The US Government Wants You to Know It’s Cracking Down on Crypto

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The jokes were written.

On Wednesday, the US Department of Justice ominously said it would hold a live noon press conference to announce “international cryptocurrency enforcement action.”

Crypto Twitter panicked, as did crypto prices. Bitcoin and Ethereum each fell nearly 5% in minutes, equivalent to a flash crash. Which big player has been caught in the DOJ’s crosshairs? Binance was a popular bet, and CZ didn’t help matters by only tweeting “4,” which he announced on January 2 as his new cue for “FUD, fake news, attacks, etc.”

Then the press conference took place. It wasn’t Binance. It wasn’t Celsius, or Voyager, or Blockfi, or any other bankrupt crypto lender that screwed up its customers. It was a Hong Kong-based Russian crypto exchange called Bitzlato.

Bitz-what? Bitzlatte? I’ve been writing about crypto since 2011 and have never heard of it.

Bitzlato, the DOJ said, handled more than $700 million in illicit funds, including millions in ransomware revenue.

Okay. But as of Jan. 18, Bitzlato client wallets contained… $11,000, according to a Coinbase COO. At the top of Bitzlato, client wallets held $6 million, a trifle. And yet, DOJ Deputy Attorney General Lisa Monaco touted the enforcement action as “a blow to the cryptocurrency ecosystem.” She said that Bitzlato, “has fueled a high-tech axis of cryptocurrency.”

The crypto market rebounded quickly.

I could incorporate a bunch of other better memes about this, but let’s get to why and what it means.

The DOJ tries to relent.

People in crypto laughed it off, but those outside of crypto probably didn’t. The US government wants to make it clear, especially after the massively scrutinized collapse of FTX, that they are aware of the CRYPTO CRIME (!) and are taking decisive action.

The DOJ has reportedly been investigating Binance since 2018 and, according to Reuters, is split on whether to bring charges. The DOJ is also rumored to be investigating Digital Currency Group, owner of crypto lender Genesis, which filed for bankruptcy this week.

And the DOJ isn’t alone: ​​The SEC indicted both Genesis and Gemini last week for violating securities laws.

SEC Commissioner Hester Peirce, in an interview on our gm podcast last month, was hesitant to say outright that the collapse of FTX would directly lead to more crypto regulation. But it’s clear that at the very least, it’s already led to more postures. And Peirce said she hoped it wouldn’t lead to her peers overreacting with hasty restrictions.

I think we should all be on the lookout for regulatory frameworks that are being developed in the context of enforcement action, because it’s very tempting for regulators to do so, Peirce said. And that excludes everyone from the process.

I often say that crypto people have an irrational fear of the very word “regulation”. They assume that regulating crypto means shutting it down completely, when regulation could simply mean in an ideal-for-all scenario creating new safeguards for retail investors.

That said, what Sam Bankman-Fried has created is a new climate in which regulators and politicians feel more pressure than ever to show that they really want to rid crypto of bad actors. And that could lead to an overshoot. We had already seen it last year with Tornado Cash.

The next big coercive action in fashion may not be against a small player.

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