In 2022, the Web3 space is seeing increased scrutiny from regulators, legislators, and law enforcement entities in the United States, particularly related to cryptocurrency activity. The United States is not alone in this endeavor. Other countries are similarly working on how to define regulatory guidelines for cryptocurrency and, together with the United States, are seeking to understand how to facilitate cross-country coordination in law enforcement cases. The introduction of new proposed legislation and the announcement of federal indictments involving cryptocurrency and digital asset schemes increasingly have people wondering what the future of regulation will look like in Web3.
This blog article details major regulatory developments in Web3 this year thus far as well as details some of the most notable federal law enforcement cases that have been announced in the last few months. With these impending developments, it is more important than ever for projects to undergo security processes, such as the CertiK KYC, in order to commit to higher levels of verification and due diligence.
In June 2022, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Responsible Financial Innovation Act Bill, legislation that is intended to create a regulatory framework for digital assets. The bill, among other things, seeks to define crypto assets and establish a congressional advisory committee that will develop guiding principles to help advise policymakers on cryptocurrency. The bill creates a clear standard for determining which digital assets are commodities and what types are securities, providing clarity and structure for businesses and regulators.
The RFI Act signals further regulatory advancement in Web3. As more regulation develops in this space, cryptocurrency projects need to be aware of these changes and make a best effort to comply with any upcoming regulations. CertiK’s Smart Contract Audit and KYC services offer the highest level of verification on the market; implementing these services allows projects to demonstrate an effort at compliance and security protocols.
The RFI also makes provisions for expanding international information-sharing. This provision aids the effort of United States law enforcement entities to work with international agencies to investigate cryptocurrency crimes.
In February 2022, the FBI announced a new crypto-based unit dedicated to blockchain analysis and virtual asset seizure. The creation of this FBI unit signals increased efforts by law enforcement to develop capacity for cryptocurrency investigations.
Lisa Monaco, United States Deputy Attorney General, stated that “Know Your Customer” (KYC) requirements in cryptocurrency is a pertinent area that companies should focus on to help combat crime in this area. Projects seeking to comply with these standards while simultaneously protecting their privacy can do so through CertiK. CertiK offers the leading KYC Badge process that allows project teams to privately de-anonymize while remaining publicly anonymous, if they choose. KYC is conducted by an experienced group of former law enforcement investigators and military intelligence experts. Learn more about the CertiK KYC here.
In June 2022, the Department of Justice (DOJ) announced its first ever insider trading charges related to digital assets. Nate Chastain, a former product manager at OpenSea, allegedly committed insider trading by using his knowledge of confidential information on what NFT’s would be featured on OpenSea and then purchased and sold them according to when they would be featured.
In July 2022, three individuals were charged in a cryptocurrency insider trading tipping scheme. Among the individuals was Ishan Wahi, a former product manager at Coinbase Global, Inc. The federal indictment alleges that Wahi, on at least 14 occasions, tipped off his brother or an associate on what crypto assets Coinbase was planning to list. These actors then would place profitable trades on these assets in advance of the assets' public listing on the Coinbase platform.
In June 2022, the DOJ announced criminal charges against six defendants across six cases for their alleged involvement in cryptocurrency fraud. Included in these charges was the largest known NFT scheme charged to date, a fraudulent investment fund that traded on cryptocurrency exchanges, a global Ponzi scheme that sold unregistered crypto securities, and a fraudulent initial coin offering. In their indictment release, the DOJ announced their intent to continue to pursue investigations of criminal cryptocurrency schemes.
In July 2022, a federal jury convicted Randall Crater in NYC for scheming to defraud investors by marketing and selling fraudulent virtual currency through My Big Coin Pay Inc. Crater was convicted on four counts of wire fraud and three counts of money laundering; each count carries a maximum sentence of 110 years.
The clear increase in law enforcement investigations for criminal, cryptocurrency-related cases, as well as the introduction of proposed legislation in Congress, indicates an increasing focus on cryptocurrency-related activity from agencies, regulators, and legislators.
Web3 actors and enthusiasts must pay attention to the increase in law enforcement cases as these cases are the first of many to come involving wire fraud, money laundering, Ponzi schemes, and insider trading within Web3.