Source: Cointelegraph Original: "{title}"

Views from: Genny Ngai and Will Roth of Morrison Cohen LLP

Since taking office, the Trump administration has designated several drug and violent crime groups as "Foreign Terrorist Organizations" (FTO) and "Specially Designated Global Terrorists" (SDGT). President Trump has further declared a "complete eradication" of these criminal groups. These executive orders are certainly not favorable for the cryptocurrency industry. Although these measures may seem to target only criminal organizations, it is important to be cautious: these executive actions will likely cause unpredictable collateral damage in the digital asset space. Cryptocurrency practitioners, such as software developers and investors, may become targets of aggressive anti-terrorism prosecutions and subsequent civil lawsuits.

Increased Risks of Criminal Anti-Terrorism Investigations

The greatest threat posed by Trump's executive orders comes from the U.S. Department of Justice (DOJ). Following the President's request to classify criminal groups as terrorist organizations, the DOJ immediately issued a memorandum directing federal prosecutors to use the "most severe and broadest charges" (including anti-terrorism charges) to combat criminal groups and transnational crime organizations.

This represents a new and severe dimension of law enforcement for prosecutors. Once a criminal group is identified as a terrorist organization, prosecutors can bypass traditional drug crime and money laundering regulations and instead investigate the group and any individuals deemed to be "knowingly providing material support or resources" to the designated criminal group under anti-terrorism laws such as 18 U.S.C. § 2339B — the "material support provision."

Why should the cryptocurrency industry be wary of this change? Because "material support or resources" is not limited to providing physical weapons to terrorists. Its legal definition is extremely broad, encompassing "any tangible or intangible assets and services." Any act of knowingly providing valuable items to a designated criminal group could potentially violate § 2339B.

Although cryptocurrency platforms are not financial institutions and do not hold user assets, aggressive prosecutors may assert that software developers designing crypto platforms and investors funding these protocols are effectively providing "material support or resources" to terrorists, leading to harmful investigations against them.

This is not a theoretical assumption. The government has shown a willingness to adopt such a radical stance towards the cryptocurrency industry. For example, the DOJ has prosecuted the developers of the blockchain mixing protocol Tornado Cash for money laundering and sanctions violations, accusing them of operating a large-scale money laundering network that laundered at least $1 billion in criminal proceeds for cybercriminals, including sanctioned North Korean hacker groups.

Additionally, the government has identified criminal groups using cryptocurrency to launder drug money and has filed multiple lawsuits against individuals laundering money for Mexican and Colombian drug trafficking organizations through cryptocurrency. Blockchain intelligence firm TRM Labs has also found that the Sinaloa drug cartel, recently designated as an FTO/SDGT, has used cryptocurrency platforms for money laundering.

The digital asset community faces real risks. Aside from the reputational damage and defense costs associated with criminal anti-terrorism investigations, violations of § 2339B can result in a maximum sentence of 20 years in prison (potentially life imprisonment if it results in death) and fines. Anti-terrorism laws also have extraterritorial effects, meaning that cryptocurrency businesses outside the U.S. may also face investigations or prosecutions.

Civil Anti-Terrorism Lawsuits Will Surge

The designation of criminal groups as FTO/SDGT will also lead to a significant increase in the likelihood of cryptocurrency businesses facing lawsuits under the Anti-Terrorism Act (ATA). Under the ATA, victims or their representatives can sue terrorists as well as entities that "knowingly provide substantial assistance in the incitement or conspire with those committing international terrorist acts."

Aggressive plaintiff attorneys have already utilized the ATA to sue cryptocurrency companies in court. After Binance and its founder pleaded guilty at the end of 2023, U.S. victims of the October 7 Hamas attack sued Binance under the ATA, accusing the defendants of "knowingly providing illegal channels for fundraising and supporting terrorist activities for Hamas and other terrorist organizations," handling nearly $60 million in cryptocurrency transactions related to terrorism. Although the defendants' motion to dismiss received partial support, the district court currently allows the plaintiffs to continue the lawsuit under the "incitement theory." With drug trafficking organizations officially listed as terrorist entities, cryptocurrency businesses should expect more ATA lawsuits to emerge.

Staying Vigilant is Crucial

Cryptocurrency businesses may believe that Trump's war on criminal groups does not concern them. However, the reality is that the impact of this war will spread widely, and cryptocurrency businesses may inadvertently get caught in the crossfire. The digital asset community must not relax its internal compliance measures at this moment. In light of the applicability of anti-terrorism laws, cryptocurrency businesses must ensure they identify and block all transactions related to FTO/SDGTs, continuously monitor the updated list of terrorist organizations, and dynamically assess emerging regional risks.

Views from: Genny Ngai and Will Roth of Morrison Cohen LLP

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