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  • Kimberly Tanner

Curbing crypto crimes abroad: will U.S. laws succeed?

With the recent fraud scandal involving the cryptocurrency exchange FTX, the regulatory landscape of cryptocurrencies changed rapidly.  As investors, politicians, and others realized the pervasiveness of illicit activity inherent in the blockchain. Concerns regarding crime involving cryptocurrencies are real. Crypto crimes affect the ability to enter and protect a free and fair marketplace. These crimes also hinder public trust in cryptocurrency and blockchain technology.  According to a leading blockchain investigation organization Chainalysis, 2022 saw a $20.6 billion volume received through illicit activity, namely scams and funds sent or received by sanctioned entities or individuals. 

The scope of cryptocurrency law in the United States, as it currently stands, tends to be focused heavily on regulatory violations; however, various exchange scandals and the discovery of more individual crimes led to an increased focus on bringing criminal charges.  However, it is essential to recognize that cryptocurrency’s presence in the United States is declining. Many cryptocurrency traders live outside of the United States, and many cryptocurrency exchanges are fleeing the U.S. market. To understand what may come with crypto crimes, regulators and attorneys alike must inquire to what extent U.S. law can apply extraterritorially to control illicit cryptocurrency actions. 

The Supreme Court in RJR Nabisco v. European Community held that applying U.S. law on foreign actors or entities extraterritorially requires that: 1) a statute has expressly written in extraterritorial language; 2) the criminal action is found to involve American actors abroad; or 3) foreign, illicit activity conveys an “intended and substantial effect on the U.S. market. Where the substantial effect on the United States is at issue, courts require a nexus between the illicit action and the jurisdiction where legal action is brought. 

Establishing proof of a substantial effect or a sufficient nexus becomes tricky with cryptocurrency. Illicit or criminal transactions account for less than 1% of all 2022 cryptocurrency transactions. Because of the decentralized nature of many cryptocurrencies, the ability to track funds becomes difficult. Only certain blockchain transactions can be easily tracked by blockchain exploring software. Different cryptocurrencies also use blockchain technology differently, requiring a slightly different analysis of the chain of transactions.  In cryptocurrency, obfuscating funds by creating jumps in transactions, splitting funds through other wallets, or transferring funds to various coins is easy. Common illicit crypto transactions include trading on an illicit market (i.e., darknet trading or online gambling), trades or proceeds gained from illegal activities (i.e., child abuse materials, terrorist financing, gambling). Many of these individuals or entities sponsoring these kinds of illicit activities are based outside the United States, often meaning these illicit trades occurred abroad.        


What would the judicial standard of “substantial effect” be when few crypto transactions are illicit and may not even touch the United States?  Courts seem to suggest that the key to extraterritorial application through “substantial effects” is the nexus between the illegal activity and the location of the illegal activity within the United States. In the context of cryptocurrency, courts have interpreted this nexus requirement strictly, requiring either an express statutory allowance for extraterritorial application or that the illicit action took place in that court’s jurisdiction. The court in Terpin v. AT&T Mobility, LLC held that California legislatures “did not intend the statutes of this state to have force or operation beyond the boundaries of the state.” The court continued, holding that simply declaring residency in a particular jurisdiction is not sufficient to establish the extraterritorial nexus requirement.  Instead, the court stated that satisfaction of the nexus requirement requires that the “liability-creating conduct [to occur] in California or establish how any of his California statutory claims apply extraterritorially.” Davis v. Jumio Corp. clarified the scope of the Terpin “liability-creating conduct” standard, finding that, if the alleged actions were found to have occurred “primarily and substantially” in that court’s jurisdiction, then the nexus requirement is satisfied.  Factors the court can consider are the Plaintiff's residency, the harm's location, and where company policies are enforced. 

When it comes to crypto crimes, extraterritorial application of U.S. laws is likely unsuccessful. It seems that states require either that the statutes expressly allow for extraterritorial application or that a substantial portion of the illicit events took place in the jurisdiction at issue.  For cryptocurrency, this likely means that any substantial effects test will fail unless a criminal actor conducts the crypto crime in that court’s jurisdiction.  In recognizing this trend in statutory interpretation, statutory changes at the state level would need to occur.  Such changes at the state level would allow for broad, statutory interpretations, granting more freedom for extraterritorial applications of statutes; otherwise, regulators might find their efforts in curbing crypto crime halted. 

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