The courts are grappling with legal uncertainties around the status of cryptoassets. Following recent developments including the confiscation of more than £900,000 from cyber hacker Grant West, what is the latest state of play?
Sarah Wood, specialises in asset recovery, restraint and confiscation work. She is on the committee of the Cybercrime Practitioners Association and has particular experience of POCA proceedings involving cyber currencies. She assesses the situation for Lexis Nexis PSL:
What powers are currently available to regulators and prosecuting agencies to seize/restrain/confiscate/forfeit bitcoin/cryptocurrency?
Prosecuting authorities are able to seize, restrain, confiscate and forfeit cryptocurrency pursuant to the provisions of Proceeds of Crime Act 2002 (POCA) in much the same way as they can other property. This is because it is widely accepted that cryptocurrency is ‘realisable property’ for the purpose of the definition of property that is set out within POCA section 84. Prosecutors have successfully obtained both restraint and confiscation orders over cryptocurrency, most recently in the case of R v West at Southwark Crown Court in August 2019. Mr West, a cybercriminal was convicted of hacking companies’ databases to obtain clients’ financial details which he then sold on the dark web. He was ordered to pay a confiscation order that included £922,978 worth of cryptocurrency. Similarly, in the case of R v Teresko [(2018) Crim LR 81] a confiscation order was made at Kingston Crown Court in respect of Bitcoins held by the Defendant worth £975,000.
What are the relevant legislative provisions and how are they applied in practice?
Dealing with restraint orders first, section 41 of POCA enables a Court to make a restraint order prohibiting a person from dealing with any ‘realisable property’ held by him, provided the conditions within section 40 are met. Section 83 defines realisable property as any ‘free property held by the Defendant (and any free property held by the recipient of a tainted gift)’. Section 84 then defines ‘property’ as ‘all property wherever situated’ and includes ‘all forms of real or personal property’. There is no dispute that, for the purposes of section 84, cryptocurrency is ‘property’. It is for the same reason that the Courts have the power to make a confiscation order in respect of cryptocurrencies as the ‘recoverable amount’ for the purposes of POCA section 9 is the total of the values of all free ‘property’ held by the Defendant. It is these provisions that have been used to restrain and confiscate cryptocurrencies.
How will orders made in respect of cryptocurrency be enforced?
If a Defendant does not pay a confiscation order then the default sentence will be activated. The Prosecution also has the ability to apply to the Court for an Enforcement Receiver to be appointed pursuant to POCA section 50, and to exercise the powers contained within section 51. These powers include realising the property in such manner as the Court may specify and are wide enough, in theory, to enable a Receiver to transfer the cryptocurrency to a wallet controlled by them for conversion to sterling. In order to avoid potential difficulties in enforcing orders made in respect of cryptocurrencies, Prosecutors ought to consider being proactive at the restraint stage and invite the Court to use the wide range of powers available within POCA section 41(7). Section 41(7) enables a Court to make such order as it considers appropriate for the purpose of ensuring that a restraint order is effective. These powers are wide enough to include a requirement that the Defendant should transfer the cryptocurrency into a police wallet and converted to sterling at that stage, which is what happened R v Teresko before the confiscation order was made.
What are the specific technical/practical issues raised by cryptocurrency in terms of restraint/seizure/forfeiture and confiscation?
One of the most obvious issues is identifying the cryptocurrencies held by a Defendant, particularly given that one of the reasons why criminals purchase cryptocurrencies is because of the anonymity surrounding them. Unless something obvious is found during a search (as it was in the Teresko case when the key for the Defendant’s Bitcoin wallet was found) investigators will need to see if they can trace sterling into cryptocurrencies via a crypto-currency exchange. This will involve identifying transfers to the exchanges via standard banking evidence. If such transfers can be identified then the Prosecution can apply for a production order pursuant to POCA section 345 against the currency exchange which should then enable them to identify what cryptocurrencies the Defendant holds.
Are there any areas of the law which require further clarification or development?
In May the UK Jurisdiction Taskforce (UKJT) established a public consultation to seek views from lawyers and coders on the key issues of legal uncertainty surrounding the status of cryptoassets and the usage of smart legal contracts.
- Among the questions to be considered are, if a cryptoasset is capable of being recognised as property, is it a chose in possession, a chose in action or another form of personal property?
- Can a cryptoasset be characterised as ‘property’ for the purposes of the Insolvency Act 1986? Can cryptoassets be characterised as ‘goods’ under the Sale of Goods Act 1979?
- It is to be hoped that the legal statement that will ultimately be published by the UKJT will assist in providing some guidance to the Courts in respect of these questions.
That is not to say that Courts are not already grappling with these issues. In a recent case (Robertson v Persons Unknown) the Commercial Court took the view that Bitcoins amounted to ‘legal property’ as opposed to mere data or information. Mr Robertson was the victim of a spear phishing attack. The email account of a firm in which he was investing was hacked and Mr Robertson’s intended investment of 100 Bitcoin was misdirected to fraudsters. These were the ‘persons unknown’ who were sued as the first defendant. It was established that 80 of Mr Robertson’s Bitcoins had been sent to a wallet held at Coinbase UK Ltd. The Court granted an application for an Asset Preservation Order (‘APO’) to secure the 80 Bitcoins and a Bankers Trust Order to permit Coinbase to reveal the identity of the individual who controlled the wallet containing the 80 Bitcoins. Notably Mrs Justice Moulder was not satisfied that the ‘balance of convenience’ and ‘risk of dissipation’ requirements for a freezing order were satisfied, but she was prepared to grant the APO on the basis that there were proprietary questions to be answered in respect of the 80 Bitcoins.
This article was originally published by Lexis Nexis PSL in September 2019.
Sarah is Joint Head of the Business Crime Team at 5SAH. Sarah is ranked in Chambers and Partners for Asset Forfeiture and Proceeds of Crime. She is an experienced and highly accomplished practitioner who specialises in criminal and family matters involving high-value assets and complex financial arrangements