DOJ’s new memo, “Ending Regulation By Prosecution.” This initiative, propelled most notably by the Trump-era deregulatory blueprint, seems to take that pendulum too far. On the surface, it's about fostering innovation, but scratch beneath the surface and you'll find unintended consequences that could dramatically reshape Web3 – and not necessarily for the better. Think of it like this: you remove speed limits to encourage faster travel, but what about the increased accidents?
Criminals Get A Get-Out-Of-Jail-Free Card?
The change centers prosecuting bad actors who engage in criminal activity over and above a refocusing away from prosecuting platforms for regulatory failures. Sounds reasonable, right? What do we do when that line between platform and individual starts to get murky?
For example, if a decentralized exchange (DEX) operating on open-source code is used to launder millions. The new policy represents a major change to the DOJ’s priorities. Their actions have now made them less likely to target the DEX, and they’re focusing on the launderers themselves. What if, for example, the DEX developers were aware that their platform was being used to launder stolen funds? Imagine if instead they looked the other way, or even quietly pushed for it to happen. At the same time, the policy calls for encouraging innovation without unnecessary delay. In reality, it creates a don’t ask, don’t tell mentality that lets criminals operate with impunity behind the safety wall.
This is reminiscent of the Wild West phase of the internet. Think back to just a few years ago, when the prospect of holding websites responsible for illegal material their users posted was unthinkable. The DOJ’s shift is re-creating that same scenario in Web3. Such a transformation would turn the new marketplace into a Wild West, with disruptive innovation flourishing just as much as disruptive criminality. That is a recipe for disaster.
Institutional Money Runs For The Hills
Institutional investors crave certainty. They deserve a clear regulatory framework to make the commitment of billions to digital assets worthwhile. Nevertheless, the DOJ’s action, even in its efforts to provide clarity, creates new sources of uncertainty.
By decreasing regulatory oversight, the DOJ is implicitly suggesting that Web3 is a more risk-prone environment. Picture this scenario — you’re a manager of a pension fund looking to invest in a DeFi protocol. Previously you may have felt a little more comforted by the idea of regulatory backstop. Now, with the DOJ stepping back, you're left wondering: who's going to protect my investment if things go south?
The recent disbandment of the NCET, the specialized crypto enforcement team also adds to this fear. It’s similar to disbanding the financial crimes unit right at the moment that a brand-new, super-advanced financial system is taking root. Are they serious?
This is not an attempt to quash innovation. We’re really just trying to create an even playing field where law-abiding businesses aren’t always forced to compete against scams and illegal activity. Without it, institutional money will remain on the sidelines and Web3’s potential will be highly limited. This is a huge step backwards.
Victims Get Left Holding The Bag
We’re encouraged the DOJ acknowledges that victim compensation must do better. The new policy makes it harder to actually recover their stolen assets.
Think about it: if the DOJ is less likely to target platforms used for illicit activities, it becomes more difficult to trace and seize the funds stolen through those platforms. Law enforcement is too preoccupied pursuing high profile criminals. These criminals frequently operate outside the U.S. and are difficult to track down, pulling focus from the more organized actors that facilitate fraud to begin with.
This is akin to pursuing each individual pickpocket, while leaving untouched the international organized crime syndicate that trains and equips the pickpockets. The DOJ’s emphasis on individual actors, though laudable on its surface, overlooks the systemic aspects of crypto crime.
DOJ’s assurances of better asset forfeiture ring hollow. They are making it harder to seize those assets today. Victims of crypto scams are suffering through huge financial losses already. Today, they are in an even tougher uphill battle to reclaim their money. I don’t know about you, but that gets me fired up!
Regulatory Arbitrage Becomes The Norm
By making these businesses look to jurisdictions with the thinnest regulatory guardrails, the DOJ’s new turn will encourage a race to the bottom. This is regulatory arbitrage on steroids.
Businesses will migrate to jurisdictions governed by the least oversight. They will use these jurisdictions as launching pads to expand their reach to consumers in countries with more rigorous rules. This creates a race to the bottom. Countries are in a race to the bottom to lure in crypto businesses, meaning regulatory standards are always under attack right now.
This was precisely the case in the floating offshore banking industry. Tax havens like the Cayman Islands and Panama became magnets for illicit funds because they offered a cloak of secrecy and minimal regulatory oversight. The DOJ’s policy would make Web3 the same sorts of a place for financial crime. And who benefits? Not the average user.
Innovation Stifled By Lack of Trust
In the end, we believe that the DOJ’s shift threatens to extinguish innovation by further undermining confidence in an already tenuous Web3 ecosystem. When consumers live in fear of scams and the loss of their funds, they start to distrust emerging technologies. Unfortunately, this fear prevents them from pursuing more creative applications.
Innovation is fostered by an environment where trust and security are present. Users should have a baseline level of trust and confidence that their investments are safe and that the platforms they’re operating on aren’t a scam. The DOJ's policy, while intended to foster innovation, could inadvertently create an environment of fear and uncertainty, undermining the very thing it's trying to promote.
It's time to ask ourselves: are we willing to sacrifice investor protection and accountability in the name of innovation? Or is there a better way to strike a balance that still lets Web3 flourish but precludes it being a criminals’ paradise? The answer, I believe, is clear: We need smart regulation, not deregulation that leaves victims in the dust and paves the way for a new era of unchecked financial crime.
