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In the first part in a legal series on cryptocurrencies, Angharad Hughes and Will Glover, barristers at 3 Temple Gardens, begin their series of articles in the developing area of cryptocurrency regulation by providing an introduction to cryptocurrency and the crypto sector, the current approach in England and Wales and regulation under the Fifth Money Laundering Directive (MLD5).
Currencies are inherently built on trust, and cryptocurrencies are no different. It is investors’ belief in the integrity of the background infrastructure, or blockchain, that underpins the success of cryptocurrencies. The blockchain is a continuously growing list of transactions, (the blocks) made by using the cryptocurrency. These blocks are essentially chronological ledgers of crypto transactions which can be searched and used to trace the history of all transactions, but not necessarily the underlying beneficial ownership. Unlike cash therefore, the blockchain has the potential to make it easier to ‘follow the money’ when it comes to investigations.
It is ironic that despite their potential to guard against it, cryptocurrencies are an attractive vehicle for fraudulent activity and the disposal of criminal assets. The biggest attraction of cryptocurrency, for those involved in criminal activity, is its potential anonymity. Taking Bitcoin as an example, whilst Bitcoin transactions are traceable, the transaction record does not store information which would reveal the identity of the individual receiving, spending or otherwise dealing with the coins. This makes cryptocurrency appealing to those who want to move around large sums of money without the usual transparency and for those wanting to make illegal purchases on the Dark Web.
Until recently, the crypto sector was remarkable for its lack of regulation. Cryptocurrency exchanges have owners, as do their servers and registered offices, meaning that if governments had acted sooner, regulation and other restrictions could already be in place. Such regulation might have made them a less attractive prospect for those interested in their illegitimate potential. Unsurprisingly, governments around the world are now playing catchup. On 23rd February 2020, the G20 reinforced its commitment to the Financial Action Task Force (FATF) measures to reduce the risk posed by cryptocurrencies. The US has also indicated that it is embarking upon a journey of cryptocurrency regulation by virtue of the Crypto-Currency Act of 2020 laid before Congress on 9th March 2020. The EU’s efforts are to be found in the Fifth Money Laundering Directive (MLD5).
Cryptoassets are property
In AA v Persons Unknown  EWHC 3556 (Comm), the High Court considered whether Bitcoin was property. The Court concluded that, cryptocurrencies generally, are a form of property. This ruling means that investigatory bodies now have multiple ways of pursuing illegal cryptoassets. Before this decision, cryptoassets were being defined as a form of property under the broad definition of ‘all forms of real or personal property’ under section 84(1)(b) of the Proceeds of Crime Act 2002 (POCA 2002) in the criminal courts. There is now nothing in theory preventing an unexplained wealth order on cryptoassets under POCA 2002, s362A. We will examine this in closer detail in later articles in the series.
Prior to AA v Persons Unknown and in what is believed to be the first case of its kind, in R v Teresko (Sergejs) (not reported by LexisNexis) the Crown obtained an order to have Bitcoins not only seized but restrained and converted into sterling using POCA 2002. The defendant was accused of money laundering and drug dealing. During the course of the investigation, Surrey Police found evidence of Bitcoins. He had used cryptocurrency to conceal his funds and had over £1.2 million worth of Bitcoin. Surrey Police applied successfully to have the Bitcoins seized and restrained. Upon conviction, the Crown also successfully applied to have the restrained Bitcoins converted into pounds through an approved Bitcoin exchange.
Tracking ownership through devices
A note of caution. The authorities’ ability to seize Bitcoin as part of proceedings so far, has only really been possible where laptops or other devices have been seized, which have then shown evidence of ownership of the cryptocurrency. There has been no obvious central body, like a bank, where orders can be applied for in the usual way to reveal the owner’s accounting history and freeze or seize assets. However, we may see movement towards applications for such orders against crypto entities in the future. These issues are being tackled, in part, by the Fifth Money Laundering Directive (MLD5) which is touched on below. More on these issues later in the series.
R v West (unreported, Southwark Crown Court, 25th May 2018), is a further example of tracing through devices. A computer hacker, who was convicted of money laundering and conspiracy to defraud, carried out cyber-attacks on various high street names in order to obtain email addresses. Between July and December 2015 he sent phishing emails pretending to be from Just Eat, the popular take-away food provider, offering a voucher in return for answering questions on personal information. The victims’ answers would then be sold on the Dark Web. When officers arrested the Defendant he was on his computer which allowed the police access to his virtual wallet. The police seized more than £500,000 worth of Bitcoin having gained access to the ownership information through access to the computer.
In R v Johnson (unreported, Leicester Crown Court, 5th February 2020) a drug dealer who used cryptocurrency to import drugs into the UK was sentenced to 8 years’ imprisonment. The defendant had been trading Bitcoin in consideration for illegal substances entering the UK. A search of his home address revealed heroin, ketamine, LSD and MDMA tablets. Following searches at his address a seized laptop enabled Leicestershire Police’s economic crime unit to trace the Bitcoin he had been using, revealing the equivalent of £300,000 in Bitcoin.
It is clear from West and Johnson above that, without access to relevant devices, evidence of each virtual wallet would have been difficult or impossible to obtain. This underlines the investigative problems for agencies and authorities who now want to tackle the conundrum of anonymity in which cryptocurrencies are shrouded.
MLD5 came into force in January 2020 which inter alia seeks to tackle the criminal use of cryptocurrencies. This development by the EU demonstrates that they are finally adapting to the dramatically evolved financial landscape since the Fourth Money Laundering Directive (MLD4) in 2017. MLD5 seeks to regulate both cryptoasset exchange providers (think ‘currency exchange’) and custodian wallet providers (eg Bitcoin), meaning they will be subjected to the same sort of regulation as traditional financial services bodies. This in turn should make it more difficult for them to be used within the Dark Web and as a vehicle for criminality.
On 10th January 2020 the Financial Conduct Authority (FCA) became the anti-money laundering and counter-terrorist financing supervisor of UK cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), SI 2017/692 (as amended by regulations 3 to 13 of The Money Laundering and Terrorist Financing (Amendment) Regulations 2019, SI 2019/1511). MLR 2017 (as amended) seek to give effect to the activities specified in MLD5 and a wider range of activities as recommended by FATF of the G20. They now set out that cryptoasset businesses, including exchanges and wallet providers, must comply with the UK money laundering regulations.
Within the next year these businesses will have to register with the FCA or cease trading. There will be obligations to carry out customer due diligence and submit suspicious activity reports. In addition, providers must be able to give information on demand to inquiring authorities. The FCA’s guidance document, helpfully called ‘Guidance on Cryptoassets—Feedback and Final Guidance to CP 19/3’ aims to provide clarity on the type of cryptoassets that fall within the new regulatory remit and the resulting obligations. We will take a closer look at the regulations in later articles in the series.
The next step for the EU will be the Sixth Money Laundering Directive (MLD6) which, coronavirus issues notwithstanding, will be written into law by December 2020 and must be implemented within regulated entities by June 2021. Following the UK’s exit of the EU it is yet to be seen whether this will be implemented into UK law; it is likely however that a similar approach will be adopted.
When compared to the accelerated rate of public interest and investment in cryptocurrencies, international and domestic political machinery has been slow to respond to the inevitable regulatory challenges. Perhaps that international sluggishness, when coupled with the UK Government’s apparent scepticism, betrays an underlying fear that cryptocurrencies represent a threat to more traditional financial institutions. In any event, further jurisdictional challenges lie ahead. Enforcement and regulation needs to be implemented globally; governments that break rank with a unified approach will become safe havens for criminal cryptoasset operations. It will be interesting to see what further steps governments take to combat financial crime in the crypto arena. In the meantime, this series will continue to post content examining the caselaw and the operation of provisions in this fascinating and developing area of after-the-event regulation.
Will Glover is a barrister at 3 Temple Gardens. He has been instructed on matters relating to serious fraud, corruption and corporate offending. His recent instructions include defence work at the pre-charge stage of an SFO investigation, as well as trials involving the alleged mis-selling of alternative investment products and a high value counterfeit currency conspiracy.
Angharad Hughes is a barrister at 3 Temple Gardens. She came to the Bar with experience in financial and complex crime, civil recovery and fraud obtained at a top-tier firm. She was recently instructed to assist a team bringing a private prosecution on behalf of a corporate entity. She is also the founder of Griffin-LAW a pro-bono project advancing social mobility at the Bar.
This article was first published on the website of 3 Temple Gardens on 21 May 2020 and is reproduced with permission. To access the footnotes, see the original article here
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