Opinion by: Genny Ngai and Will Roth of Morrison Cohen LLP

Since taking office, the Trump administration has designated several drug and violent cartels as Foreign Terrorist Organizations (FTOs) and Specially Designated Global Terrorists (SDGTs). US President Donald Trump has also called for the “total elimination” of these cartels and the like. These executive directives are not good developments for the cryptocurrency industry. On their face, these mandates appear focused only on criminal cartels. Make no mistake: These executive actions will cause unforeseen collateral damage to the digital asset community. Crypto actors, including software developers and investors, may very well get caught in the crosshairs of aggressive anti-terrorism prosecutions and follow-on civil lawsuits.

Increased threat of criminal anti-terrorism investigations 

The biggest threat stemming from Trump’s executive order on cartels is the Department of Justice (DOJ). Almost immediately after President Trump called for the designation of cartels as terrorists, the DOJ issued a memo directing federal prosecutors to use “the most serious and broad charges,” including anti-terrorism charges, against cartels and transnational criminal organizations.

This is a new and serious development for prosecutors. Now that cartels are designated as terrorist organizations, prosecutors can go beyond the traditional drug and money-laundering statutes and rely on criminal anti-terrorism statutes like 18 U.S.C. § 2339B — the material-support statute — to investigate cartels and anyone who they believe “knowingly provides material support or resources” to the designated cartels. 

Why should the crypto industry be concerned with these developments? Because “material support or resources” is not just limited to providing physical weapons to terrorists. “Material support or resources” is broadly defined as “any property, tangible or intangible, or service.” Anyone who knowingly provides anything of value to a designated cartel could now conceivably violate § 2339B. 

Even though cryptocurrency platforms are not financial institutions and never take custody of users’ assets, aggressive prosecutors may take the hardline view that software developers who design crypto platforms — and those who fund these protocols — are providing “material support or resources” to terrorists and launch harmful investigations against them.

This is not some abstract possibility. The government has already demonstrated a willingness to take this aggressive position against the crypto industry. For example, the DOJ indicted the developers of the blockchain-based software protocol Tornado Cash on money laundering and sanction charges and accused them of operating a large-scale money laundering operation that laundered at least $1 billion in criminal proceeds for cybercriminals, including a sanctioned North Korean hacking group.

Recent: Crypto crime in 2024 likely exceeded $51B, far higher than reported: Chainalysis

Moreover, the government already believes that cartels use cryptocurrency to launder drug proceeds and has brought numerous cases charging individuals for laundering drug proceeds through cryptocurrency on behalf of Mexican and Colombian drug cartels. TRM Labs, a blockchain intelligence company that helps detect crypto crime, has even identified how the Sinaloa drug cartel — a recently designated FTO/SDGT — has used cryptocurrency platforms to launder drug proceeds.

The digital asset community faces real risks here. Putting aside the reputational damage and costs that come from defending criminal anti-terrorism investigations, violations of § 2339B impose a statutory maximum term of imprisonment of 20 years (or life if a death occurred) and monetary penalties. Anti-terrorism statutes also have extraterritorial reach, so crypto companies outside the US are not immune to investigation or prosecution.

Civil anti-terrorism lawsuits will escalate 

The designation of cartels as FTOs/SDGTs will also increase the rate at which crypto companies will be sued under the Anti-Terrorism Act (ATA). Under the ATA, private citizens, or their representatives, can sue terrorists for their injuries, and anyone “who aids and abets, by knowingly providing substantial assistance, or who conspires with the person who committed such an act of international terrorism.” 

Aggressive plaintiffs’ counsel have already relied on the ATA to sue cryptocurrency companies in court. After Binance and its founder pled guilty to criminal charges in late 2023, US victims of the Oct. 7 Hamas attack in Israel sued Binance and its founder under the ATA, alleging that the defendants knowingly provided a “mechanism for Hamas and other terrorist groups to raise funds and transact illicit business in support of terrorist activities” and that Binance processed nearly $60 million in crypto transactions for these terrorists. The defendants filed a motion to dismiss the complaint, which was granted in part and denied in part. For now, the district court permits the Ranaan plaintiffs to proceed against Binance with their aiding-and-abetting theory. Crypto companies should expect to see more ATA lawsuits now that drug cartels are on the official terrorist list. 

Vigilance is key 

Crypto companies may think that Trump’s war against cartels has nothing to do with them. The reality is, however, that the effects of this war will be widespread, and crypto companies may be unwittingly drawn into the crossfire. Now is not the time for the digital asset community to relax internal compliance measures. With anti-terrorism statutes in play, crypto companies must ensure that transactions with all FTOs/SDGTs are identified and blocked, monitor for new terrorist designations, and understand areas of new geographical risks.

Opinion by: Genny Ngai and Will Roth of Morrison Cohen LLP.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

The top Democrat on the US House Financial Services Committee issued a warning after reports suggested that Tesla CEO Elon Musk’s “government efficiency” team would be given access to data and systems at the Securities and Exchange Commission (SEC).

In a March 31 notice, Representative Maxine Waters reiterated a warning from a letter she sent to acting SEC Chair Mark Uyeda in February in response to the Musk-led Department of Government Efficiency’s reported access to sensitive SEC information. DOGE is an advisory body to US President Donald Trump rather than an official department established by Congress. According to the California lawmaker, giving Musk such access would have “dire consequences” for US investors and present conflicts of interest.

“[…] as a result of this takeover, the agency is at greater risk of data breaches and market disruptions, both of which could result in investors, including retirees, losing their hard-earning savings,” said Waters, adding:

“Not only that, Musk, who has been the subject of repeated SEC enforcement actions for breaking securities laws and regulations, can benefit his own businesses and harm his competitors by using his access to confidential business information and his influence over the agency’s operations.”

Waters’ warning followed multiple reports suggesting that Musk’s DOGE team contacted the SEC and would be given access to the commission’s systems and data. Since joining the Trump administration as a “special government employee,” Musk has spearheaded efforts to fire staff at multiple government agencies, including the US Agency for International Development (USAID) and the watchdog Consumer Financial Protection Bureau (CFPB). Many of DOGE’s actions face lawsuits in federal court from parties alleging the group’s actions were illegal or unconstitutional.

Related: Can the law keep up with Musk and DOGE?

As one of the major US financial regulators, the SEC is responsible for oversight and regulation of many aspects of the cryptocurrency industry, including whether many tokens qualify as securities. Under Uyeda and US President Donald Trump, the commission has dropped several lawsuits alleging violations of securities laws against crypto firms since January.

‘Cost-cutting’ strategy at SEC?

It’s unclear whether the DOGE team intends to “purge” the SEC of employees Musk considers not loyal to the Trump administration, as has been implied in some lawsuits involving firings at other government agencies. Cointelegraph contacted acting chair Uyeda and SEC Commissioner Caroline Crenshaw for comment but did not receive a response by the time of publication.

DOGE’s reported infiltration of the SEC comes as the US Senate Banking Committee is expected to vote on whether to advance the nomination of Paul Atkins, Trump’s pick to chair the agency. At his March 27 confirmation hearing, Atkins said he would “definitely” be willing to work with DOGE if confirmed. Democratic lawmakers at the hearing questioned Atkins’ potential conflicts of interest with the crypto industry.

Magazine: SEC’s U-turn on crypto leaves key questions unanswered

The market for tokenized real-world assets (RWAs) is growing by the day, but contrary to belief, the biggest hurdle to broader adoption isn’t regulation, but a lack of dedicated secondary markets for buying and selling tokenized securities, according to Prometheum founder and co-CEO Aaron Kaplan. 

In an interview with Cointelegraph, Kaplan drew attention to ARK Invest CEO Cathie Wood’s recent appearance at the Digital Asset Summit in New York, where she said that a lack of regulatory clarity is preventing her company from tokenizing its funds.

“Contrary to popular belief, however, the hurdle isn’t ambiguous regulation,” said Kaplan, who noted that the US Securities and Exchange Commission’s (SEC) special purpose broker-dealer framework and Alternative Trading System (ATS) licensing “already provide a regulated pathway for issuing blockchain-native funds that offer efficiency advantages over traditional issuances.”

“The real bottleneck lies in the limited market infrastructure for delivering tokenized securities trading to a broad investor base,” he said.

Excluding stablecoins, the value of tokenized RWAs has increased by nearly 8% to $19.5 billion over the past 30 days, according to industry data. Private credit and US Treasury debt remain the two largest use cases. 

“These assets currently sit on a handful of blockchains, but there is still no fully public secondary market where institutional and retail investors can buy, sell, and trade them, as they do with traditional securities on Nasdaq or through a brokerage account like Fidelity,” said Kaplan, who identified two general approaches for building out these platforms. 

The first is building tokenized securities markets using decentralized finance (DeFi) frameworks, much like what Ondo Finance, Ethena Labs and Securitize are doing.

Related: Ethena Labs, Securitize launch blockchain for DeFi and tokenized assets

The second approach involves integrating tokenization protocols into existing brokerage platforms that operate under SEC-registered entities and are subject to federal securities laws. 

“Legacy crypto and fintech platforms are already accustomed to facilitating cryptocurrency trading, so you would expect them to seek to broaden their offerings to include tokenized securities,” said Kaplan.

While many in the latter camp do not operate digitally, they “won’t cede market share without a fight,” said Kaplan. “Many are already investing in their own tokenization initiatives, or partnering with fintech and crypto firms, to remain competitive.”

“What’s at stake is the next wave of users onboarding into the digital asset space […] The question is then, will the brokerage industry enter the digital asset space, or will crypto platforms build the next gen markets for investors to buy and sell digital securities?”

As a digital asset trading and custody firm, Prometheum is attempting to bridge the infrastructure gap by building a full-service digital asset securities marketplace. The company claims that securities traded on Prometheum have reduced fees, faster settlement times and increased efficiency.

Related: CME Group taps Google Cloud for pilot asset tokenization program

Investors want ‘digital native’ versions of assets they’ve always known

Perhaps the biggest demand driver for tokenized assets among traditional investors is that they want to access “digital native versions of all assets, in addition to crypto tokens, through a single ecosystem they are comfortably using […] to meet a range of financial goals,” said Kaplan.

One area where tokenization appears to be gaining traction is in real estate. As Cointelegraph recently reported, luxury and commercial properties are being tokenized all over North America and secondary markets are being established to enable the trading of tokenized shares. 

A 2024 report by Boston Consulting Group (BCG) called tokenization a “game-changing blockchain use case in financial services” due to its scalability and near-instant transactions. 

According to BCG managing director and senior partner Sean Park, tokenization could boost investors’ annual returns by roughly $100 billion while increasing the revenue streams of financial institutions. 

The potential of tokenization has even been flagged by the World Economic Forum in a recent article published by Digital Asset co-founder and CEO Yuvan Rooz. 

In the article, Rooz showed that roughly 10% of the $230 trillion global securities market is eligible for use as collateral. 

“Tokenization, which improves collateral mobility and capital efficiency, could unlock this untapped capital and optimize intraday liquidity so that funds can be accessed and moved within the same trading day to meet payment and settlement obligations,” said Rooz.

Magazine: Block by block: Blockchain technology is transforming the real estate market