Prosecution Of Virtual Asset Service Providers For Criminal Liability
1. Introduction to Virtual Asset Service Providers (VASPs)
Definition:
Virtual Asset Service Providers (VASPs) are entities that facilitate the exchange, transfer, or safekeeping of virtual assets (cryptocurrencies, tokens, NFTs, etc.). Examples include:
Cryptocurrency exchanges
Crypto wallets
Token issuers
Payment service providers for crypto
Regulatory Background:
Due to the anonymity and cross-border nature of virtual assets, VASPs are regulated under:
Anti-Money Laundering (AML) laws
Counter-Terrorism Financing (CTF) regulations
Securities regulations (if tokens are considered securities)
Failure to comply can lead to criminal liability, including prosecution for fraud, money laundering, tax evasion, or facilitating illicit transactions.
2. Criminal Liability of VASPs
VASPs can be prosecuted for:
Money Laundering & Terrorist Financing
Facilitating the transfer of illicit funds without due diligence.
Fraud & Misrepresentation
Misleading investors about the security, liquidity, or value of virtual assets.
Operating Without License
Offering crypto services without required authorization.
Tax Evasion
Failing to report transactions or aiding clients in tax evasion.
Complicity in Cybercrime
Allowing or ignoring ransomware payments, scams, or hacking proceeds.
3. Key Case Law Examples
Here are six landmark or illustrative cases:
Case 1: SEC v. BitConnect (USA, 2018)
Facts:
BitConnect operated a cryptocurrency lending platform promising high returns.
Allegedly misrepresented profits and engaged in a Ponzi scheme.
Legal Action:
SEC filed for fraud under securities laws.
Outcome:
Platform shut down; founders charged with fraud and conspiracy.
Investors were awarded restitution.
Significance:
Highlighted that VASPs can be criminally liable if they misrepresent investment opportunities.
Case 2: United States v. Larry Dean Harmon (USA, 2020)
Facts:
Operator of a crypto mixing service (Helix) helped anonymize Bitcoin transactions, including criminal proceeds from darknet markets.
Charges:
Money laundering under 18 U.S.C. § 1956.
Outcome:
Convicted and sentenced to 18 months imprisonment.
Over $300 million in Bitcoin transactions traced to criminal activity.
Significance:
Demonstrated that VASPs or crypto service operators can be held liable for facilitating money laundering.
Case 3: SEC v. EtherDelta (USA, 2018)
Facts:
EtherDelta operated a decentralized crypto exchange allowing trading of tokens.
Failed to register as a securities exchange.
Charges:
Violation of Securities Act registration requirements.
Outcome:
Founder paid a $388,000 penalty.
SEC emphasized the requirement to register any exchange offering tokens classified as securities.
Significance:
VASPs operating exchanges can be held criminally or civilly liable for regulatory violations.
Case 4: Shyft Network / AUSTRAC Investigation (Australia, 2021)
Facts:
AUSTRAC investigated Shyft Network for allegedly failing AML/CTF reporting obligations while facilitating virtual asset transfers.
Outcome:
Regulatory sanctions including fines and mandatory compliance upgrades.
Significance:
Shows regulatory bodies can pursue both civil and criminal actions against VASPs for AML/CTF breaches.
Case 5: UK – National Crime Agency v. Coinfloor (2019)
Facts:
Coinfloor, a UK crypto exchange, was found to have insufficient KYC/AML controls.
Some customer accounts were used for illicit transactions.
Outcome:
The exchange faced regulatory action and civil fines; senior management were warned of potential criminal liability if compliance did not improve.
Significance:
Reinforces that criminal liability arises when VASPs negligently facilitate illegal activity.
Case 6: United States v. Alexander Vinnik (BTC-e, 2017-2020)
Facts:
Alexander Vinnik ran BTC-e, a cryptocurrency exchange used for laundering funds from hacking, fraud, and darknet marketplaces.
Charges:
Money laundering, operating an unlicensed money service business.
Outcome:
Extradited to France and sentenced for laundering billions of dollars.
BTC-e was shut down.
Significance:
A high-profile case demonstrating that VASP operators can face international prosecution for criminal facilitation.
4. Observations from Cases
AML/CTF Compliance Is Crucial:
Failure to follow reporting and KYC procedures is a common factor in prosecutions.
Licensing Matters:
Operating without proper authorization exposes VASPs to criminal and civil liability.
International Cooperation:
Many cases involve cross-border crimes, requiring coordination between regulators and law enforcement.
Platform Responsibility:
Even decentralized exchanges or crypto mixers can incur liability if used knowingly for criminal activity.
Civil & Criminal Overlap:
SEC, FINCEN, AUSTRAC, and other regulators pursue both financial penalties and refer criminal charges.
5. Key Takeaways
VASPs are under intense regulatory scrutiny worldwide.
Criminal liability arises not only from intentional misconduct but also from negligence in compliance.
Enforcement spans multiple areas: fraud, money laundering, unlicensed operations, and securities violations.
Cross-border cases are becoming common due to the global nature of virtual assets.
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