This Little-Known DOJ Rule Often Leaves Crypto Fraud Victims Empty-Handed: Bloomberg Law

An obscure Department of Justice (DOJ) regulation is nullifying efforts by cryptocurrency fraud victims to recover their stolen funds.

Regulation 28 CFR 9.8(c) allows the government to prioritize its claim on forfeited assets over victim restitution, often leaving defrauded investors with little or nothing, according to a recent report from Bloomberg Law.

The regulation, which took effect in 1997, contradicts the spirit of the Mandatory Victims Restitution Act (MVRA) of 1996, which primarily aims to ensure victims of federal crimes are “made whole” by fully compensating them for their losses.

Regulation 28 CFR 9.8(c) Limits Value of Lost Funds

Under 28 CFR 9.8(c), the amount that can be restored to victims from forfeited funds is limited to the value of the property on the date of loss, ignoring any appreciation that may have occurred since the crime.

This distinction is especially significant in the volatile world of cryptocurrency, where values can skyrocket in a short period.

For example, the value of Bitcoin surged more than 1,200% in the past five years, and Ethereum’s value soared over 2,400%.

Given this market dynamism, the difference between the value of stolen crypto at the time of theft and its value at sentencing can be staggering.

Victims who lose 10 Bitcoin in a theft could see its value double or triple by the time of sentencing, but under current DOJ rules, they would only be compensated for the value at the time of theft.

The 28 CFR 9.8(c) regulation remains despite the vast impact of crypto fraud.

The FBI’s 2023 cryptocurrency fraud report revealed over 69,000 complaints, with total losses exceeding $5.6 billion.

Seniors over the age of 60 were disproportionately affected. Yet, even when fraudsters are caught and their crypto assets seized, the government’s claim on these funds takes precedence over victim restitution.

The report noted that federal forfeiture and victim restitution serve distinct purposes.

Forfeiture is intended to punish criminals by seizing the proceeds of their crimes, while restitution aims to compensate victims for their financial losses.

To bridge this gap, the DOJ’s Money Laundering and Asset Recovery Section can use a process called “restoration” to return forfeited assets to victims.

However, the 28 CFR 9.8(c) regulation restricts the amount that can be restored to the value at the time of loss, ignoring any appreciation in the stolen property’s value.

FTX Creditors Miss Out on Bitcoin Rally

Last month, a Delaware judge approved FTX’s reorganization plan, which involves paying out more than $14 billion to customers of the collapsed cryptocurrency exchange.

According to the plan approved by Delaware bankruptcy Judge John Dorsey, 98% of FTX’s creditors will get 119% of the amount of their allowed claim as of November 2022.

While this may seem like a favorable outcome, creditors face a harsh reality.

Since FTX’s collapse, the price of Bitcoin has surged by approximately 300%, meaning that if FTX creditors were paid in Bitcoin instead of fiat, they would have seen significantly higher returns.

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