March 2022 Issue
The risks associated with cryptocurrency have been known about for almost as long as such assets have been in existence. Yet there appears to have been only modest progress in the battle against the bad actors who view crypto as the latest convenient means of making illegal gains.
Research from Chainalysis shows that criminals used a record amount of cryptocurrency in 2021. The value of crypto sent to addresses that have criminal associations totalled $14bn last year – a figure more than double 2020. While the overall rise in crypto-related activity easily outstrips the rise in its use for illegal purposes, the statistic does highlight both the risks involved in cryptocurrency and the amounts of money that are involved in criminal activity linked to such assets.
Authorities are having to adapt their tactics in response to the changing techniques of those using crypto for illicit gain. A recent example is the challenge posed by criminals’ use of decentralised finance (DeFi) – a system based on secure distributed ledgers that involves algorithms handling all transactions, with no personal interaction between the parties involved. With more than $100bn involved in DeFi markets, it is not difficult to see the appeal for wrongdoers, who view such developments as vehicles for fraud, theft or money laundering.
Courts’ approach
Cryptocurrency is, to some degree, unchartered territory in terms of the law. But courts have provided remedies to people affected by cryptocurrency-related crime. These remedies have reduced the risk of stolen assets never being recovered.
The case of Mr Dollar Bill Limited v Persons Unknown (2021) saw an individual succeeding in his application for Norwich Pharmacal and Bankers Trust relief to be served out of the jurisdiction. This meant that he was able to compel a cryptocurrency exchange and banks to disclose information about the movement of finances that could assist him in obtaining assets that he said were lost due to cryptocurrency-related fraud.
The 2021 case of DPP V Briedis and Reskajs saw the director of public prosecutions obtain a property freezing order under section 245A of the Proceeds of Crime Act 2002 (POCA) against two respondents (the individuals accused of wrongdoing). The court ruled that cryptocurrencies fell within the definition of “property” in section 316(4) of POCA and referred to the landmark case of AA v Persons Unknown, which saw the High Court state for the first time that cryptocurrency could be considered property. Both these cases show that judges are displaying a willingness to adapt in order to deal with cryptocurrency fraud.
Another 2021 case is of huge importance. Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited, was believed to be the first initial coin offering (ICO) fraud case to go before the Commercial Court and was the first time a court had considered the location of bitcoin. It was also the first case where the court granted permission to serve a freestanding Bankers Trust order out of the jurisdiction against cryptocurrency exchanges – in previous cases it was doubted whether this could be done. The fact that the court considered these issues will be of value to future parties looking to bring legal cases for alleged crypto-related fraud.
In the case of Fetch AI Limited, Fetch AI Foundation PTE v Persons Unknown, Binance Holdings and Binance Markets (2021) – the first of its kind – London’s High Court ordered Binance to identify and freeze the accounts of unknown fraudsters who traded $2.6m in cryptocurrency to anonymous third parties without permission. The case showed that those involved in crypto-related crime cannot rely on the cloak of anonymity.
Cryptocurrency and authorities
Like the courts, authorities are coming to recognise the pitfalls associated with crypto.
The International Monetary Fund (IMF) has recommended a number of policies for emerging markets and developing economies, as more nations look to adopt cryptocurrency. The European Union (EU) has also produced a package of reforms to tackle financial crime that includes measures to make it mandatory to collect details of anyone sending and receiving cryptocurrency.
Last year saw the Department of Justice (DOJ) announce the creation of a national cryptocurrency enforcement team to investigate and prosecute the criminal misuse of cryptocurrency. The DOJ also devised its ‘Civil Cyber-Fraud Initiative’ to tackle what it classes as emerging cyber threats that target sensitive information and critical systems. 2021 also saw the US’ first sanctioning of a crypto exchange, over its alleged role in enabling illegal cryptocurrency transactions involving ransomware attackers.
On this side of the Atlantic, 2021 saw the Financial Conduct Authority (FCA) banning Binance, the world’s biggest crypto-currency exchange, from the UK. And yet, a request made under the Freedom of Information Act 2000 last year led to the FCA disclosing that it had no active investigations into cryptocurrency fraud between January 2019 and December 2019 and had not opened any between January 2020 and March 2021. Those statistics emphasise that it is ultimately up to those involved in cryptocurrency to manage and react to the risks they face.
Taking action to reduce risk
Courts and authorities do seem, to some extent, to be responding to the legal problems associated with cryptocurrency. But their awareness alone will not be enough to protect those with an innocent involvement in crypto. Minimising the risks involves being aware of them and what to do to reduce or remove them – and taking the necessary steps. If, for whatever reason, it has not been possible to take those steps – and losses have been suffered – the right course of action has to be taken immediately.
Putting it in the simplest terms, protecting yourself against the risks posed by cryptocurrency is about acting swiftly. Acting quickly is important when assessing the risks before becoming involved and when acting to try and regain the losses that may have been suffered due to crypto-related crime.
Assessing the risks has to be about more than reading up on cryptocurrency and listening to anecdotal (and often misleading) advice from friends, family or business acquaintances. It has to involve taking detailed, specific and up-to-date guidance from experts in the field. Lawyers with the knowledge of how cryptocurrency works, its track record to date regarding criminal activity and the strategies to adopt to reduce the chances of falling victim to such activity can be of longstanding value. They can also advise individuals on the best way to pursue those who have taken crypto-assets from them illegally.
It should be emphasised that those looking to make illegal gains will try to move quickly and avoid having their actions detected or their identities discovered for as long as possible. If this does happen, the response has to be immediate and targeted. Any delay could affect the chances of recovering the assets that have been stolen. An individual or group of individuals that illegally obtains crypto-assets may move them repeatedly and rapidly or exchange some or all of them for physical or other digital assets. They may even fritter them away, which is known as dissipation. All these actions mean that any efforts to recover them are likely to be more complex and time consuming. The quicker action to recover those assets is taken, the less chance there is for the criminals to continue such activity.
Using the law
The law and its enforcement in relation to cryptocurrency is evolving. It may not be evolving at the speed of developments in cryptocurrency, but it does at least offer options to those who are looking to regain what is rightfully theirs. If someone has lost assets through cryptocurrency crime, there is an obvious risk that it may not be recovered. But using the available legal tools tactically and intelligently can overcome that risk.
The aforementioned cases have seen a number of innovative arguments put forward – arguments that have seen courts give rulings that can be of huge assistance to those seeking to recover what was stolen. A number of them involved issues relating to the cryptocurrency being considered an asset that could be the subject of a freezing order. Although cryptocurrencies are a relatively new concept, if they have been taken from someone illegally they can be the subject of a freezing order in the same way as other, more traditional assets, such as money, jewellery or works of art.
Freezing orders can be put in place to prevent the respondent diminishing the value of assets, moving them or making them impossible to locate before any judgement is made regarding the ownership of them. Applying for a freezing order involves showing there has been action taken, such as a fraud, which has led to the cryptocurrency being removed from its owner, and that there is a real risk of it being dissipated.
The application has to demonstrate that there is a good, arguable claim against the defendant. This can involve emphasising aspects of the defendant’s conduct, explaining how that person illegally obtained the cryptocurrency in question and, if possible, how they have moved it around since it was obtained. Taking such an approach with crypto can be as effective as it would be with any other asset.
Conclusion
Cryptocurrency and the risks associated with it are continuing to change. Individuals and organisations looking to be involved with cryptocurrency have to ensure that their risk management develops accordingly.
Syed Rahman is a partner at Rahman Ravelli. He can be contacted on +44 (0)20 3910 4566 or by email: syedur.rahman@rahmanravelli.co.uk.
© Financier Worldwide
BY
Syed Rahman
Rahman Ravelli
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