The challenge of decoding cryptoassets in criminal funding

Cryptoassets represent a digital store of value, designed to be transferred or exchanged electronically and protected by robust cryptographic security. These digital assets exist exclusively in the electronic sphere, operating on a peer-to-peer basis without the oversight of any centralised institution, such as a bank or government. However, the anonymity and accessibility that characterise these assets have given rise to grave concerns about their misuse.

Today, cryptoassets are increasingly exploited by criminals as a way to launder profits from illegal activities, including human and drug trafficking, fraud, and money laundering. Disturbingly, there is also an escalating risk of these digital assets being harnessed to raise and transfer funds for terrorist activities. The urgency of this situation calls for swift and effective intervention.

The need for timely and effective intervention

In April 2023, the UK government published its most recent iteration of The Economic Crime and Corporate Transparency Bill to communicate its current efforts in fighting economic crime and its intentions for the future.

As such, the UK government needs to first provide clarity on the status of cryptoassets under the law. Then, it must provide effective mechanisms for people whose assets have been stolen to recover them. Finally, it must apply account freezing orders and restraint orders more carefully to ensure that the right individuals are being targeted – for example, those acting unlawfully as opposed to innocent investors.

The pressing need for the UK government to dispel ambiguities around the state of cryptoassets under the law continues to grow. Such clarity will enable law enforcement agencies to address economic crimes more effectively. Increased transparency provides the government with a legal framework within which they can operate, and businesses to navigate this complex landscape with confidence. This would also ensure that the UK retains its position as a pioneer in the global economic landscape, setting a benchmark for other countries to follow.

Future-proofing the UK's approach to cryptoasset regulation

To address these threats effectively, the UK must revisit its strategy, using the legislation it has proposed in the bill. This strategy needs to encompass the unique technological characteristics of cryptoassets and account for any potential advances in technology that could be exploited for criminal or terrorist purposes.

The strategy should begin by leveraging existing legal provisions. The Proceeds of Crime Act (POCA) 2002 provides a significant legal arsenal for law enforcement agencies in the UK. These agencies are endowed with powers to obtain and enforce a confiscation order against any individual who has benefitted from crime.  In addition to powers allowing them to seize and recover cryptoassets. Upon successful recovery, a substantial proportion of these assets are earmarked for the fight against economic crime. The precedent for such recovery operations has been well established. In fact, the UK executed its first post-conviction confiscation of cryptoassets in July 2018, with a cumulative value of £1.2 million.

However, at the moment, many of these powers are used ineffectively and without concern for the financial impact on innocent people. Police and other investigating authorities can secure account freezing orders (AFOs) with relative ease and little judicial scrutiny. While these have exploded in popularity over the last few years, this has created significant hurdles for innocent individuals in many cases. The enforcement agencies need to use these powers more fairly, effectively and in a targeted way – these are core fundamentals in any new strategy to fight against economic crime.

Modernisation of legislation

The time has come to modernise the proceeds of crime legislation. If the government intends to introduce fresh powers to recover cryptoassets in a broader range of circumstances than is currently permissible, it must ensure that they are used carefully so as not to cause financial harm to individuals.

Forfeiture powers are an integral part of this equation. Strengthening these powers in response to cryptoasset-related crimes can act as a potent deterrent, striking at the heart of the criminal enterprise by targeting its financial resources. However, it is vital to ensure that such measures strike a balance between effectiveness and proportionality, preserving individual rights while enforcing the law.

At present, existing forfeiture powers are constrained to cash and listed assets. However, establishing a cryptoasset-specific civil forfeiture power will provide a safeguard against the risks posed by those individuals who utilise their funds to fuel further criminal activity or terrorism. This could also help to recover crypto assets belonging to individuals that are stolen in phishing scams or through other means.

Notably, these amendments, which also impact the Proceeds of Crime Act 2002, the Anti-Terrorism, Crime and Security Act 2001, and the Terrorism Act 2000, represent a concerted effort to ensure our legal framework is capable of addressing the modern landscape of terrorist financing. The consultation with the Independent Reviewer of Terrorism Legislation and Counter-Terrorism Policing in drafting these amendments indicates a rigorous approach towards implementing effective, informed, and holistic solutions.

As the digital landscape evolves, it is essential that our legislation keeps pace. The use of cryptoassets will undoubtedly continue to grow and diversify, and as such, the law must be equipped to navigate these changes effectively. It is by no means an easy task, but one that is vital to the safety, security, and economic stability of our society.

The broad engagement of stakeholders is also necessary. This includes financial institutions, regulatory bodies, and individual users of cryptoassets. Their perspectives and experiences can provide valuable insights into the development and implementation of robust, comprehensive and fair regulation. By creating an open dialogue and actively involving these parties, legislation can be shaped to serve its purpose effectively: protecting society, enabling commerce, and preventing crime.

It is unclear whether the need for a strategic shift in the way cryptoassets and their potential misuse are managed will be addressed by the changes in The Economic Crime and Corporate Transparency Bill. The ongoing evolution of these digital currencies and their associated technology requires UK legislation to be agile and adaptable, evolving alongside these advancements to ensure the continued protection of society from the threats posed by these digital currencies.

Sam Healey is partner in Business Crime and Regulation, at JMW Solicitors