into sanction violations offenses as well.

Cryptocurrency Background

Cryptocurrencies are digital tokens traded between electronic devices using a technology called blockchain, which allows tokens to be traded between owners through decentralized distributed technology. Much of the blockchain operates through “smart contracts”—electronic vending machines that allow users to trigger digital operations by performing functions such as transferring cryptocurrency tokens into the contract’s ecosystem.

Mixers, also called tumblers, are types of smart contracts that jumble cryptocurrency tokens together in a private pool en route between the originator and the intended recipients. Contrary to popular belief, most cryptocurrencies are not anonymous, only pseudonymous. Some people use mixers like Tornado Cash to increase that anonymity. But others use it for money laundering: inserting dirty money and believing they have extracted clean money.

Also contrary to popular belief, cryptocurrency is not truly decentralized. While the code is distributed on machines throughout the globe, interacting with this code requires gateways using recognizable and centralized companies. When the sanctions regimes start, those companies cut ties.

Which brings us to sanctions.

OFAC’s New International Sanctions.

The U.S. Department of Treasury has authority to sanction individuals, companies, entities, and even countries under the International Emergency Economic Powers Act (IEEPA) and other statutes, in the name of national security or to combat threats to foreign policy or the economy. OFAC is an agency within Treasury that has the regulatory authority to designate entities as sanctioned. This has the effect of prohibiting United States citizens or companies from doing business with the sanctioned individuals. Think how difficult it is to get Cuban cigars.

Tornado Cash was sanctioned after it was identified as helping to launder millions in stolen bitcoin for two heists by “Lazarus Group”—a North Korean hacker group—in June and August of this year. OFAC identified continued interactions with “Tornado Cash” as a threat to national security and made doing so illegal.

What does This Mean?

Most people are not members of any North Korean hacker groups. But many now engage in cryptocurrency trading, so this new measure might open people up to new or increased criminal liability.

First, this affects money laundering. If cryptocurrency transactions derive from the funds of unlawful activities (and the transaction was aware of or suspected an unlawful source) then such transactions could open the transactor up to money laundering liability.

There are two main types of money laundering. Usage laundering, under 18 U.S.C. § 1957, penalizes normal monetary transactions using known or suspected unlawfully obtained funds. Section 1956, on the other hand, punishes money laundering directed at concealing or promoting the underlying unlawful activity, or at evading reporting requirements. The latter usually carries a harsher penalty: a twenty-year maximum sentence, as opposed to ten years under 1957.

Cryptocurrency mixers, by their very nature, attempt to conceal transactions. Their use, when unlawfully obtained funds are involved, may look a lot more like concealment money laundering than usage money laundering. And prosecutors are certain to look askance at suspected laundering through a sanctioned entity even if defendants did not know the entity was sanctioned.

Second, the OFAC sanctions themselves could expose ordinary cryptocurrency investors and businesses using cryptocurrency to criminal liabilities. Willfully trading with IEEPA sanctioned entities carries a maximum fine of $1,000,000 and a maximum penalty of 20 years’ incarceration. True, the government must prove a violation was “willful,” i.e., not only that the defendant knew what he was doing, but that it was his purpose. But these new sanctions raise unique issues. And even an unsuccessful prosecution can be devastating.

It is usually obvious one is trading with a sanctioned entity. For instance, a chemical engineer who reached out to the “state-owned National Petrochemical Company of Iran” knew exactly what he was doing when he violated anti-Iranian sanctions. See, e.g., United States v. Amirnazmi, 645 F.3d 564 (3d Cir. 2011).

But Tornado Cash and other sanctioned cryptocurrency mixers are not really companies, or government agencies, or individuals. They are lines of code that can be accessed through the internet by anyone with the technical know-how—and possibly by some just messing around. Moreover, while this sanctions action effectively closed Tornado Cash by making it unpalatable for reputable companies to work with, mixer services are in demand for major hacker groups, and it is only a matter of time before ones are designed that bypass third party throttles. This means unwary cryptocurrency traders could do business with sanctioned lines of code in the future without ever realizing it. Cases will turn on whether defendants had the appropriate mental state.

Moreover, OFAC will likely want its law enforcement partners to ramp up scrutiny on users of these services to ensure sanctions have teeth.

In sum, while financial regulators are still deciding what to do about cryptocurrency as an investment vehicle, National Security regulators like OFAC have fired a broadside into cryptocurrency money laundering operations. This will have grave consequences for defendants accused of money laundering through cryptocurrency and open new avenues of criminal liability for sanctions violations.

Talk to an Experienced Attorney

If you believe you may be convicted of money laundering or sanctions violations through cryptocurrency, contact a federal white collar crime attorney with experience in these areas and able to adapt to technological innovations. If you would like to discuss your case with us confidentially, please use the contact form to set up your free consultation.

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