Crypto Cops: Whatcha Gonna Do When They Come for You?

Cryptocurrency is gaining traction, not just in society, but in business as well. Keeping up with regulations will be paramount.
By: | July 29, 2022

Virtual currency has taken off in recent years, and the pandemic has certainly made this digital asset skyrocket into societal popularity.

Cryptocurrency investments have reached new heights since COVID entered the picture, as investors found wealth in the volatile world of digital coin. It also helps that more places are accepting digital currencies as payment, and even the world’s governments are starting to launch pilot programs to deal in crypto-cash.

But with so much new coming from the world of crypto, those dealing in the space are keen to know more about the legal picture surrounding it.

A webinar hosted by BakerHostetler, “Crypto Cops — What to do When They Come for You,” aimed to illuminate on some of the key legal topics, from enforcement in the digital asset space, regulatory issues and what to do when the crypto cops come for you.

Three attorneys from the firm, Teresa Goody Guillén, Michelle Tanney and Veronica Reynolds, shared insight on blockchain and cryptocurrencies. Here’s what they had to say.

Virtual Currency and Market Concepts

The panelists kicked off the webinar by giving a background and update on blockchain and cryptocurrency. President Biden recently passed Executive Order 14067 on March 9, designed to promote the responsible development of digital assets. This executive order is especially important, because it defines terms and concepts around digital assets.

“The creation of Bitcoin, in particular, allowed the solution to a problem people hadn’t been able to solve before, which is transacting without a third-party intermediary,” explained Reynolds. This means people no longer have to know their counterparty to trust doing business together — a revolutionary change in conducting business.

Teresa Goody Guillén, attorney, BakerHostetler

Because it’s important to understand the technology to participate in blockchain, the panelists spent time describing smart contracts, blockchain and the benefits of the peer-to-peer transactions we can experience with cryptocurrency.

In insurance, for example, using blockchain to facilitate exchanges could reduce fraud and speed payments to policyholders.

A trending use of the digital asset space was explained by Tanney: “Many athletes across the MLB and NFL are choosing to get paid in cryptocurrency. For example, the quarterback of the Jaguars, Trevor Lawrence, decided to have his entire rookie bonus of $24 million paid in cryptocurrency.”

Partnering with exchanges like Blockfolio, this new trend is changing the way people are compensated for their work and the way people purchase goods and services.

Regulatory Enforcement and Congressional Involvement

Regulation always follows innovation, and the digital asset space is no different.

With a new economy developing around these digital assets, congressional involvement and new regulations will continue to grow.

And regulatory enforcement is complex when it comes to cryptocurrency-related crime.

There are several different government agencies involved in the investigation, prosecution and prevention of cryptocurrency crime. Because cryptocurrency could be considered a currency, property, security or a commodity, different agencies are involved as regulators, including the IRS, the SEC, the Treasury Department and the Commodity Futures Trading Commission (CFTC).

Enforcement regimes also overlap, from the Department of Justice, the SEC, the CFTC and the Treasury Department, including the IRS and OFAC. Each agency has different enforcement and referral capabilities, which has led to overlapping and fragmented jurisdictions.

It can be challenging and frustrating for individuals to understand the enforcement and regulatory regimes, even at times being impossible to comply with conflicting requests from all regulatory agencies at the same time.

What to Do When the Regulators Come for You

Veronica Reynolds, attorney, BakerHostetler

There are various levels of regulatory control and different ways the regulatory agencies can come for you.

The SEC does sweeps, which are a way to gather information on an industry-wide basis. Sweeps don’t target one particular company but rather look at the operating model of an industry.

Next are SEC Voluntary Requests, which are formal notices sent to individual companies seeking information. While voluntary, the panelists noted not complying with the request can lead to additional consequences. The voluntary requests are generally before a formal order is issued.

The SEC and DOJ can subpoena documents or testimony. A subpoena can be issued to a witness or a target of an investigation, and you may not know which of these you are when you receive the subpoena.

Tips for Responding to a Subpoena or Request for Information

The panelists recommended a few key tips for responding to a subpoena or voluntary request for information:

  1. Hire a securities defense lawyer. They will ensure you comply with your obligations and responsibilities — and protect your interests. Speak with counsel to know how to preserve documents and evidence.
  2. Understand what is considered privileged. Clients can inadvertently waive their Fifth Amendment rights by making statements. Work with counsel to know what is considered privileged information in these cases — and what is not protected.
  3. Read the subpoena and understand the deadlines. Be prepared to meet all of the deadlines outlined in the subpoena.
  4. Outline tactics for producing documents or testimony. If documents are required, it may take time to find and reproduce all of the required evidence so start making a plan with counsel early.
  5. Don’t discuss the case, except with your attorney.
  6. Consider an independent investigation depending on the facts of the case.

Key Takeaways

Some of the key points stressed in the presentation were directed at attorneys but can be useful to insurers and risk managers, as well.

The first point was to know the technology to be able to opine on the law — and in the case of insurance, the risks. Like any other risk, knowing it well means insurers can better mitigate the hazards of cryptocurrency.

Another important point raised in the webinar is cooperation with the SEC and DOJ.

Michelle Tanney, attorney, BakerHostetler

Cooperation is integral to working with the SEC and DOJ. Four broad measures of company cooperation include self-policing prior to a discovery of misconduct, self-reporting misconduct when it is found, remediation efforts, and cooperation.

Tanney commented further about the delicate nature of self-reporting misconduct to regulatory agencies: “Self-reporting is an art, not a science. Working with competent counsel is integral in navigating that process especially when it comes to the remediation aspect like dismissing or disciplining wrongdoers or modifying internal controls.”

The panelists wrapped up by recommending proceeding with caution when it comes to cryptocurrency. They advised abiding by the old adage “ask for permission not forgiveness” with the SEC. It’s not always best to be first with new technology adoption, especially if you don’t know the digital assets market well.

Goody Guillén summarized this by saying: “Don’t gamble without knowing the stakes. When you’re involved in an investigation, your actions and decisions are gambles, and you should speak with a lawyer to know the pros and cons and consequences of decisions and actions and non-actions.”

Cryptocurrency, while exciting and potentially profitable, should be a proceed-with-caution investment. &

Abi Potter Clough, MBA, CPCU, is a keynote speaker, author and business consultant focused on leadership and strategy, personal branding, Insurtech and international risk management. She has over 15 years of experience at a Fortune 500 company with expertise in P&C claims operational leadership, lean management consulting, digital communications and Insurtech. She chairs the International Insurance Interest Group of the CPCU Society and devotes time to many international risk management projects. She holds many insurance industry designations. Abi can be reached at [email protected]

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