BSQ Briefing: New Powers to Tackle CryptoCrime in Changes to the Proceeds of Crime Act 2002

In an effort to keep up with rapid advances in technology changes to the Proceeds of Crime Act 2002 (POCA 2002) have recently been enacted. The new provisions are aimed at making it easier for the authorities to deal with criminal activity involving cryptocurrencies such as Bitcoin. A raft of amendments to POCA 2002 in the Economic Crime and Corporate Transparency Act came into law on the 26th of April 2023.

Law enforcement agencies such as the police, NCA, FCA, SFO and HMRC will now have broader authority to seize, sell, or destroy cryptocurrencies during investigations and criminal confiscation, forfeiture and civil recovery proceedings. The new powers supplement and improve the pre-existing POCA 2002 regime – designed well before the advent of cryptocurrencies technology – to better cater for the incorporeal qualities of cryptocurrencies.

 The Act also creates new obligations for crypto exchanges and crypto custodians. The Courts now have powers to order the sale and recovery of cryptocurrencies held by such institutions. Under the new rules the Magistrates Courts retain jurisdiction to deal with applications for the search, seizure, and forfeiture of cryptocurrencies.

 However, BSQ remains concerned at the suitability of Magistrates Courts for determining complex issues concerning the application of the law to cryptocurrency-related issues such as blockchain technology, digital wallets, and international transactions that may arise in these types of cases. It is not uncommon for these types of applications to be made by Accredited Financial Investigators and dealt with by Justices who are both not legally qualified, which can be problematic.

 A summary of the key provisions is set out below.

Criminal Law Regime

No Need for Arrest Before Seizure: The Act removes the requirement for a person to have been arrested before cryptocurrencies can be seized. The amendment applies to the seizure of all assets but will be particularly useful in the context of cryptocurrencies as verifying who owns a cryptocurrency can be difficult. 

Extended Powers to Seize Cryptocurrencies and “Cryptocurrency Related Items”: The powers to search, seize and detain “property” in the Proceeds of Crime Act 2002 are extended so as to apply to cryptocurrencies in a similar manner as POCA 2002 deals with cash and other listed assets. The Act creates a new definition for "cryptocurrencies" as a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically, is comprehensive, covering various technologies and types of digital assets including NFTs and stable coins.

Interestingly, in adopting this definition, the Government has gone beyond the requirements of the

Fifth Anti-Money Laundering Directive (AMLD5) published in 2018 by using the term “cryptoasset” rather than “virtual currency” as used in AMLD5. The term “cryptoasset” catches a wider range of activities including all three types of cryptocurrencies: exchange tokens, security tokens, and utility tokens.

 Recognising that as per the above that crypto technology is continuously evolving, the Act allows for the Secretary of State to amend the definitions of “cryptoasset” and “crypto wallet” by Regulation.

 It also provides a new definition for a “crypto wallet” and ““cryptoasset service provider.” POCA 2002 is amended to give state agencies the power to seize “cryptoasset-related” items such as passwords, memory sticks, and other storage devices used to store cryptocurrencies or that could give access to information that is, likely to assist in the seizure of cryptocurrencies.

 New Powers to Require Disclosure of Electronic Information: The authorities can request disclosure of information which is stored in electronic form for the purposes of either determining whether an item is a “cryptoasset-related item” or for enabling or facilitating the seizure of a cryptoasset. Failure to comply could constitute an obstruction offence.

 Extending Magistrates Courts Powers to Order the Sale of Cryptoasset: In the same way funds in bank accounts can be realised under POCA 2002, the enforcement powers of a Magistrates’ Court are extended to cover orders for the sale of cryptocurrencies. For example, a cryptocurrencies service provider can be required to sell cryptocurrencies and pay the resulting sum over to the court on account of money which is payable by a defendant under a confiscation order. Any realised sums should be paid in sterling currency.

 Magistrates Courts Powers to Order Destruction of Cryptoassetss: Where there are reasonable grounds to believe that the realisation of the cryptocurrencies may be contrary to the public interest such as where there is a risk the assets could be used for money laundering if entered into general circulation, the Magistrates Court can make an order for destruction. The detained cryptocurrencies may only be destroyed up to the amount outstanding under the confiscation order. Third parties who have, or may have, an interest in the property have the right to make representations before an order is made.

 Civil Law Regime

 Freezing Orders for Crypto Wallets Held by Crypto-Exchanges: Magistrates now have the authority to issue freezing orders on crypto exchanges, similar to Account Freezing Orders under POCA 2002. While this enables authorities to freeze assets held on exchanges, it may have limited impact on individuals holding cryptocurrencies outside of exchange platforms.

Powers for Law Enforcement to Safeguard Crypto-assets Not Held on an Exchange:  The Act allows authorities to recreate cryptocurrencies wallets and transfer "unhosted" cryptoasset, which are not held by a third-party custodian, into law enforcement-controlled wallets. This provision facilitates the seizure and control of cryptocurrencies held outside traditional exchange platforms.

 Victims Recompense: Victims of crypto-related crimes can apply for stolen cryptoassets to be returned to them if they can show ownership of frozen or confiscated assets. This provision aims to provide a means for victims to recover their losses resulting from crypto-related theft or fraud.

Powers of Sale and Recovery: The Courts new powers to recover cryptoassets directly from cryptocurrencies exchanges and custodian wallet providers and to order the sale of cryptocurrencies held by third parties, such as exchanges, can also facilitate asset recovery in crypto-related cases.

UK Jurisdiction: Only "UK-connected" cryptocurrencies service providers are subject to the crypto wallet freezing orders and the powers to order the sale of cryptocurrencies included in the new legislation. This means that many crypto-related activities may fall outside the scope of the Act's regulatory framework, highlighting the need for international collaboration to address cross-border crypto-crime effectively.

 BSQ maintains a watching brief on the latest developments in crypto crime and cryptocurrency regulation.

Companies or individuals requiring advice on AML and KYC compliance measures or pending investigations or prosecutions in the crypto industry should contact our London offices on (020) 3858 0851.