It’s a Racket! Jed S.

Rakoff, December 18, 2025 issue (NYRB)

The Oxford English Dictionary defines “cryptocurrency” as “any of various digital payment systems operating independently of
a central authority and employing cryptographic techniques to control and verify transactions.” This definition captures the
goals of cryptocurrency’s advocates: to provide an accepted digital currency for the purchase and sale of goods and services that
assures freedom from government oversight of transactions. Were such a system ever to become widespread, the effect on the
regulation and stabilization of national economies might be devastating, since banking agencies such as the Federal Reserve
depend heavily on monetary policy—control of the liquidity of a nation’s currency and the interest rates at which it is offered—
to reduce inflation and increase employment.

In practice, however, cryptocurrency has so far largely failed to achieve its goal of widespread consumer use, for the great
majority of goods and services continue to be purchased and sold in dollars or other regulated national currencies.
Cryptocurrency has, though, to a remarkable extent achieved its goal of being comparatively free of serious government
regulation, and as a result it has often become a vehicle for fraud and criminality. An examination by the International
Consortium of Investigative Journalists, The New York Times, and other news organizations found that “at least $28 billion tied
to illicit activity has flowed into crypto exchanges over the last two years.”* Marietje Schaake, the international policy director
at Stanford University’s Cyber Policy Center, recently wrote, “Perhaps the most avid users of cryptocurrencies have been a
group that explicitly values their opaque nature: criminals.” Past cases, both civil and criminal, brought in my court and
elsewhere tend to confirm this observation.

Although the idea for a digital currency goes back at least to the early 1980s, it was Bitcoin, launched in 2009, that first made
use of a “blockchain,” a digital ledger that records and validates cryptocurrency transactions without regulation or supervision
by a government, bank, or similar institution. Anyone can access a blockchain to record their cryptocurrency transactions, often
on a pseudonymous basis. Private individuals or companies, known in crypto jargon as “miners,” then validate the recorded
transactions in various complicated and energy-intensive ways, in return for which they receive rewards, usually in the form of
cryptocurrency.

Bitcoin was complicated to use and thus did not initially have many customers. What eventually brought it more attention was
its rapid increase in value beginning in 2011. As demand for Bitcoin periodically increased, mostly owing to hype, the price of a
Bitcoin “token” often increased disproportionately because of the limited number of them available. But there was no
corresponding increase in the number of businesses that allowed their goods to be purchased with cryptocurrency. Nor did
Bitcoin (or any other form of cryptocurrency) pay dividends, since there was no product or service being sold to third parties.
The only way a cryptocurrency investor could make money was by selling his tokens when their price rose. And such selling,
untethered to any underlying economic reality, could cause the price of Bitcoin to fall rapidly, as it did most dramatically in
2022, leading to billions of dollars in losses.

In short, what was really being offered was a form of gambling masquerading as the financial “wave of the future.” The result
was a series of gyrations in which the price of Bitcoin and other cryptocurrencies rapidly rose and fell, often with devastating
results. One always heard about some savvy investor who made a mint trading cryptocurrency, but far more common were the
beguiled investors who held on to their cryptocurrency for too long and lost their shirts.

This was bad enough, but the unregulated nature of the cryptocurrency markets made these markets easy targets for crooks.
Perhaps the earliest criminal use of cryptocurrency was for money laundering, and this continues today. A drug dealer, for
example, can sell his illicit products for cryptocurrency or use the proceeds from his sales in conventional currency to purchase
cryptocurrency, in either case secure in the knowledge that the market is largely unregulated and the transactions easily
concealed under phony names and secret accounts. And he can then sell his cryptocurrency and wind up with revenue not
easily traced to the underlying narcotics sales.

Using this model, Ross Ulbricht, an American so-called entrepreneur, developed a black-market website called Silk Road that
facilitated forms of money laundering by drug dealers throughout the world. He was arrested in 2013, and in 2015 he was
convicted before one of my fellow judges, Katherine Forrest, who, because his criminal enterprise was so huge, sentenced him
to life imprisonment. Last January, however, President Donald Trump gave Ulbricht a full pardon.

The Silk Road black market served as my introduction to how cryptocurrency facilitates money laundering. In 2014 I presided
over a criminal case involving two men who knowingly aided extensive money laundering on Silk Road. Although both
defendants pleaded guilty, I had some sympathy for one of them, Charlie Shrem, who was only about twenty-four at the time of
his criminal activities, so I sentenced him to a comparatively lenient two years in prison.

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Shrem stated at his sentencing that he still believed in the future of Bitcoin. And indeed, after he completed his term in prison,
he became a leading advocate for cryptocurrency. Unexpectedly, however, I saw Shrem a few years later when he was sued by
Cameron and Tyler Winklevoss, investors who alleged that he had defrauded them of millions of dollars in a Bitcoin deal.

That case was eventually settled, but not before Shrem appeared in my courtroom wearing a very expensive suit, shirt, and tie.
So I guess not everyone who invests in cryptocurrency loses his shirt!

meanwhile, as the cryptocurrency market continued to rise and fall, often with lightning speed, new forms of cryptocurrency
were quickly developed, and today there are more than 10,000 kinds of tokens available. These include so-called altcoins, a
term that theoretically covers any cryptocurrency other than Bitcoin (and, in some people’s view, Ethereum) but is usually used
to refer to larger, more established competitors such as Solana. Yet the price of even these altcoins continues to fluctuate
rapidly.

Another, perhaps more comical kind of cryptocurrency token is a so-called meme coin: a crypto asset named after some public
figure or fad. I suppose I should be flattered that about a year ago, two men came out with a new meme coin named $Rakoff,
complete with a cartoon likeness of me, which they marketed aggressively until I got wind of it and demanded that they remove
my name. But you can still purchase it under its new name, $Juris.

Or, if you prefer, you can purchase the meme coin that Donald Trump launched shortly before his second inauguration, known
as $TRUMP. After an initial surge, the price of $TRUMP fell dramatically, but it has since rebounded, and President Trump’s sons
are now vigorously promoting various forms of cryptocurrency through their company World Liberty Financial. It was recently
announced that a United Arab Emirates–backed financial firm has invested $2 billion in one of the company’s cryptocurrencies.

Like other cryptocurrency investments, meme coins have proved highly volatile, and investors in many of them have lost
billions of dollars. But because of the relatively small supply of tokens, meme coins have provided especially good vehicles for
the fraud that used to be called a “pump and dump” scheme but is now called, in crypto jargon, a “rug pull.” In these schemes,
the promoters of meme coins not only extravagantly hype their latest offering but also secretly sell it back and forth among
themselves, causing the price to rise artificially, and then they quickly sell their holdings before the price inevitably crashes.
Because these promoters often own majority shares in their own coins, they frequently stand to make the most in a sell-o!. The
frequency of this form of fraud, the subject of decades of enforcement actions involving stocks and bonds, has not stopped the
newly appointed leaders of the Securities and Exchange Commission from advising their staff that, contrary to some earlier SEC
pronouncements, transactions in meme coins usually do not constitute transactions involving securities and therefore are not
subject to the SEC’s antifraud provisions.

Still another kind of cryptocurrency token is a so-called stablecoin, which is purportedly designed to maintain a stable value by
being tied in one respect or another to “safer” investments, thus countering the volatility that has made cryptocurrency
investments so much of a gamble. But many of these stablecoins have proved to be fraudulent.

A good example is a case that came before me less than two years ago, SEC v. Terraform Labs PTE Ltd. Terraform, a company
cofounded by the South Korean businessman Do Kwon, o!ered various kinds of cryptocurrency tokens to investors under names
like TerraUSD and LUNA. According to Kwon, TerraUSD was a distinctive kind of stablecoin. Unlike other stablecoins, whose
value is pegged to the value of the dollar, Treasuries, or other assets, TerraUSD was supposedly stabilized by a sophisticated but
secret algorithm linking its value to that of another of Terraform’s coins, LUNA. This algorithm purportedly prevented the
trading price of TerraUSD from ever falling below one dollar for more than a few minutes. The algorithm promised that
purchasers of LUNA could make a lot of money if the demand for TerraUSD increased, but that they would never lose the money
they invested in TerraUSD.

Even in Cryptoland this proposal was initially greeted with some skepticism, but when one morning the price of TerraUSD,
which had fallen to about ninety cents, immediately rebounded to nearly one dollar, investors began to believe the hype, and the
price of LUNA skyrocketed to well over one hundred dollars. This great increase was further enhanced by Terraform’s
subsequent announcement that it was partnering with a South Korean mobile payment application called Chai (roughly similar
to Venmo), which had been founded by Terraform’s cofounder Daniel Shin, to allow its users to process and settle their
consumer transactions through cryptocurrency exchanges on the Terraform blockchain. But in May 2022 the stablecoin’s price
collapsed, falling to as low as eleven cents, and investors lost more than $40 billion.

In the civil lawsuit assigned to me, the SEC alleged that Terraform’s representations were all a pack of lies and that the only
reason the Terraform token price had swiftly rebounded after falling to ninety cents was that Kwon had arranged for an
associate to make a huge secret investment in those tokens. Similarly, Chai never actually used the Terraform blockchain to
process its customers’ transactions; it simply allowed Terraform to pretend this was happening by allowing it to create fake
blockchain records that mimicked the actual payments, in conventional currency, being processed through Chai.

The SEC’s case went to trial in my court, and the jury unanimously found Terraform liable on all the counts of fraud. The SEC
then settled the case with Terraform, but for a fraction of the $40 billion loss, prompted perhaps by the fact that the company
had by then gone into bankruptcy. It should be mentioned that after the case was assigned to me but before it went to trial,
Terraform moved to dismiss the complaint on the grounds that investments in its tokens were not investments in securities

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subject to SEC jurisdiction. A “security” is, in brief, an investment that promises future profits (or protection against losses)
based on the work of others. I eventually held that most transactions in Terraform tokens were in fact disguised securities
investments, but not every court addressing cryptocurrency arrangements has agreed with this, and the issue remains
unresolved to this day. Kwon, however, was indicted under a more general federal fraud statute known as “wire fraud,” and he
was eventually extradited, pleaded guilty, and is currently awaiting sentencing before another of my colleagues.

In similar fashion, Sam Bankman-Fried was convicted in 2023 of defrauding investors of billions of dollars through his
cryptocurrency exchange, FTX, and was later sentenced to twenty-five years in prison. Changpeng Zhao, the CEO of the world’s
largest cryptocurrency exchange, Binance, pleaded guilty in late 2023 to money laundering violations. In October he was
pardoned by President Trump. And in November another judge of my court, Denise Cote, sentenced the developer of a
cryptocurrency-based mobile application to five years in prison for facilitating more than $200 million in money laundering.

In matters of everyday civil enforcement, however, another reason why cryptocurrency remains so unregulated is the
uncertainty over which federal agency has the authority to regulate it. Is it just another form of currency and therefore subject
to the oversight of banking regulators like the Office of the Comptroller of the Currency (OCC)? Or is it a vehicle for consumer
purchases and trades and thus subject to the oversight of the Federal Trade Commission or the Consumer Financial Protection
Bureau? Or is it simply a commodity and therefore subject to the oversight of the Commodity Futures Trading Commission
(CFTC)? Or are transactions in cryptocurrencies frequently just disguised securities transactions subject to regulation by the
SEC? Or finally, as certain advocates argue, are cryptocurrency transactions somehow sufficiently unique that they are not
subject to the jurisdiction of any of these agencies, and hence not subject to governmental regulation at all?

In the view of many experts, the latter proposition is absurd and simply confuses the use of a novel technology with the nature
of the underlying transactions. Under the Biden administration, the SEC took the lead in seeking to combat fraud in the
cryptocurrency markets. But the Trump administration seems intent on ordering the various agencies to limit or scale back
even the regulatory attempts that were previously made. Earlier this year the SEC dismissed lawsuits and ended investigations
targeting numerous cryptocurrency ventures. In February the SEC dismissed a major case against Coinbase, and in May it did
the same in a case against Binance. Indeed, both the SEC and DOJ have touted reassessments of their approach to crypto
regulation. And similarly, federal banking regulators, like the OCC, have recently scaled back or eliminated entirely the modest
supervision they had previously exercised over this market. Meanwhile, President Trump, who once called cryptocurrency a
“scam,” has now warmly embraced its supposed virtues.

In the summer Congress passed and President Trump signed the so-called GENIUS Act, which was designed to provide more
stability to stablecoins by requiring the issuers of such tokens to redeem or repurchase them on demand for a fixed amount in
“safer” investments—in other words, a variation on the promise that Terraform falsely made has now become a legally binding
obligation. But there’s a catch: neither the SEC nor the CFTC has the power to enforce this regulation, and many issuers can
apply to a new body, the Stablecoin Certification Review Committee, to be subject only to enforcement under the laws of a given
state (as long as the state’s regulatory regime is “substantially similar” to the federal government’s and the SCRC approves).
Nevertheless, state-level enforcement is generally much more lax than federal enforcement. Even worse, foreign issuers (which
are very common in cryptocurrency) can apply to the committee to be largely exempted from the act’s provisions.

It is important to remember that cryptocurrency fraud is a global problem. Silk Road, which catered to drug dealers throughout
the world, was an early example. Another was the global cryptocurrency exchange linked to Bitcoin known as Mt. Gox. In
February 2014 Mt. Gox declared bankruptcy, confessing that it had somehow lost 850,000 Bitcoin—7 percent of all the Bitcoin
then in existence. More generally, cryptocurrency has become a frequent target of computer hackers worldwide, resulting in
reported losses of billions of dollars by those whose accounts were hacked. Also on a worldwide basis, perpetrators of
ransomware schemes often demand that the ransom be paid in cryptocurrency so as to further conceal their identities.

What is to be done? China has banned altogether the use of cryptocurrency exchanges by its nationals (though this may be
difficult to enforce). In the US, the focus has increasingly been on proposed legislation to bring some semblance of order to this
gyrating and volatile market. In addition to the GENIUS Act, Congress is currently considering the so-called CLARITY Act, which
would transfer to the CFTC exclusive regulation of “mature” cryptocurrencies, defined as crypto assets whose blockchains are
not controlled by the issuers.

But it is hard to escape the conclusion that these and other cryptocurrency bills pending in Congress are little more than
window dressing whose main elect is to transfer regulation of cryptocurrency from the hitherto most aggressive agency, the
SEC, to historically more lenient authorities. In any event, it seems likely that for the immediate future, cryptocurrency will
continue to serve no positive purpose in our country other than to provide a platform for fraud and crime. The strong actions
taken by the federal government in prior decades to make our securities, commodities, and currency markets among the most
open and honest in the world have contributed substantially to attracting investment, strengthening the dollar, and deterring all
sorts of financial misconduct. It would be a terrible loss to see this huge achievement undercut by the seeming racket called
cryptocurrency. —November 20, 2025

Jed S. Rakoff (Jed S. Rakoff is a United States District Judge for the Southern District of New York. (December 2025)
1. See David Ya!e-Bellany, Spencer Woodman, and Sam Ellefson, “The Crypto Industry’s $28 Billion in ‘Dirty Money,’” The New York Times,
November 17, 2025. ↩