The Department of Justice recently released a report that served as a “Cryptocurrency Enforcement Framework” as part of the Attorney General’s Cyber Digital Task Force. The full contents can be read here. What follows are some key takeaways from the report and some additional context.
1- Distributed ledger technology and even cryptocurrency itself is regarded as a potential positive technological force by the Department of Justice
“At the outset, it bears emphasizing that distributed ledger technology, upon which all cryptocurrencies build, raises breathtaking possibilities for human flourishing.” — in almost the beginning of the report this key point stands out almost right away —a somewhat positive attitude to DLT and blockchain.
The report then brings up case studies of DLT usage in the federal government, from the FDA’s pilot of a machine learning and blockchain-based system to modernize food safety to the Department of Defense’s consideration of blockchain “to provide increased effectiveness, efficiency, and security.”
Even cryptocurrencies, often shorn by states and condemned by European financial institutions and Chinese ones alike, get some light credit in the first section — though it’s in the context of the Federal Reserve piloting digital currencies, not in the context of independent peers arriving to a global consensus — in other words, cryptocurrency concepts without the governance and political choices that make cryptocurrency special.
2- Three categories of crime involving cryptocurrency fall into special scrutiny by the Department of Justice: financial transactions involved with criminal activity (such as buying illegal drugs with cryptocurrencies), money laundering/evading tax laws, and crime such as theft of cryptocurrencies that directly affect cryptocurrency markets
Very early on (in the first ten pages), it’s clear that the Department of Justice is uniquely focused on specific times of crime associated with cryptocurrencies — mostly ones that involve either crimes committed in cryptocurrency markets or criminals using cryptocurrency to hide information or financial flows that can be associated with criminal activity.
Two difficulties for the Department of Justice come up often in this discussion: the technical know-how to understand what is going on, and the global nature of the distribution of cryptocurrencies. There’s a commitment to dedicate resources and tap long-standing international partnerships to help allay some of those issues, but it’s clear that these are regarded as fundamental challenges in the scope of what the Department of Justice seems most interested in: direct criminal activity in cryptocurrency markets, or information that can tie financial flows to criminal activity.
3- The Department of Justice tries to make clear, at least on a broad level, that it’s tracking key terms and innovations in cryptocurrency, especially privacy-preserving ones
Early on, a section is devoted to the Department’s view on Web 3.0, which seems to combine an awkward mash-up of strong Web 2.0 concepts (algorithmic personalization of content) vs. Web 3.0’s effects (less reliance on centralized service providers, whether ISPs or cloud services).
It seems to ignore the central thrust of Web 3.0 and mesh networks as one being oriented towards independent peer-to-peer communication and hosted services on self-owned and self-managed instances. Yet the message is clear: the Department of Justice is trying to figure out what these new ideas and technologies mean for its enforcement of the law. This appears largely because the report is a skimmed summary of Binance’s summary of Web 3.0 with important context removed, one of the few times and perhaps the only time the report cites a cryptocurrency source that is “quasi-official”.
Privacy-preserving technologies or cryptocurrencies such as Monero and mixing are specifically name-checked and expanded upon. In fact, the Department of Justice specifically cites even just the usage of what they describe as anonymity-enhanced cryptocurrencies (specifically citing Dash, Monero and ZCash) as a “high-risk activity that is indicative of potential criminal activity” on page 41 of the report.
Decentralized finance is also briefly mentioned — in a way that suggests that the Department of Justice is aware of the trend though is not yet ready to dedicate pages of case studies. ICOs have their own spotlight when it comes to cooperation with the SEC. Yet the central focus is very much on privacy-focused cryptocurrency chains and methods of privacy-enhancement — for now.
4- The Department of Justice is very focused on pre-defined rogue states, terrorist groups, and individuals using cryptocurrencies on Darknet markets
Most of the case studies cited are either individuals operating on the Darknet with cryptocurrencies (ex: DeepDotWeb), terrorist groups in Syria asking for bitcoin donations or “rogue nations” such as North Korea and Iran, with a specific case study on the SamSam ransomware the Department of Justice claims was created by Iranian hackers. Interestingly, despite the rise of the digital yuan (DCEP) and heavy burdensome restrictions on cryptocurrency exchanges and users, and the Department of Justice’s increasingly China-centric focus, China was not mentioned once in the report as either an example or counter-example.
Clearly, for now, the Department of Justice sees the upholding of the traditional financial order and the definition of rogue states as its framework for how to comprehend cryptocurrency, rather than “great power” conflict frameworks it has read into other parts of its enforcement powers.
5- The Department of Justice’s relationship and architecture with other government agencies with regards to cryptocurrency is fully sketched out, and occupies large parts of the report
A large part of the report is spent on case studies and specific examples/instances of the Department of Justice collaborating with different government agencies on cryptocurrencies and the way it thinks about those relationships, from FinCEN’s settlement with Ripple (which mitigated possible criminal charges from the Department of Justice’s parallel investigation with FinCEN) to how the SEC and the Department of Justice worked together to tackle the Telegram ICO.
Emphasis is placed on the Department of Justice’s long-standing relationships with regulatory agencies within the federal US government, as well as its surprising cooperation with state attorneys in New York state as well as international collaboration with the FATF (Financial Action Task Force), especially surrounding anti—money laundering provisions.
6- Most of the sources it cites are from the Wall Street Journal or internal government references
It appears that the Department of Justice is most comfortable citing the Wall Street Journal, Reuters, and an array of internal sources or other government agencies.
The only external source of note the author noted was a reference to Binance Academy’s Wiki section of Web 3.0, to make an adjacent point about Web 3.0 that was not central to the thurst of the article. This suggests an unwillingness to cite if not consult sources that might be closer to the ground on cryptocurrency terms and innovations, and which might have a slightly different or diverse perspective than the Department of Justice.
7- While potential for distributed ledger technologies is mentioned, it still feels like the Department of Justice sees cryptocurrencies as more threat than opportunity
The overwhelming part of the report is filled with case studies and specific statutes and crimes that were or could be committed with cryptocurrencies. Despite some encouraging and more balanced words at the beginning of the report, it seems that for the most part, the Department of Justice sees cryptocurrencies as more threat than opportunity. This is especially the case with regards to its opinion on privacy-enhanced cryptocurrencies such as Dash, Monero and ZCash — the line that even usage of them might be considered suspicion of committing crimes is a strong one, and would be akin to pre-suspecting anybody using end-to-end encryption of possible criminal activity.