October 14, 2020

CipherTrace

DOJ Publishes Cryptocurrency Enforcement Framework
Crypto Red Flags for Law Enforcement
Another DeFi Project Hacked
CEO of Bitcoin Escrow Company Pleads Guilty to Fraud and Embezzlement
CFTC, DOJ Charge BitMEX Owners with Illegal Operations
Florida Crypto Trader Charged With Stealing Millions from Investors

DOJ Publishes Cryptocurrency Enforcement Framework

On October 8, the US Department of Justice published the Cryptocurrency Enforcement Framework. The Framework is broken down into three parts: an overview of cryptocurrency-related threats, laws and regulations to combat these threats, and ongoing challenges and future strategies for cryptocurrency enforcement.

The framework distinguishes three main categories in the illicit use of cryptocurrencies: 1) using cryptocurrency directly to commit crimes or to support terrorism; 2) using cryptocurrency to hide financial activity, such as evading taxes or operating an unregistered MSB; 3) or committing crimes within the cryptocurrency marketplace itself. In discussing the DOJ’s ongoing challenges in combating these threats, the framework promises that the Department of Justice will continue its aggressive investigation and prosecution of those who use cryptocurrencies to commit, facilitate, or conceal their crimes, highlighting the fact that the DOJ “has prosecuted a number of individuals operating as P2P exchangers for money laundering and for violating the BSA.”

According to Cyber-Digital Task Force member Brian C. Rabbitt, the acting Assistant Attorney General for the Criminal Division, “While the Department of Justice and its partners are committed to supporting the advancement of legitimate cryptocurrency technologies and uses, we will not hesitate to enforce the laws that govern these technologies when necessary to protect the public.” From criminal codes to regulatory authorities, the broad range of legal tools available for investigating and prosecuting individuals who misuse cryptocurrency for criminal purposes are all outlined within the framework.

Read the Press Release: https://www.justice.gov/opa/pr/attorney-general-william-p-barr-announces-publication-cryptocurrency-enforcement-framework

Read the Framework: https://www.justice.gov/ag/page/file/1326061/download

On the blog: How to know if your investigation involves cryptocurrency

According to the US Department of Treasury, there has been a consistent decrease in reported bulk cash seizures by agencies throughout the United States since 2013. This reduction could be indicative of increased cryptocurrency use by criminals who once preferred cash. The lack of cash seizures for known cash-intensive activities should be an automatic red flag for potential use of cryptocurrency to obfuscate and move funds.

The signs of cryptocurrency usage, however, can easily be overlooked by investigators unfamiliar with what to look for.

Know the signs: https://ciphertrace.com/crypto-red-flags-for-law-enforcement/

DeFi Project WLEO Hacked for $42,000

On October 11, the Wrapped LEO (WLEO) DeFi project contract was hacked, resulting in $42,000 worth of stolen funds. According to an update on the LEO Finance website, the hacker stole Ethereum from the decentralized exchange Uniswap’s pool by minting WLEO to himself and then swapping it into the market for ETH. As a result of the hack, the price of WLEO plummeted by 99%.

The hacker has already transferred the ETH to an exchange using anonymous accounts, according to LEO Finance’s reporting. LEO Finance community founder Khaleel Kazi added that the exchange “had been contacted but there may be nothing they can do since the hacker seems to have used non-KYC’d accounts to receive the ETH.” Exchanges with weak or porous KYC allow unverified users to withdraw up to 2 BTC every day with limited due diligence.

Why it matters: The unaudited smart contracts on which many DeFi projects rely, unsurprisingly, often have vulnerabilities that bad actors can exploit. As Olaf Carlson-Wee, the founder and CEO of Polychain Capital, said on a recent episode of Unchained, “I do think it scares me a little bit how much capital is being dumped into contracts that are unaudited. I think that getting security audits is, overall, an important part of maturing any one of these systems.”

Listen to Unchained Episode 189: https://unchainedpodcast.com/olaf-carlson-wee-if-there-is-a-money-losing-exploit-the-money-is-gone/

Bitcoin Escrow Company CEO Pleads Guilty to Fraud and Embezzlement

Jon Barry Thompson, the head of New-York based bitcoin escrow company Volantis, pled guilty to fraud and embezzlement of over $7 million USD in investor funds. In court documents acquired by CoinDesk, Thompson admitted to misrepresenting Volantis’s bitcoin custody, control, purchasing practices, and risk exposure to secure investor funds. Thompson could face a maximum 60-year prison term. His sentencing is scheduled for January 7, 2021.

Thompson also settled with the Commodity Futures Trading Commission (CFTC) on Thursday, agreeing to pay $7.4 million in restitution as well as being barred from all future bitcoin trading and promising full cooperation in any future CFTC investigations.

Why It Matters: As the financial impacts of the COVID-19 pandemic continue, many people are turning to cryptocurrency projects to acquire loans on their digital assets, earn interest, and generate wealth. Bad actors continue to abuse cryptocurrency to scam users out of their funds. Cryptocurrency can be a great investment, but investors need to do their due diligence before backing a project.

Read the DOJ Press Release: https://www.justice.gov/usao-sdny/pr/principal-cryptocurrency-escrow-company-indicted-7-million-fraudulent-scheme

BitMEX Owners Charged with Illegal Operations and Anti-Money Laundering Violations

On October 1, the US Department of Justice announced the indictment of four BitMEX executives, charging the group with violating the Bank Secrecy Act (BSA), and conspiring to violate the BSA by “willfully failing to establish, implement, and maintain an adequate anti-money laundering (“AML”) program.” On the same day, the Commodity Futures Trading Commission (CFTC) filed a civil enforcement action charging five entities and three individuals that own and operate the BitMEX trading platform, including BitMEX CEO Arthur Hayes. These charges include operating an unregistered trading platform and violating multiple CFTC regulations such as failing to implement AML procedures while generating $1B USD in transaction fees.

In an effort to improve compliance, BitMEX has already taken steps to enhance their AML procedures and has hired a Chief Compliance Officer.

Read our analysis of the case: https://ciphertrace.com/cftc-doj-charge-bitmex-owners-with-illegal-operations-and-anti-money-laundering-violations/

Crypto Trader Charged With Fraud and Ordered to Repay Over $6 Million USD to Investors

Thomas J. Gity, a Florida man running a digital assets day trading company, was charged with fraud and embezzlement of over $6 million from investors. The SEC complaint, dated September 29, alleges that Gity defrauded investors of $6.8 million from January 2018 through January 2019 by promoting the false representation that “he was a highly-profitable digital asset trader and had never lost money during a trading day.”

Gity used this lie, along with promises of huge returns, to lure in over 18 investors to his operation. He also asserted that he had $100 million under management. The SEC alleges that Gity used the majority of investor funds to perpetuate his Ponzi-like scheme, while funneling about $1.8 million to his son.

Why It Matters: This case demonstrates that cryptocurrency investors should be cautious when choosing where to invest. Lofty promises that seem too good to be true are red flags. Digital assets, just like any other type of investment, attract malicious actors who leverage little-understood products and promises of riches to attract would-be-investors into their schemes.