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January 4th, 2024
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Digital Asset Classification vs Wire Fraud: What’s the Most Powerful Law in Crypto Right Now
Reuters | Ian McGinley | Aug 23, 2022
Regulation and enforcement in the cryptocurrency space are hot topics, with the debate centered around the complex issue of whether to classify digital assets as securities, commodities, or a separate asset class entirely. In the middle of this debate, the Department of Justice (DOJ) has sent a message — the classification does not matter for its purposes. In recent prosecutions, DOJ has used the wire fraud statute, 18 U.S.C. § 1343, a law with origins dating back to the 1800s, to bring innovative cases in the cryptocurrency space that do not depend on how a digital asset is classified.
See: Analysis: Into the Eye of a Tornado | Sanctions Compliance Best Practices for Crypto Businesses
DOJ has used wire fraud to prosecute the first two rug pulls involving NFTs and to prosecute two digital asset insider trading cases. DOJ has not recently used wire fraud in a large-scale market manipulation case, but it is likely to be a next area of focus, given public reports of market manipulation and spoofing (creating orders with the intent to cancel) by crypto whales, who are individuals or entities that own substantial amounts of a particular cryptocurrency.
Recent Rull Pull Cases
- In the first half of 2022, DOJ charged two innovative NFT rug pull cases using the wire fraud statute, both of which are still pending. First, in March 2022, the U.S. Attorney's Office for the Southern District of New York (SDNY) in U.S. v. Nguyen charged the first fraud case involving NFTs. SDNY alleged that the creators of the Frosties NFT collection committed a $1.1 million rug pull by falsely promising purchasers that in addition to cartoon-like images, they would receive perks, such as giveaways and access to a metaverse game.
- Second, in June 2022, the DOJ Fraud Section in U.S. v. Tuan charged the second NFT rug pull against the creator of the "Baller Ape" NFT project, alleging a $2.6 million rug pull. The allegations in that case are even more egregious: the creators did not provide anything to purchasers, not even images.
- In neither case did the DOJ allege that the NFTs at issue were securities or commodities, as the classification of NFTs was immaterial to the wire fraud charges. DOJ charged a basic theory of wire fraud — that purchasers of these NFTs did not receive what they were promised.
- While these were not large-scale frauds, they underscore DOJ's focus on the accuracy of the statements and disclosures defendants made to purchasers in digital assets -- regardless of the identity of the underlying asset.
See: Crypto Exchanges Comply But Ethereum Community Unhappy About Harsh Canadian Rules
Going forward, we can expect DOJ to focus on larger disclosure issues, likely at the corporate level. Crypto companies communicate with the public frequently, over various forms of social media. Companies often respond in real time to market events. While communicating quickly and frequently with the public has commercial benefits, it can also lead to inaccuracies. DOJ has already used wire fraud to prosecute alleged misrepresentations made over social media in other contexts (seeU.S. v. Milton, S.D.N.Y. 2021), and it may seek to do so as well in the crypto space.
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