Victims of cryptocurrency fraud often lose out to the government when it comes to recouping their losses. This is due to an obscure Justice Department regulation that prioritizes the government’s right to keep confiscated funds over victims’ rights to compensation for their losses.
28 CFR 9.8(c) has a devastating impact on victims. This conflicts with Congressional goals of ensuring that victims of federal crimes are made whole, and should be amended to ensure that victims, rather than the government, have priority when funds are recovered from a accused.
Despite the settlement’s injustice and widespread enforcement aimed at denying victims full restitution, it has largely escaped public scrutiny because it is enforced by a little-known section of the DOJ in an administrative process that does not It is not public and is subject to little or no significant judicial review.
Few assets have appreciated in value as quickly and as strongly as cryptocurrencies. Bitcoin has seen a 1,245% increase over the past five years, briefly soaring to over $100,000 in recent weeks. Ethereum has seen an increase of 2,405% over the past five years.
At the same time, fraud is rampant in the cryptocurrency space. Phishing, social engineering, extortion schemes and SIM swapping (where fraudsters take control of a victim’s cell phone and reset their accounts) are just a few examples of how Malicious actors defraud victims of valuable crypto assets.
According to the Federal Bureau Investigation’s 2023 Cryptocurrency Fraud Report, the FBI received more than 69,000 complaints from the public regarding financial fraud involving the use of cryptocurrency in 2023. Estimated losses related to cryptocurrency totaled over $5.6 billion. People over 60 were by far the most likely to be victims of cryptocurrency fraud.
Successfully investigating and prosecuting crypto frauds is rare, and asset recovery in these cases is even rarer. But incredibly, even in these small number of cases, the government typically keeps most of the assets recovered at the victims’ expense.
Congress passed the Mandatory Victim Restitution Act in 1996 with the “primary and overriding” goal of “making victims of crime whole, fully compensating such victims for their losses, and restoring such victims to their former condition.” of original well-being”.
For victims of crimes covered by the MVRA, including most crypto fraud crimes, the amount of restitution is provided by a basic, common-sense formula (assuming that the stolen property itself can no longer be returned). In other words, the greater of the value of the property on the date of loss or the value of the property on the date of sentencing.
This formula recognizes that a victim’s loss – and corresponding restitution – must include the appreciation of the value of assets after the date of the crime. A victim is not “cured” without compensation for the increased value of their stolen property – gains that they clearly would have made had they not been dispossessed of their property as a result of the crime.
For many fraudulent items, there may be little difference between the value of the property on the date of loss and the value on the date of sentencing. Currencies, precious metals and even securities generally experience only slight fluctuations in value.
On the other hand, cryptocurrency is different. Ten Bitcoins stolen a year ago are worth less than half their current value, a difference of more than half a million dollars. Providing restitution for this added value – which the victim gained by risking their money – is essential to making it whole.
Congress certainly thought so when it provided a formula in the MVRA that compensates victims for appreciation or gains between the date of the crime and the date of conviction.
In most cases, victims have little chance of obtaining redress from the defendant, who is often indigent and has little prospect of income, at least in the short term. But in many cryptocurrency cases, the government seizes and confiscates the proceeds of crime — including often large amounts of cryptocurrency — which it can then keep under federal forfeiture law.
Confiscation and restitution have different objectives. Confiscation aims to punish the defendant for gains made from illegal activity while restitution aims to compensate victims. The confiscated funds therefore belong to the government.
Nonetheless, Congress provided a mechanism called “restoration” by which the Justice Department – through its Money Laundering and Asset Recovery Section – can “return confiscated property to victims” – that is, using confiscated property to restore the integrity of victims where there will be no recovery after the loss. accused. Using forfeited funds to compensate victims would fulfill Congress’s intent – and fundamental fairness – to make victims whole with funds traceable to fraud.
However, 28 CFR 9.8(c) is routinely applied to seriously hinder this goal. It took effect in 1997 after the passage of the MVRA and limits the amount that can be returned to a victim from forfeited funds to “the fair market value of the property” on the date of the loss.
In other words, a victim will not be compensated by restoration for any increase in value of their stolen property or winnings that occurred after the date of the loss. This restriction applies even if the government has seized enough property to fully compensate all victims of the scheme.
DOJ regulations limiting restoration to the value of the property on the date of the loss often leave the government with a massive windfall at the expense of victims. Nor can it be consistent with Congress’ directive, through the MVRA, that victims be made whole and receive the “full amount” of their losses.
It’s also just plain unfair. Property is only confiscated if it is directly linked to the offenses giving rise to the conviction. Thus, the confiscated funds, even if they do not directly identify the victims, are nevertheless the fruit of the crime by which the accused caused harm to the victims.
It was the victims who suffered the loss, not the government. It is normal that it is the victims, rather than the government, who benefit from these funds.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Elisha Kobre is an associate in Bradley’s Government Enforcement, Investigations and Litigation practice groups.
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