The Crypto Desk

How a Hidden DOJ Rule Can Leave Crypto Fraud Victims Without Recourse: Insights from Bloomberg Law

How a Hidden DOJ Rule Can Leave Crypto Fraud Victims Without Recourse: Insights from Bloomberg Law

The Hidden Challenge: DOJ Regulation Thwarts Crypto Fraud Victims

An obscure regulation from the Department of Justice (DOJ) is inadvertently undermining the recovery efforts of victims of cryptocurrency fraud. Regulation 28 CFR 9.8(c) essentially places the government’s claims on forfeited assets above the restoration of funds to victims, leaving many defrauded investors with little to no restitution, as highlighted in a recent Bloomberg Law report.

Understanding Regulation 28 CFR 9.8(c)

Implemented in 1997, this regulation contradicts the intent of the Mandatory Victims Restitution Act (MVRA) of 1996, which was established to ensure that victims of federal crimes are “made whole” through full compensation for their losses. In contrast, Regulation 28 CFR 9.8(c) restricts the restitution amount victims can receive from forfeited funds to the value of the property at the time of loss, disregarding any subsequent appreciation.

This limitation carries enormous implications in the ever-fluctuating crypto market. For instance, over the last five years, Bitcoin’s value surged over 1,200%, while Ethereum skyrocketed more than 2,400%. Such volatility means that victims of cryptocurrency theft may find themselves receiving a fraction of what their stolen assets are worth by the time restitution is considered. A victim who loses 10 Bitcoin during a theft, for example, could face a situation where the value of those coins has dramatically increased by the time of court proceedings—yet current regulations dictate they only receive compensation based on the value at the time of theft.

The Stark Reality of Crypto Fraud

Despite the alarming impact of cryptocurrency fraud, which saw over 69,000 complaints and total losses exceeding $5.6 billion according to the FBI’s 2023 cryptocurrency report, the 28 CFR 9.8(c) regulation remains in effect. Particularly concerning is that seniors over the age of 60 have been disproportionately affected by this surge in fraud.

Compounding this issue is the precedence that the government holds over victims in cases where fraudsters are apprehended and their crypto assets are seized. While federal forfeiture aims to penalize criminals by confiscating the proceeds of their illegal activities, the goal of victim restitution is to provide financial redress to those harmed. Unfortunately, the current regulatory landscape allows the DOJ to prioritize its claims, often leaving victims out in the cold.

Can Victims Find Recourse? The Restoration Process

Even with these challenges, there is a potential pathway for victims in the form of the DOJ’s Money Laundering and Asset Recovery Section, which can utilize a process known as “restoration” to return forfeited assets to victims. However, the limitations imposed by Regulation 28 CFR 9.8(c) mean that the restitution process is often inadequate, as it still only considers the initial value of the stolen property at the time of the crime.

FTX Case Highlights Regulatory Flaws

The implications of this regulation are further exemplified by the recent developments surrounding FTX, a once-prominent cryptocurrency exchange that collapsed under notorious circumstances. A Delaware judge recently approved FTX’s reorganization plan, which aims to pay out over $14 billion to customers affected by the crash. Remarkably, 98% of FTX’s creditors are set to receive 119% of their claimed amounts as of November 2022.

FTX Cryptocurrency Exchange Logo

However, even with this seemingly positive outcome, creditors face a stark reality. Since the downfall of FTX, Bitcoin’s price has soared by approximately 300%. Had these creditors been compensated in Bitcoin instead of fiat currency, they would have potentially enjoyed far greater returns, showcasing the inherent risks and challenges embedded within the current regulatory framework.

Why This Matters: A Call for Change

The implications of these regulatory shortcomings extend beyond individual cases. They highlight a pressing need for legislative reform that acknowledges the unique nature of cryptocurrencies and the volatility of their values. As fraud cases continue to rise and affect more victims, it is imperative that rules like Regulation 28 CFR 9.8(c) be revisited and adjusted to better serve the interests of those who suffer significant financial losses.

Expert Opinions: What Leaders Are Saying

Legal experts and advocates for victims’ rights are calling for a comprehensive review of regulations surrounding victim restitution in cases of crypto fraud. Many argue that the regulatory environment should adapt to changing financial landscapes and ensure that victims receive adequate compensation reflective of current market values. As highlighted by a leading attorney specializing in financial fraud cases, “The system must evolve to protect the rights of victims in a rapidly changing digital economy. The current regulatory framework falls short, and it’s time for lawmakers to prioritize victim compensation.”

Future Outlook: A Need for Legislative Action

Moving forward, stakeholders in the cryptocurrency space are urged to advocate for reforms aimed at ensuring victims are compensated fairly. This may include amending the outdated regulations that limit the value of restitution to the point of loss, as well as exploring new legislative frameworks to address the unique challenges posed by the dynamic nature of cryptocurrency. With the crypto market continuing to grow, the call for robust victim protections remains more critical than ever.

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