Top Chicago Criminal Defense Lawyers Explain Crypto Currencies and Prosecutions
Cryptocurrencies Explained
A great number of Americans have heard of “crypto currencies,” but really do not understand them. Cryptocurrencies are “virtual” currencies that are possesses in an encrypted digital wallet. Thus, there are no physical dollars or coins associated with them.
Importantly, cryptocurrencies are not backed by, or issued by, a Government. In other words, if a cryptocurrency fails or goes belly up, there is no Governmental entity to come in and make payments to those who have suffered losses.
Cryptocurrencies also require a great deal of computing power to transact because of the unique nature of each piece of currency. The value of cryptocurrency fluctuates daily, so it is best used as a type of investment or means of exchange, rather than as a daily-use currency.
When compared with physical, Government-backed currencies, arguably it is more difficult for one to commit fraud with cryptocurrencies, as compared to physical currencies including because of the existence of a “ledger,” which is a record of all cryptocurrencies bought, sold, or traded. The ledger protects an individual’s privacy through the use of unique identifiers for each individual – instead of his/her name. Before engaging in a crypto transaction, users can ensure the seller/sender actually owns what he or she purports to transfer, and that it has not been sold to multiple people.
In the United States, crypto crime rates appear to rise and fall with the market value of cryptocurrencies.
Crypto Prosecutions
Crypto Crimes are typically criminally prosecuted as securities fraud, wire fraud, tax fraud, money laundering, or racketeering.
Government agencies like the SEC, IRS, FinCEN, and CFTC can also bring civil enforcement actions for crypto offenses as well.
| Explanation | Statute | Enforcement Actions | |
| Securities Fraud
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Securities fraud applies to a variety of illegal activities involving deception of investors or manipulation of financial markets.
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Securities Fraud Statutes:
18 USC § 1348 | Securities and Commodities Fraud.
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The SEC does not consider cryptocurrencies as securities in most cases. However, in limited instances, federal securities laws can be applied to cryptocurrencies.
If a transaction(s) meet each of these conditions, individuals may be charged with securities fraud: · Investment of money, · Expectation of profits for investment, · Investment of money is in a common enterprise (where all parties involved contribute to the investments and expect a profit), and · Any profit comes from the efforts of a promoter or third party. |
| Wire Fraud | Wire fraud is a federal crime, which punishes criminally fraudulent activity carried out using electronic communications that cross State lines. | 18 USC § 1343 | Fraud by wire, radio, or television.
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The CFTC enforces Regulations relating to fraudulent schemes, unregulated commodities exchanges, and price manipulation. Cryptocurrencies are commodities, and many crypto prosecutions begin with CFTC investigations. |
| Money Laundering
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Much like more traditional forms of money laundering, crypto money laundering typically utilizes multiple transactions, some of which go through seemingly-legitimate transactions to conceal the illicit origin of the funds. | Anti Money Laundering Act of 2020 (AMLA).
Money Laundering Control Act 1986
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The U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) typically investigates money laundering cases.
See 2022 Money Laundering Quick Sheet.
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| Tax Fraud | Cryptocurrencies are a virtual currency taxed as property. Sales of cryptocurrencies are taxable and must be properly reported.
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26 USC § 7201 | Tax evasion.
26 USC § 7202 | Failure to collect or pay tax. 26 USC § 7203 | Failure to file return, supply information or pay tax. 26 USC § 7206 | Fraud and false statements. 26 USC § 7212 | Interference with IRS laws. |
The IRS tracks these transactions through information requests to all major Virtual Currency Exchanges (“VCE”) where cryptocurrencies are bought, sold, and traded.
See 2022 Tax Fraud Quick Sheet
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Common Crypto Crimes
| Crime | Explanation |
| Phishing Scams | Crypto phishing scams deceive their targets by sending seemingly legitimate emails and/or text messages to convince another to follow a login link to a crypto account. Once the target logs in, the scammer collects the target’s login information and steals or holds the funds for ransom. |
| Pump and Dump Schemes | In a pump and dump scheme, numerous individuals work together to drive up the price of a cryptocurrency. Once the price is sufficiently inflated, the scammers promptly sell their currency, which tanks the value for new investors. |
| Blackmail and Extortion | Blackmail and extortion scams exploit their targets by claiming to have a photo, video, or other embarrassing information about the target, which the scammer will keep private if the target pays, or release publicly if they do not. Examples include “revenge porn,” information about an affair or debt, information about criminal activity, or something else their target wishes to keep private. |
| Business or Job Opportunity Scams | This type of scam offers an opportunity within the crypto realm. For example, crypto mining or investor recruitment. The first requirement for the opportunity is to invest in, purchase, or pay in cryptocurrency. Another type of scam is similar to common check fraud scams. A scammer deposits crypto into the target’s crypto or bank account, purportedly in exchange for either Government-backed currency or another type of digital currency. Once the target provides the requested currency, the deposit into the target’s account fails or bounces. |
| Giveaway Scams | A giveaway scam most often entices victims by impersonating a celebrity or public figure offering free cryptocurrency to a certain number of people.
Some common example of giveaway scams include “Elon Musk” offering hundreds of thousands or millions of cryptocurrencies, like Bitcoin, Dogecoin, or Ethereum via X (formerly Twitter) for alleged Tesla and/or SpaceX milestones. Another method uses YouTube deep fakes to impersonate celebrities who want to “give away” millions in cryptocurrencies. |
| Investment Scams | In crypto investment scams, an “investment manager” or online “friend” or “romantic partner” will convince another to participate in an opportunity with the promise of profit. These scams are often highly convincing with resources like websites, brochures, and “successful client” stories and examples. Once an individual logs in to his or her account via these platforms, the crypto thief will either hijack your account or hold it for ransom. |
| Impersonation Scams | Impersonation scams aim to steal cryptocurrency by impersonating law enforcement personnel, bank, credit union, or other financial institution personnel, or large businesses people frequently interact with, like Amazon or FedEx. Often, they convince an individual that his or her account is frozen or that products are being held until a transfer of bitcoin takes placed to “solve the problem.” Impersonation scams may also attempt to leverage online “relationships” or “influencers” to convince victims to part with their cryptocurrency. |
Michael Leonard
Matthew Chivari
Kenzie Milton
Leonard Trial Lawyers
March 23, 2024