Criminal Liability In Fintech And Blockchain-Related Crimes
1. Introduction: Fintech and Blockchain-Related Crimes
Fintech (Financial Technology) refers to the use of technology to deliver financial services, including digital payments, lending platforms, and cryptocurrencies.
Blockchain is a distributed ledger technology underpinning cryptocurrencies like Bitcoin and Ethereum. It provides decentralized and immutable records, but its pseudonymous nature poses unique criminal law challenges.
Types of Crimes in Fintech and Blockchain
Fraud and Scams: Ponzi schemes, phishing, fake ICOs.
Money Laundering: Concealing illegal funds using digital assets.
Unauthorized Access / Hacking: Account takeovers and wallet theft.
Insider Trading / Market Manipulation: In crypto exchanges.
Tax Evasion / Regulatory Violations: Misreporting crypto transactions.
2. Legal Principles of Criminal Liability
Mens Rea (Intent): The offender must knowingly or intentionally commit the offense.
Actus Reus (Action): The illegal act, such as transferring stolen crypto or issuing fraudulent tokens.
Strict Liability Offenses: Some fintech regulations impose liability regardless of intent (e.g., failing to follow KYC/AML rules).
Jurisdiction Issues: Blockchain’s decentralized nature makes cross-border enforcement challenging.
3. Case Law Illustrating Criminal Liability in Fintech and Blockchain Crimes
Case 1: United States v. Shrem (2015)
Facts:
Charlie Shrem, a Bitcoin entrepreneur, was involved with BitInstant, a Bitcoin exchange. He was charged with aiding and abetting unlicensed money transmission and laundering proceeds for users of the Silk Road marketplace.
Key Points:
Shrem knowingly facilitated transactions for illicit activities on Silk Road.
Evidence included blockchain transaction records, bank records, and communications.
Outcome:
Pleaded guilty to aiding and abetting money laundering.
Sentenced to two years in prison.
Significance:
Demonstrates that cryptocurrency transactions, though pseudonymous, can be traced, and facilitating illegal activity carries criminal liability.
Case 2: SEC v. Munchee, Inc. (2017)
Facts:
Munchee, a blockchain startup, conducted an ICO (Initial Coin Offering) without registering it as a security.
Key Points:
SEC argued that the tokens were securities under U.S. law.
Investors were misled regarding the utility and value of the token.
Outcome:
ICO was halted; Munchee refunded investors.
SEC emphasized that misrepresentation and unregistered offerings can lead to civil and criminal liability.
Significance:
Shows that fraudulent ICOs and misrepresentation in fintech are prosecutable, even if blockchain is used.
Case 3: United States v. Faiella & Gilmore (2014)
Facts:
Faiella and Gilmore operated Bitcoin Savings & Trust, a Ponzi scheme promising high returns paid in Bitcoin.
Key Points:
They collected over 700,000 BTC from investors.
Evidence included transaction logs on the blockchain, investor complaints, and emails.
Outcome:
Both were convicted of fraud and money laundering.
Sentences included several years in prison and asset forfeiture.
Significance:
Highlights that Ponzi schemes using cryptocurrencies are subject to traditional fraud laws, and blockchain records can be key evidence.
Case 4: United States v. Gelfman (2018)
Facts:
Gelfman managed a digital currency hedge fund and was accused of misappropriating investor funds.
Key Points:
Gelfman used investor deposits for personal purposes, violating fiduciary duties.
Blockchain transaction trails were crucial in tracing diverted funds.
Outcome:
Convicted of wire fraud, securities fraud, and money laundering.
Significance:
Demonstrates that digital financial assets in fintech are treated like traditional assets for fraud and fiduciary violations.
Case 5: United States v. QuadrigaCX Executives (Canada, 2019)
Facts:
QuadrigaCX was a Canadian crypto exchange. After the death of its CEO, millions of dollars in crypto went missing. Executives were charged with fraud, misrepresentation, and mishandling funds.
Key Points:
Customers lost funds due to poor management and misrepresentation.
Blockchain records helped track deposits and withdrawals, though wallets were inaccessible.
Outcome:
Criminal investigation revealed negligence, mismanagement, and potential fraud.
Highlights the challenge of custodial responsibility in crypto exchanges.
Significance:
Shows that exchange operators can face criminal liability for mismanagement or fraudulent conduct.
Case 6: United States v. Nakamoto / Silk Road (Ross Ulbricht, 2015)
Facts:
Ross Ulbricht operated Silk Road, an online marketplace for illegal drugs, paid with Bitcoin.
Key Points:
Ulbricht charged with money laundering, computer hacking, drug trafficking conspiracy.
Bitcoin transaction analysis and server logs linked him to the operation.
Outcome:
Convicted on all counts and sentenced to life imprisonment without parole.
Significance:
Shows the traceability of blockchain transactions and severe criminal liability for using fintech to facilitate illegal marketplaces.
Case 7: United States v. Boaz Manor (2020)
Facts:
Manor was involved in phishing attacks targeting cryptocurrency wallets, stealing Bitcoin from victims.
Key Points:
Victims’ transaction records and IP addresses linked Manor to the theft.
Blockchain analysis proved unauthorized transfers.
Outcome:
Convicted of wire fraud, theft, and money laundering.
Significance:
Demonstrates that account takeovers and crypto theft constitute criminal offenses, and digital forensic evidence is admissible in court.
4. Key Takeaways
Fintech and blockchain crimes are prosecuted under traditional fraud, money laundering, and cybercrime laws.
Criminal liability extends to:
Facilitating illicit transactions
Running fraudulent ICOs
Misappropriating funds or assets
Unauthorized access to wallets or exchanges
Evidence types include blockchain transaction records, bank accounts, digital communications, and forensic IP tracking.
Jurisdictional issues are significant due to the global and pseudonymous nature of blockchain, but courts have relied on digital trails to secure convictions.
Courts treat cryptocurrencies as property or financial assets, subject to fraud, money laundering, and theft laws.
RELATED Blog
comments