DOJ disbands its National Cryptocurrency Enforcement Team and will no longer pursue 'regulation by prosecution'

The U.S. Department of Justice "will no longer pursue litigation or enforcement actions that have the effect of superimposing regulatory frameworks on digital assets"

Earlier this month, the Department of Justice disbanded its National Cryptocurrency Enforcement Team and said it would no longer pursue what Deputy Attorney General Todd Blanche described as “regulation by prosecution.”

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The U.S. Department of Justice “will no longer pursue litigation or enforcement actions that have the effect of superimposing regulatory frameworks on digital assets” in lieu of regulatory agencies putting together their own frameworks for overseeing the sector, a 4-page memo signed by Deputy Attorney General Todd Blanche on April 7 said. In other words, the DOJ will no longer pursue “regulation by prosecution,” the memo said.

The DOJ's memo raised concerns that it may mean criminal activities in the crypto sector would not be prosecuted, or at least prosecuted as heavily as it was under the past several years — both by disbanding the National Cryptocurrency Enforcement Team (NCET) and by shifting the entity's priorities.

At a practical level, the memo itself is internal guidance but may not be a binding document. Multiple attorneys told CoinDesk they interpreted the guidance to indicate that the DOJ would still bring fraud or other criminal cases involving crypto, but would try to avoid any cases where the DOJ itself had to determine if a digital asset was a security or a commodity.

“Fraud is still fraud,” said Josh Naftalis, a partner at Pallas Partners LLP and a former prosecutor with the U.S. Attorney's office for the Southern District of New York. “This memo does not seem to say the DOJ is not going to prosecute fraud in the crypto space.”

Still, the memo raised alarms for prominent Democrats who questioned whether the DOJ was suggesting it would let criminal conduct occur. Senators Elizabeth Warren, Mazie Hirono, Richard Durbin, Sheldon Whitehouse, Christopher Coons and Richard Blumenthal wrote a letter to Blanche, saying his “decision to give a free pass to cryptocurrency money launderers” and shut down the NCET were “grave mistakes that will support sanctions evasion, drug trafficking, scams and child sexual exploitation.”

“Specifically, the Department will no longer target virtual currency exchanges, mixing and tumbling services and offline wallets for the acts of their end users or unwitting violations of regulations — except to the extent the investigation is consistent with the priorities articulated in the following paragraphs,” the DOJ memo said, a passage the Senators' letter referenced.

New York Attorney General Letitia James wrote an open letter to Senate leaders in the same week asking them to advance legislation to address cryptocurrency risks. She did not specifically reference Blanche's memo but detailed possible ways to better police the sector through legislation.

Katherine Reilly, a partner at Pryor Cashman and a former prosecutor with the U.S. Attorney's Office for the Southern District of New York, told CoinDesk that most of the major crypto cases brought by the DOJ in recent years would not have been affected had this guidance been in effect.

The BitMEX case in 2020, when the DOJ and Commodity Futures Trading Commission brought unregistered trading and other charges against the platform, is "probably closest to the line" of being a case that may not have been brought under this guidance, she said.

Trump pardoned BitMEX, its founders and a senior employee in late March, barely two weeks before the DOJ memo was shared.

"I think that it's clear that the Justice Department wants to limit the DOJ's role in regulating the crypto industry … looking beyond its role in other crimes, fraud, laundering proceeds from narcotics trafficking, things like that, and sort of take a step back from the role of trying to bring order and fairness to the crypto industry as a whole," Reilly said.

That's "probably the intent behind the BitMEX pardons too," she said.

Naftalis said the DOJ will continue to pursue drug, terrorism or other illicit financing charges even under the memo.

"I think that the headline for the industry is to the extent that there are legal uses of crypto, they're not going to set the guard rail by criminal enforcement," he said. "That's for Congress."

One section of the memo tells prosecutors not to charge Bank Secrecy Act violations, unregistered securities offering violations, unregistered broker-dealer violations or other Commodity Exchange Act registration violations "unless there is evidence that the defendant knew of the licensing or registration requirement at issue and violated such a requirement willfully."

Carla Reyes, an Associate Professor of Law at SMU Dedman School of Law, told CoinDesk that this may be referencing recent cases where developers build tools under the impression that they were not committing unlicensed money transmitting activities under existing guidance but may get charged anyway.

"Most criminal statutes require some level of knowledge to define your intention, and knowledge that you're committing a crime when you do it," she said. "The further away you get from that, the lesser the charge, but the more willful [and] intentional it