Cryptoassets ARE property under English law AND the Proceeds of Crime Act 2002 (POCA 2002).

Speedread:

The recent High Court decision in AA v Persons Unknown [2019] EWHC 3556 (Comm) provided an affirmative answer to the long-standing question of whether cryptoassets were property under English law. The ruling stands to expand the orders under the Proceeds of Crime Act 2002 (POCA 2002).

This article looks specifically at the emerging area of cryptoassets and where the recent ruling might take the criminal and civil orders in POCA 2002.

What are Cryptoassets?

Cryptoassets are defined by the Financial Conduct Authority (FCA), as

• “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically.”^[1] 

The FCA has attempted to streamline the various terminology to a universal definition with each asset in a further token category. For example,

• the FCA does not refer to Bitcoins as a cryptocurrency. They are instead, cryptoassets in the ‘Exchange Token’ category.

The Decision in AA v Persons Unknown

AA v Persons Unknown involved four (4) defendants, a Canadian based insurance company and its English insurer.

The Canadian insurance company’s data was hacked and held for ransom by the first defendant, a person unknown, and the ransom amount was requested in Bitcoin.

The English insurer paid the ransom to the Bitcoin address of the second defendant, another person unknown.

It was later revealed that 96 of the 109.25 Bitcoin sent were held in an address under the operation of the third and fourth defendants trading as Bitfinex, a cryptocurrency trading platform and virtual wallet provider.

The application was for a proprietary injunction to stop the movement of the Bitcoins and reveal the identity of the first and second defendants.

Before the court could consider the injunction, it had to determine if Bitcoin were property under English law. Mr Justice Bryan concluded:

“I consider that a crypto asset such as Bitcoin are property. They meet the four criteria set out in Lord Wilberforce’s classic definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175 as being definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence.”^[2]

The High Court decision was aided by the UK Jurisdiction Taskforce’s (UKJT) paper Legal Statement on Cryptoassets and Smart Contracts, the Singaporean High Court case B2C2 Ltd v Quoine Pte Ltd [2019] SGHC (I) 03, and the civil cases Liam David Robertson v Persons Unknown (CL-2019-000444, unreported, 15 July 2019) and Vorotyntseva v Money-4 Ltd (T/A Nebus.com) and others [2018] EWHC 2596 (Ch).

The Proceeds of Crime Act 2002 vs the Newest Form of Property

Part 8 of the Proceeds of Crime Act 2002 affords investigative and prosecutorial bodies access to information about criminal funds and property. As a form of property, cryptoassets obtained through or for the means of concealing criminal funds, now fall into the crosshairs of POCA 2002. Interestingly, the lack of precedent regarding cryptoassets’ proprietary position has not delayed the criminal courts.

The courts have used POCA 2002 to obtain Bitcoin attached to the proceeds of crime. The criminal courts determined Bitcoin were a form of property assisted by the broad definition in Section 84(1)(b) of POCA 2002, and ahead of the High Court’s ruling.

In R. v Teresko (Sergejs) [2018] Crim. L.R. 81 (Crown Ct (Kingston)), the Crown Prosecution Service (CPS) obtained an order to have Bitcoins not only seized but also restrained and converted into fiat currency using POCA 2002.^[3]

This ruling took place a year before the decision in AA v Persons Unknown.

The criminal courts followed this decision with R v West (unreported, 28.9.2019, Southwark Crown Ct) ordering confiscation of the Defendant’s Bitcoins.

The High Court ruling in AA v Persons Unknown ensures investigative and prosecutorial bodies can pursue criminally involved cryptoassets, beyond Bitcoin.

Alongside the criminal orders in POCA 2002, the court has the power to recover assets in the civil courts on the civil standard (balance of probabilities) under Part 5 of POCA 2002. In Vorotyntseva v Money-4 Ltd (T/A Nebus.com) and others, the court granted an ex parte freezing order on Bitcoin and Ethereum.

The National Crime Agency (NCA), has not used its powers under Part 5 of POCA 2002 outside of exchange tokens, but that could change post-AA v Persons Unknown.

If the NCA, were to obtain a freezing order, it could theoretically order an Unexplained Wealth Order (UWO) on cryptoassets under section 362A of POCA 2002.

Recently, the Court of Appeal (Civil Division) upheld the first UWO in the case of Zamira Hajiyeva v National Crime Agency [2020] EWCA Civ 108.

It is worth considering the combined impact the decisions in Hajiyeva and AA v Persons Unknown will have on the cryptoasset/POCA 2002 relationship. With the Court of Appeal upholding the first UWO and the High Court confirming the proprietary status of cryptoassets, the NCA could consider a future UWO for cryptoassets.

Conclusion

From a POCA 2002 perspective, the ruling in AA v Persons Unknown strengthens the previous efforts in the criminal courts, expands the power of the civil orders and allows for the newly reaffirmed UWOs to flourish.

However, POCA 2002 orders will still have to penetrate cryptoassets’ anonymity. Sarah Wood, Barrister at 5 St Andrew’s Hill, concludes in her article for Lexis PSL “one of the most obvious issues is identifying the cryptocurrencies held by a defendant…because of the anonymity surrounding them.”^[4]

The Defendant in R v West was arrested while he was using his computer, allowing Police to access his virtual wallet and provide evidence to the CPS for a conviction and confiscation order.^[5]

Unless there is proof that a Defendant is dealing or concealing illegal cryptoassets, the court will have no evidence to consider an order. For example, tracing transactions on block chain, without an address or transaction hash is cyber ‘needle in a haystack’.

The civil courts appear to appreciate the complexities around cryptoasset anonymity and have accepted the evidence of successful blockchain tracking investigations (see companies such as Chainalysis Inc) in AA and Liam David Robertson v Persons Unknown.^[6]

Although, as Barristers Tim Akkouh and Freddie Popplewell note in their article for the Journal of International Banking and Finance Law, the question of what law governs the tracing process (lex suits, lex fori or elective situs) is unclear and “the issue would need to be resolved by legislation.”^[7]

It is only a matter of time before POCA 2002 is used again in the civil or criminal courts to pursue cryptoassets. In the meantime, AA v Persons Unknown leaves behind an open lane for POCA 2002 to continue its stride.

[1] The Financial Conduct Authority, “Guidance on Cryptoassets Feedback and Final Guidance to CP 19/3“, July 2019, last accessed 11 February 2020

[2] AA v Persons Unknown [2019] EWHC 3556 (Comm), para 59

[3] Crown Prosecution Service, More than £1.2 Million of Bitcoin seized from Drug Dealer,  19 July 2018, last accessed 11 February 2020

[4] Sarah Wood, Regulating cryptoassets and their implications, Lexis PSL, 29 September 2019, last accessed 11 February 2020

[5] https://www.bbc.co.uk/news/uk-england-44249888

[6] AA v Persons Unknown [2019] EWHC 3556 (Comm), para 60

[7] Time Akkouh and Freddie Popplewell, How to Freeze a Cryptocurrency, Journal of International Banking and Finance Law, (2020) 2 JIBFL 101

https://brightlinelaw.co.uk/cryptoassets-relationship-with-the-proceeds-of-crime-act-2002/