The recently enacted Economic Crime and Corporate Transparency Act 2023 (the Act) introduces new powers with far-reaching implications. This blog focuses on the potential impact on crypto-related crime.
Challenges with the current regime
Currently, law enforcement agencies rely predominantly on powers of recovery under the Proceeds of Crime Act 2002 (POCA). While cryptoassets are “property” under POCA, certain features of cryptoassets make it difficult to exercise these powers. For example, under POCA, an arrest has to be made prior to the seizure of assets. However, given the complexity in identifying the true owner of a crypto wallet, it is often challenging to arrest a suspect and therefore seize cryptoassets.
Further, victims of crypto-related crimes currently have limited options for recovery of cryptoassets. In the absence of the authorities having the means to obtain freezing orders, individuals are forced to pursue the matter through the courts, which can be costly and ineffective. The Act introduces new routes to recovery or compensation for victims.
What are the key changes?
The Act introduces several amendments to POCA, largely focusing on adapting the existing confiscation and recovery powers. This will allow cryptoassets to be seized in a wider range of circumstances and extends powers to additional law enforcement agencies, including the Financial Conduct Authority. Examples of key changes for cryptoassets include:
Criminal reforms
- Removing the requirement for an arrest to be made prior to exercising seizure powers;
- Extending existing powers of search, seizure and detention to cryptoassets;
- Providing for the destruction of cryptoassets in exceptional circumstances; and
- Extending the courts’ power to authorise the sale of assets to certain cryptoassets.
Civil reforms
- Introducing a crypto wallet freezing order for certain cryptoassets;
- Allowing authorities to recover cryptoassets directly from cryptoasset exchanges and custodian wallet providers; and
- Enabling detained or frozen cryptoassets to be converted to cash or returned to victims.
Law enforcement agencies can search and seize “cryptoasset related items”, which might contain or give access to information that may assist in seizing cryptoassets. In practice, we expect law enforcement agencies may serve freezing orders on crypto exchanges, in line with the approach currently used with traditional banks. However, freezing orders may be of limited effect where cryptoassets are held in an account operated by the fraudster themselves, rather than with an exchange.
Who does the Act apply to?
Importantly, the provisions of the Act regarding crypto wallet freezing orders and powers of sale for cryptoassets only apply to “UK-connected” cryptoasset service providers, meaning those which:
- act in the course of business in the UK;
- have entered customer contracts requiring disputes to be heard in the UK;
- hold data in the UK relating to the persons to whom it provides services; or
- have their registered / head office and day-to-day management in the UK.
This limits the scope of the Act, given the prevalence of overseas cryptoasset service providers in the UK, and emphasises the importance of international cooperation when tackling crypto-crime. There are also practical difficulties for law enforcement agencies executing seizure powers outside of the UK, particularly when cryptoassets can be transferred rapidly between jurisdictions.
Practical implications
- New route to recovery for victims: Where victims can demonstrate their ownership of frozen / confiscated cryptoassets, they can apply to court for their return. If a forfeiture order is made, the cryptoassets will be sold and proceeds remitted to the public purse. If no forfeiture order has been made, courts can order the sale of the cryptoassets and use the proceeds to compensate victims.
- Wider obligations for cryptoasset exchanges and custodian wallet providers: The Impact Assessment on the cryptoasset provisions of the Act predicts additional reporting costs of up to £1.9m. The Act follows recent legislative changes requiring additional reporting obligations, including bringing cryptoasset businesses within the UK sanctions regime, and the Government’s plans to bring such businesses within the regulatory perimeter. Cryptoasset businesses will need to ensure that they are well placed to manage these and other new legal obligations.
- Increasingly complex legal landscape: Cryptoassets remain a legislative priority, including bringing them within the financial promotions regime, creating a new class of property for cryptoassets (see our blog here) and the planned expansion of the financial services regulatory regime mentioned above. The legislature and regulators will need to consider overlapping issues and how to navigate the risk of potential conflicting approaches.
Does this represent a sea change?
The Act demonstrates a renewed effort to tackle criminal activity relating to cryptoassets by strengthening law enforcement agencies’ powers to freeze and/or seize those cryptoassets.
However, the true impact of the Act remains to be seen, including the level of recovery and/or compensation it will afford victims, given the practical limitations of the Act. We expect these points will be clarified by guidance which is due to be published, and when the provisions are used by law enforcement agencies in practice.