Insight by: Genny Ngai and Will Roth
Since assuming office, the current administration has designated multiple drug and violent cartels as Foreign Terrorist Organizations (FTOs) and Specially Designated Global Terrorists (SDGTs). The President has also advocated for the “total elimination” of these cartels. These executive actions present concerning implications for the cryptocurrency sector. While they may seem solely aimed at criminal organizations, the reality is that they will likely inflict unforeseen collateral harm on the digital asset community. Participants in the crypto space, including software developers and investors, could find themselves entangled in aggressive anti-terrorism prosecutions and subsequent civil suits.
Heightened risk of criminal anti-terrorism investigations
The primary risk emerging from the administration’s directive on cartels is the involvement of the Department of Justice (DOJ). Almost immediately after the push to designate cartels as terrorist entities, the DOJ issued a memorandum instructing federal prosecutors to employ “the most serious and expansive charges,” including anti-terrorism charges, against these organizations and transnational criminal groups.
This marks a new and significant approach for prosecutors. With cartels classified as terrorist organizations, they now have the ability to utilize more severe legal frameworks beyond traditional drug and money-laundering laws, including the material-support statute (18 U.S.C. § 2339B) to investigate these groups and anyone suspected of “knowingly providing material support or resources” to them.
Why should those in the crypto sector take heed? Because the term “material support or resources” is not solely tied to the provision of physical weapons. It encompasses a broad range of items, including “any property, tangible or intangible, or service.” Anyone who knowingly offers something of value to a designated cartel could potentially breach § 2339B.
Although cryptocurrency platforms do not function as financial institutions and do not hold user assets, zealous prosecutors may adopt a strict interpretation that software developers of crypto platforms—and those who finance these protocols—are inadvertently providing “material support or resources” to terrorist organizations and may face excessive scrutiny as a result.
This scenario is not merely theoretical. The government has already shown readiness to pursue such aggressive arguments within the crypto realm. For instance, the DOJ charged the developers of the blockchain-based tool Tornado Cash with money laundering and sanction violations, claiming they facilitated a significant money laundering operation involving over $1 billion in proceeds for cybercriminals, including a North Korean hacking collective under sanctions.
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Additionally, authorities already suspect that cartels utilize cryptocurrency for laundering drug profits and have consequently filed numerous cases against individuals for laundering these proceeds via cryptocurrencies on behalf of Mexican and Colombian cartels. A blockchain intelligence firm, which tracks crypto crimes, has identified methods by which the Sinaloa cartel—now recognized as an FTO/SDGT—has leveraged cryptocurrency platforms to clean illicit proceeds.
The digital asset community faces substantial threats from these developments. Beyond the reputational harm and the financial burdens associated with defending against criminal anti-terrorism probes, violations of § 2339B carry a statutory maximum sentence of 20 years in prison (or life if a death occurred) and may incur hefty fines. Furthermore, anti-terrorism laws can extend beyond U.S. borders, implicating crypto firms operating internationally.
Surge in civil anti-terrorism lawsuits anticipated
The official classification of cartels as FTOs/SDGTs is likely to increase the frequency of lawsuits filed against crypto companies under the Anti-Terrorism Act (ATA). The ATA allows private individuals, or their representatives, to pursue legal action against terrorists for damages, as well as anyone who “aids and abets by knowingly providing substantial assistance, or conspires with individuals committing acts of international terrorism.”
Litigators have already started using the ATA to target cryptocurrency firms. Following Binance and its CEO’s guilty plea to criminal charges in late 2023, U.S. victims of the Hamas attack on October 7 filed suit against Binance and its CEO under the ATA, alleging that the defendants knowingly facilitated a “mechanism for Hamas and other terrorist groups to generate funds and engage in illicit activities.” The lawsuit claims that Binance processed nearly $60 million in crypto transactions for these groups. The defendants sought to dismiss the case, which was partially granted and partially denied. Currently, the district court allows the plaintiffs to proceed against Binance under their aiding-and-abetting claim. As drug cartels have now been officially listed as terrorists, other crypto companies should prepare for similar ATA lawsuits.
Maintaining vigilance is crucial
Crypto firms might assume that the administration’s campaign against cartels is irrelevant to their operations. However, the reality is that the implications of this initiative will likely be far-reaching, potentially pulling crypto companies into unwanted scrutiny. It is imperative for the digital asset sector to reinforce internal compliance procedures. With anti-terrorism laws now in play, companies must ensure they identify and block transactions involving all FTOs/SDGTs, remain vigilant for new terrorist designations, and comprehend emerging geographical risks.
Insight by: Genny Ngai and Will Roth.
This article serves general informational purposes and is not intended as legal or investment advice. The opinions expressed herein are those of the authors and do not necessarily reflect or represent the perspectives of any affiliated entities.