The DOJ's Crypto Framework Is a Warning to Exchanges

Oct 14, 2020 at 12:00 UTC.The Department of Justice just fired a warning to crypto exchanges worldwide: Comply with U.S. law or face the potential wrath of the federal government.

The document came just days after prosecutors with the U.S. Attorney's Office for the Southern District of New York brought charges against crypto trading platform BitMEX, which is headquartered in the Seychelles, and its leaders, some of whom do not reside in the U.S."I do think this is definitely a warning shot about cryptocurrency exchanges that are located outside the U.S.," Marta Belcher, special counsel to the Electronic Frontier Foundation and general counsel at Protocol Labs, said of the framework.

Interpreted broadly, the DOJ's framework can also have implications for international exchanges that may have - or at one point, had - customers in the U.S. Exchanges that pulled out of the U.S. may not be safe either, based on the BitMEX charges.

Still, overseas exchanges that might have exposure to the U.S. should take note.

The DOJ framework notes that the U.S. has had anti-money laundering/countering the financing of terrorism measures for decades, with specific standards around cryptocurrency exchanges and activities since at least 2011.Despite this, many VASPs, as the U.S. government refers exchanges - still do not necessarily comply with the Bank Secrecy Act or other laws, the framework claimed.

The framework complained that some exchanges might hold U.S. customers to standards that do not apply to non-U.S. customers, or might treat crypto-to-crypto transactions differently from crypto-to-fiat transactions.

Since 2018, the U.S. has spearheaded efforts to unite global regulatory efforts around cryptocurrency exchanges and transactions through its presidency of the Financial Action Task Force, an intergovernmental standards-setting organization.

The Commodity Futures Trading Commission, Securities and Exchange Commission and Federal Bureau of Investigation charged 1Broker, a crypto product exchange based in the Marshall Islands, on claims that it allowed U.S. customers to trade on its platform.

Earlier this month, the SDNY and the CFTC unveiled a variety of charges against BitMEX, one of the world's largest crypto derivatives trading platforms - based in the Seychelles - as well as owners Arthur Hayes, Ben Delo and Samuel Reed.Both agencies allege U.S. residents were able to trade on BitMEX, despite the company not registering as a futures commission merchant, derivatives contract market or swap execution facility with the CFTC or conduct know-your-customer processes in compliance with the Bank Secrecy Act.According to the indictment, the DOJ is alleging the defendants violated the Bank Secrecy Act and conspired to violate the Bank Secrecy Act across two separate charges.

Berkovitz's comments, alongside the enforcement framework itself, seem to be implying the BSA, a broad AML/KYC-focused law, are applicable outside of the U.S.In other words, any transactions that might fit into the U.S. regulatory framework is fair game for enforcement, he said, a view the enforcement framework appeared to endorse.