The popularity of cryptocurrencies shows no sign of wavering; however, the anonymous nature of many cryptocurrencies makes them attractive to criminals for activities such as fraud, money laundering and cybercrime.
Whilst transactions are recorded on a public ledger, the identities of those behind the wallets in which the cryptocurrency is held are unknown. This, coupled with the speed with which cryptocurrency can be moved across borders and the lack of regulation globally, poses significant challenges for both law enforcement and victims of crypto crime when it comes to tracking and convicting crypto criminals and recovery of stolen crypto currency.
In this article, we explore the challenges being faced and how the UK regulatory and legal landscape is evolving to provide much needed protections from and recourse against cyber criminals.
The use of compliance versus punishment
The approach taken in regulatory actions and criminal convictions can differ significantly. Regulators tend to focus on ensuring that crypto companies comply with existing financial regulations through the implementation of fines and cease and desist orders rather than imprisonment, which can happen but is less common. Law enforcement focuses on prosecuting criminal activities involving crypto crime with the aim of punishing offenders.
Each however, has an important mandate in the war against crypto crime; the role of law enforcement is to uphold the law and deter criminal activity to protect the public, whereas regulators provide oversight and compliance to ensure companies adhere to financial regulation.
If we look at the recent FTX and Binance matters, FTX faced severe criminal charges due to direct fraud and misappropriation of funds, which lead to criminal claims and a 25-year prison sentence for its founder Sam Bankman Fried. Binance on the other hand dealt with regulatory compliance issues, with a focus on fines and corrective measures, although its founder Changpeng Zhao was sentenced to four months in prison as part of a settlement reached with the DOJ.
In both regulatory action and criminal proceedings against crypto criminals, the intangible and decentralised nature of crypto assets makes prosecution and ultimately the recovery of assets for victims very difficult. So, what steps are being taking to develop innovative and resilient regulatory and legal frameworks to help shield the public from crypto threats?
Evolving new regulatory and legal frameworks to meet the challenge
Cryptocurrency claims arising out fraud are often susceptible to arguments about which country’s courts have jurisdiction over the wrongdoing. Approaches differ from country to country which adds to the complexity of bringing a claim.
The English Court of Appeal has determined the law of the location ("lex situs") of the crypto assets to be the location where the owner of the crypto asset resides [1], which is helpful because victims of crypto crime in England and Wales can pursue claims in the English courts without having to worry about pursuing recovery in a foreign court. Whilst some jurisdictions consider the location of the asset's owner to be significant when it comes to determining jurisdiction (Singapore and Canada), many jurisdictions have little or no case law on this issue. Instead, they will consider factors like the location of exchanges, wallet providers, and relevant contractual agreements when determining which country has jurisdiction over the claim, which can be complicated and open to challenge.
The development of legal frameworks to address the challenges faced by crypto crime is key to facilitating effective prosecutions and claims against crypto criminals.
Measures being adopted in the UK
On 29 April 2024, the UK government announced an expansion of powers in relation to crypto assets, stating that this provided "greater powers for the National Crime Agency (NCA) and police to seize, freeze and destroy crypto assets used by criminals have come into force today." [2]
In summary, these powers are:
- No longer requiring the police to make an arrest before seizing crypto from a suspect. The ability to seize items that could be used to give information to help an investigation, such as written passwords or memory sticks.
- Ability to transfer illicit crypto assets into an electronic wallet which is controlled by law enforcement.
- Ability to destroy a crypto asset if returning it to circulation is not conducive to the public good; and
- The ability of victims to apply for crypto assets belonging to them to be released to them.
Whilst these powers have yet to be fully tested, they are a move in the right direction because they recognise the speed with which crypto assets can move as well as the anonymity of those behind the wallets into which stolen assets have been transferred.
The English courts have also recently shown their continued willingness to be at the fore when it comes to evolving English common law to enable victims to pursue anonymous cybercriminals. In Mooji [3], the English court granted summary judgment for (a) non-proprietary relief and (b) proprietary relief, i.e. an order for delivery of the relevant bitcoin against unknown defendants. The claimant, a victim of a crypto asset fraud, was duped into sending 20 bitcoins to fraudsters perpetrating an investment scam. Having discovered the fraud, the claimant initially obtained a freezing injunction against three categories of persons unknown, permission to serve them via NFTs to the crypto wallets of the defendants was also granted.
In a previous case, Boonyaem -v- Persons Unknown, [4] the English High Court refused to grant an order for summary judgment against unidentified (and unidentifiable) defendants. The court's reason was that it was not possible to sue the defendants because they could not be identified, following the Supreme Court decision of Cameron -v- Liverpool Victoria Insurance Co Ltd [5] which involved an anonymous hit and run driver. Unlike in Cameron where the anonymity of the driver meant they could not be properly served, the judge in Mooij concluded that it was possible to effect service on a fraudster in a crypto case via alternative methods of service. Mooij therefore re-opens the door to summary judgment applications against unknown and potentially unidentifiable fraudsters who have misappropriated crypto assets.
Since service via NFT is likely to be possible in most instances of crypto asset theft, where stolen assets have been traced to identifiable wallets, this is likely to become an important tool to recover assets for victims where they are held with reputable exchanges which are likely to comply with English court orders.
Leveraging insolvency for the recovery of crypto assets
In April 2024, The UK Jurisdiction Taskforce released a statement that concluded, amongst other things, that crypto assets fall within the definition of property under the 1986 Insolvency Act, which is consistent with the English courts approach in crypto asset cases. This means that property rights can attach to digital assets in insolvency situations.
While the statement is not legally binding, it sets out a framework of principles applicable to crypto assets, distributed ledger technology, smart contracts and associated technologies under English insolvency law, which offers valuable guidance on how the English Courts might approach such matters. The recognition of crypto assets as property in insolvent estates has significant implications on how estates are managed. For example, it allows for the application of traditional legal mechanisms to recover crypto assets which have been stolen or fraudulently taken.
The UK leading the way
These developments in the UK's regulatory and legal landscape show the willingness of the English judicial and regulatory authorities to try to ensure the public are protected as far as possible from crypto criminals. The English courts continue to be pioneers when it comes to evolving English law to meet the challenges faced by victims of crypto crime by ensuring traditional legal tools evolve to make them available to make a recovery where possible.
[1] Tulip Trading -v- van der Laan [2023] EWCA Civ 83
[2] New powers to seize cryptoassets used by criminals go live - GOV.UK (www.gov.uk)
[3] Mooij -v- Persons Unknown [2024] EWHC 814 (Comm)
[4] Unreported (December 2023)
[5] [2019] UKSC 6.
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