QUESTION
Our compliance department notified us that the government has stopped criminal, regulatory, anti-money laundering enforcement of the crypto sector. We are a bank that accepts cryptocurrency transactions. For instance, we accept cryptoassets such as Bitcoin.
One of my tasks is to monitor the cryptocurrency exchange platforms. I want to know the extent to which it is necessary to monitor these platforms if there is not going to be any enforcement. Are we wasting our time? I realize that government officials want to deregulate crypto, but it seems a stretch to allow the exchange platforms to bear no accountability. I hope you can shed some light on this subject.
If there is not going to be enforcement of regulations involving cryptocurrency, to what extent is it necessary to monitor exchange platforms?
SOLUTION
- AML TESTING
- AML TRAINING
- AML RISK ASSESSMENT
- AML PROGRAM [Written Policy]
RESPONSE
On April 7, 2025, Todd Blanche, the Deputy Attorney General in the DOJ, issued a memorandum containing the following statement:
''The Department of Justice is not a digital assets regulator.''[i]
The memorandum was issued a couple of weeks after President Donald Trump pardoned several cryptocurrency executives and a company that had pleaded guilty to anti-money laundering compliance violations.[ii]
The Justice Department has decided to stop pursuing those cases altogether. That means, in substance, that the DOJ will no longer pursue litigation or enforcement actions that effectively superimpose regulatory frameworks on the digital assets sector.
In other words, there is a focus on deregulating the cryptocurrency industry. The Justice Department will no longer target virtual currency exchanges, "mixing and tumbling" services, and offline wallets for the acts of their end users and unwitting violations of regulations.
Furthermore, the memorandum makes clear that prosecutors are directed not to charge regulatory violations in cases involving digital assets, including unlicensed money transmitting, violations of the Bank Secrecy Act, unregistered securities offering violations, and other registration requirements under the Commodity Exchange Act. When there are cases involving digital assets, prosecutors are now directed to pursue illicit financing by the culpable individuals and enterprises themselves – but not against the platforms they use to conduct the illegal activity.
DISBANDED OVERSIGHT
Mr. Blanche also disbanded the Justice Department's National Cryptocurrency Enforcement Team, effective immediately, and directed the Market Integrity and Major Frauds Unit to cease cryptocurrency enforcement and instead focus on other priorities, such as immigration and procurement frauds.
You mention that your task is to monitor the cryptocurrency exchange platforms. It appears the DOJ has changed its focus away from regulating the platforms themselves, seemingly interested in only the illicit transactions of bad actors who use the platforms. To me, this seems like going after bad drivers while doing nothing to put stop signs on the road itself to protect pedestrians.
Cryptoasset exchange platforms are subject to certain regulatory oversight, but the level and nature of that oversight vary depending on the specific jurisdiction and the nature of the cryptoassets being traded. In the US, platforms that trade cryptoassets that are securities are subject to registration and regulation as national securities exchanges. Additionally, platforms may need to register as Money Services Businesses (MSBs) with the Financial Crimes Enforcement Network (FinCEN). The Commodity Futures Trading Commission (CFTC) also regulates crypto derivatives. A regulatory referral about an cryptocurrency exchange platform to the DOJ may now not be prosecuted with respect to illicit activity conducted by the platform itself.
EUROPE AND THE UNITED STATES
A number of consumer protection issues arise from the use of cryptoassets. As a matter of fact, the European Banking Authority has warned that consumers who have bought cryptoassets through an exchange platform may lose their money if that exchange platform is hacked and subsequently goes out of business. Indeed, there is no legal protection offered for losses arising from funds held on these exchange platforms. A similar warning was issued by the Financial Services Compensation Scheme. The Consumer Financial Protection Bureau (CFPB) has released a consumer advisory bulletin to warn consumers of the risks posed by cryptoassets.[iii]
BILLIONS IN MISSING CRYPTOASSETS
Cryptoasset exchange platforms have not been subject to sufficient regulatory oversight. Therefore, without the needed regulatory oversight, cryptoassets purchased through an exchange platform could be lost if the platform fails or goes out of business. The collapse of FTX has shed light on the potential for such losses. It lost $8 billion in customer funds that were missing or unaccounted for.[iv]
In fact, one of the world's first bitcoin exchange platforms was Mt Gox, which launched in 2010. It allegedly lost $350 million in Bitcoins. Mt Gox filed for bankruptcy for the outstanding debt, admitting that 750,000 of its customers' Bitcoins and 100,000 of the company's own Bitcoins were missing (estimated to be worth more than $450 million worth of Bitcoins).[v]
Although most jurisdictions operate deposit protection statutory frameworks for money, cryptoassets tend to fall outside of the scope of deposit protection schemes, further increasing the lack of protection offered to consumers. The Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund typically protects consumer funds if a bank or credit union fails, but this doesn't apply to cryptoasset accounts. So, if an exchange or wallet company fails, the government will not cover the losses.
In the UK, there is currently no protection for any cryptoasset loss incurred by a consumer. Cryptoassets are not ordinarily regulated in the UK and so are not afforded the same protections as consumers' money in savings and current accounts with authorized banks, building societies, and credit unions. However, while the United States is now deregulating cryptocurrency exchange platforms, actions are being taken to regulate the cryptoasset landscape in the UK and EU, thereby providing greater consumer protections.
GOING AFTER THE BANDITS
Going after the bandits without regulating through enforcement the exchange platforms on which they operate seems to be a considerable reduction in consumer protection. Cryptoassets (i.e., Bitcoins and other virtual currencies) tend to be stored in digital wallets that, although secure in many ways, are vulnerable to hacking. Cases of consumers losing cryptoassets in excess of $1 million have been reported. In the event of hacking, unlike the credit protection in place for credit card transactions, very little can be done to retrieve the lost currency.
In addition, cryptoassets can be adversely affected by human error. Payments using cryptoassets are not protected by the "rights of refund" under EU laws, and therefore, unauthorized or incorrect debits cannot usually be reversed. There is the possibility that transactions in virtual currency may be irretrievably lost if the private keys required to make a transaction are lost, stolen, or disappear due to a technological fault. One reason for this happening is that there are no central agencies that record passwords or issue replacement ones if forgotten or lost.
DEREGULATING EXCHANGE PLATFORMS
The adverse effects on the consumer caused by the absence of regulatory enforcement of exchange platforms are overtly apparent. Although there are some systems in place to reduce illicit activity, such as escrows, these are not failsafe. The idea behind a central escrow, operationally speaking, is that the customer does not send the payment to the merchant directly; instead, it is held in escrow until the product or service has been received. Obviously, sending payments directly to merchants would give consumers little protection from fraudulent transactions, and having a two-tiered payment process insulates the consumer and prevents them from paying for a service that they ultimately do not receive. Cryptographic algorithms are also used to transfer funds securely over the internet. These algorithms are designed to prevent the possibility of forged payments or double spending on digital currency units.
The operation governing Bitcoin's multi-signature escrow transactions (viz., "Bitrated") means that no data is saved on its server. A decentralized computer system may verify transactions, which records all transactions in an immutable blockchain or public ledger. But, to be clear, these measures and the foregoing methods have been adopted in an attempt to secure against hackers while also supposedly increasing transparency in the virtual currency network.
STATE REGULATORY GUIDANCE
The Conference of State Bank Supervisors (CSBS) has issued a Model Regulatory Framework for State Regulation of Certain Virtual Currency Activities (Model Framework) to assist individual states in regulating cryptoassets activities.[vi] The Model Framework includes key components to be included in a regulatory regime to afford customer protections while facilitating innovation.[vii] The CSBS sought to "examine the intersection between state supervision, state law, and payments developments, and to identify areas for consistent regulatory approaches among states."[viii] The CSBS has concluded that activities involving third-party control of virtual currency, including for the purposes of "transmitting, exchanging, holding, or otherwise controlling virtual currency, should be subject to state licensure and supervision."[ix] It remains to be seen if the states will pick up where the federal government has left off.
CONCLUSION
I think it is essential to question and monitor the safety of cryptoasset exchange platforms. Among other things, there is the possibility that transactions in virtual currency may be irretrievably lost if the private keys required to make a transaction are lost, stolen, or disappear due to a technological fault. Cryptocurrency exchange platforms are targets of illicit hacking as well as alleged illegal activities by their owners.
Financial crimes certainly do occur at the platform level. Sam Bankman-Fried, the founder of FTX, was charged with several crimes related to the collapse of the cryptocurrency exchange. These included wire fraud, securities fraud, and conspiracy to commit money laundering. The charges stemmed from allegations that he defrauded FTX customers, investors, and lenders to his affiliated hedge fund, Alameda Research, by misappropriating billions of dollars of customer funds. Bankman-Fried was found guilty of all charges including fraud. A jury in New York found him guilty of securities fraud and six other criminal counts. Now, the founder of the cryptoasset exchange platform, FTX, could spend the rest of his life in prison.[x]
Ensuring the legal, safe, and stable delivery to the public of financial products or services via a financial services platform has always been the foremost mission of regulators and prosecutors. Consumers should be able to rely on supervision, criminal referrals to the DOJ, and enforcement with respect to potential violations of consumer financial protection regulations and statutes inherently implicated in a cryptocurrency exchange platform.
Jonathan Foxx, PhD., MBA
Chairman & Managing
[i] Ending Regulation by Prosecution, Memorandum for All Department Employees, Blanche, Todd, April 7, 2025, U.S. Department of Justice
[ii] In late March, Mr. Trump pardoned the co-founders and a top employee of BitMEX, a cryptocurrency exchange that had failed to implement an adequate anti-money laundering compliance program. They had pleaded guilty to violating the Bank Secrecy Act and all received probation, other than the former chief executive, who was sentenced to six months of home confinement. Mr. Trump also pardoned the company that had operated as BitMEX, which was fined $100 million in January for Bank Secrecy Act violations.
[iii] For instance, the CFPB issued a 45-page bulletin on cryptoassets, entitled Complaint Bulletin, An Analysis of Consumer Complaints related to Crypto-Assets, November 2022, Consumer Financial Protection Bureau.
[iv] The estimated total loss due to the FTX collapse was around $8 billion. This figure represents the amount of customer funds that were missing or unaccounted for when the cryptocurrency exchange filed for bankruptcy. See also, FTX Scam Explained: Everything You Need To Know, TechTarget, Hetler, Amanda, January 2, 2015 https://www.techtarget.com/whatis/feature/FTX-scam-explained-Everything-you-need-to-know
[v] What Was Mt. Gox? Definition, History, Collapse, and Future, The Investopedia Team, Updated April 23, 2024. Reviewed by Erika Rasure, Fact checked by Pete Rathburn, Investopedia https://www.investopedia.com/terms/m/mt-gox.asp
[vii] Applicable across all 50 states of America, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands.
[viii] Op.cit. vi
[ix] Op.cit. vi
