In July 2021 it was announced that the Metropolitan Police had seized a record £180m worth of cryptocurrency linked to international money laundering. This surpassed its previous record confiscation of £114m, which had only been set in June. These seizures reflect the ever-increasing use of cryptocurrencies as a vehicle to transact in illicit funds – a development which has challenged legal systems across the world, as courts and practitioners have grappled with this new digital asset class.
What is cryptocurrency?
Put as simply as possible, a cryptocurrency is like a digital book token or casino chip – the value of which can be driven up or down by trading activity. It is estimated that there are more than 10,000 cryptocurrencies being traded publicly. They do not all work the same way, but generally speaking, transactions are recorded on a decentralised ledger – meaning that it is not controlled by a central authority such as a government or bank, but through a digital infrastructure governed by its users.
The use of cryptocurrencies for nefarious purposes was, sadly, inevitable. The appeal lies in their anonymity, ease of transaction (particularly cross-border), and absence of government oversight. Such is the potential for harm that, in October 2020, the Financial Conduct Authority (FCA) banned the sale of derivatives and exchange-traded notes related to certain types of cryptoassets to retail consumers – citing, amongst other things, the prevalence of cyber theft.
English law has long provided mechanisms, both criminal and civil, through which the proceeds of crime and other wrongdoing can be restrained and recovered. The central challenge in any effort to recover assets is being able to locate and freeze them before the wrongdoer can place them further out of reach. The opacity of cryptocurrencies makes this even harder, but recent developments have started to redress the balance.
In January 2020, changes were made to the UK Money Laundering Regulations by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, to incorporate international standards set by the Financial Action Task Force (FATF). These changes include a functional legal definition of a cryptoasset as: “a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically” – and make it compulsory for any business carrying on cryptoasset activity to be registered with the FCA. Regulated entities must apply the same standards of client due diligence as other financial institutions (so that the beneficial ownership of cryptoassets can be identified), conduct enhanced due diligence when dealing with high-risk customers, and report suspicious activity.
In a civil context, English courts were prepared to treat cryptocurrency assets as property in the context of remedies to protect victims of fraud (see Elena Vorotyntseva v Money-4 Limited t/a Nebeus.com and Others  9 WLUK 501) and have subsequently endorsed the view expressed by the UK Jurisdiction Taskforce (headed by Sir Geoffrey Vos) that English law is sufficiently flexible to treat cryptocurrencies as property (see AA v Persons Unknown ( EWHC 3556). In Ion Science Ltd v Persons Unknown and others (unreported), 21 December 2020, Butcher J granted a proprietary injunction, worldwide freezing order and ancillary disclosure order against persons unknown, along with a Bankers Trust order against the parent companies of two cryptocurrency exchanges. This is an interesting judgment in a number of respects – particularly the approach to service out of the jurisdiction on persons unknown – which demonstrates the courts’ readiness to meet the challenges posed by cryptocurrencies in fraud claims.
The relationship between cryptocurrencies and the law will continue to have a cat and mouse feel to it. The law cannot move as fast as the technology. The number and sophistication of cryptoassets will continue to increase, as will the use of unlicensed exchanges and other platforms designed to conceal illicit transactions, and the growing interest among retail investors (some of whom would be best served investing their money elsewhere) will lead to higher levels of fraud. But the outlook is not as bleak as it may seem. These same developments will also drive greater understanding and expertise amongst law enforcement professionals, lawyers and judges – exactly as it did when the advent of the internet brought the birth of cybercrime.
Charlie Sorensen is Senior Associate at Baker & Partners: bakerandpartners.com...