Crypto exchange civil asset forfeiture and the long tail of the law

Link to case

Before we get to The Bank Secrecy Act and in rem asset forfeiture proceedings, let’s talk about bread. In particular, there’s nothing like a good piece of sourdough bread. Still warm from the oven and with a nice bit of sweet butter and a couple sprinkles of sea salt, it’s one of life’s great pleasures. While I’m a half decent amateur cook, a good sourdough bread takes some real time and dedication. A recent piece in the New York Times by Sam Sifton describes the process — multi-day and a real-time investment but worth the payoff if the pictures are any indication. Me, I’ll stick with a pizza dough that I can mix up and use in an hour to make a nice crispy slice.

You know another thing that takes a lot of time? Yes, enforcement actions involving crypto exchanges. Maybe I’m just hungry, but I really did flash back on Sifton’s sourdough piece while reading a new asset seizure case that appears to have started with a 2015 FBI investigation into a Michigan crypto exchange called CoinGather. We’ve seen a ton of attention paid to the SEC and its enforcement activity related to the ICO boom a couple of years ago. Less attention has been paid to the Bank Secrecy Act ("BSA") and the long tail of enforcement activity arising from violations of that U.S. federal law, which requires that entities who act as Money Servicing Businesses register with FinCEN. Criminal violations of the BSA are subject to a five-year statute of limitations, so a late October 2014 violation is still fair game, and civil penalties are subject to a six-year statute of limitations.  

This new lawsuit is what’s known as an “in rem” asset forfeiture case under a federal law (18 U.S.C. 981 to be precise) that says that "any property, real or personal, involved in a transaction or attempted transaction in violation of section ... 1960 of this title, or any property traceable to such property" is "subject to forfeiture to the United States." Section 1960 of title 18 of the U.S. code is the Bank Secrecy Act).  

The plaintiff is the United States and the defendants are “Dell PowerEdge Server, Serial Number JNFHSW1, and Any and All Cryptocurrency or Other Digital Assets Contained in Virtual Currency Wallets Residing on the Dell PowerEdge Server, Serial Number JNFHSW1[.]” In rem means something like “against a thing” and describes a legal convention that allows you to literally sue property, instead of a person, to assert ownership over it. As an aside, the government seizes property all the time in connection with criminal cases and (somewhat disturbingly) can seize and even keep someone’s property, even if they haven’t convicted them of a crime or gotten a civil judgment against them. (Plenty of commentators have critiqued this practice, by the way; see for example.)

Anyway, this particular case arises out of an alleged violation of The Bank Secrecy Act. According to the Complaint, two years into the FBI’s investigation of a virtual currency theft, they searched the house of a target of the investigation in 2017, “at which time federal law enforcement identified evidence that the Target was operating a cryptocurrency exchange called CoinGather.”

From 2014 through 2017, CoinGather supported over 90 cryptocurrency pairs, but did not allow for conversion to fiat. It took a commission on trades. And, nope, it never registered as an MSB with FinCEN and never did any AML/KYC. It was hosted on a computer on the Target’s employer and “had created a direct connection between his residence, from where he operated CoinGather, to the Defendant Server located on the premises of Community ISP, Inc.” The FBI took possession of “the Defendant Server” which allegedly had 20,000 profiles on it and included a wallet with 157 cryptocurrencies, of which 124 have value, the aggregate amount of which is in the “millions of dollars.”

The Complaint says, basically, that the government is entitled to forfeiture of the server and the crypto. As a practical matter, this sounds like it means that anyone who had an account with CoinGather risks losing their assets unless they intervene in this asset forfeiture proceeding.

This is pretty standard stuff, incidentally. I suppose what caught my eye in particular is that the alleged BSA violations go all the way back to 2014 and the property was seized in 2017. Like sourdough bread, this stuff takes a long time. The case also involves a pretty sizable number of user profiles/accounts. I’d never heard of and, according to my unscientific survey on Crypto Twitter, this was a fairly minor exchange. Still, it’s another case that shows us that law and enforcement take time, if not multiple fermentations and rises. My prediction is that we will see a significant uptick in BSA related enforcement actions in the next year and probably some OFAC cases as well. Crypto learned all about the SEC and the Howey Test over the last two years — folks will be getting educated about FinCEN, civil asset forfeiture and The Bank Secrecy Act over the next two years.

Another thing folks may be forced to learn about is how to get their property back if it's on an exchange seized by the government and subject to asset forfeiture. Without going too deep into the weeds, the federal law that governs asset seizures does include provisions that govern notice to interested parties (e.g., people whose crypto was on an exchange that was seized). Now there’s kind of an existential issue here — if an exchange is being shut down because of BSA violations involving lack of KYC/AML, the government can’t exactly notify interested parties whose crypto has been seized because, whelp, there may be no such records and, let’s face it, people using the exchange might not want their identities known. Anyway, there is a process and if you’re interested you can give it a gander at 18 U.S.C. Section 983. If I were a betting man, I’d wager the chance of anyone making a claim to recover assets held with CoinGather is about as high as me starting a loaf of sourdough bread this afternoon (read, slim to none, and slim just left town).