Civil Forfeiture of Cryptoassets in the Magistrates Court: logical extension or bridge too far?

The magistrates’ court forfeiture regime, which permits the state to forfeit property which has been obtained through unlawful conduct, dates back to the Criminal Justice (International Co-operation) Act 1990. Originally, it was limited to cash entering or leaving the UK; now. it covers all cash, listed assets and monies held in accounts with certain financial institutions. These applications are stand-alone civil proceedings which are separate and independent from any criminal proceedings that may occur.

A measure of the growth of this regime is the amount forfeited. According to the previous government’s Asset Recovery Statistical Bulletin: Financial years ending March 2018 to March 2023, £194.4m was recovered under forfeiture orders, in 2021 to 2022. While the figure decreased to £97.2m in 2022 to 2023 it is still a significant amount.

It presents a compelling argument that the forfeiture regime is succeeding in depriving criminals of the proceeds of their criminality to the benefit of the public purse.

Driving the regime’s growth are the cost protection that an applicant enjoys in the magistrates’ court, as well as the wealth of information that the provisions of the Proceeds of Crime Act 2002 (POCA) place at the disposal of an enforcement officer. Against that background, the amendments to POCA, which came into force on 26 April 2024 and extend the forfeiture regime to cover cryptoassets comes as no surprise.

Cryptoassets and the Policy Objective

Cryptoassets are a familiar term to many people, but are not easy to define or to understand conceptually. In essence, a cryptoasset is a digital representation of value or rights; it is protected by encryption and typically uses some type of distributed ledger technology or blockchain to allow data to be recorded and stored.

Cryptoassets are effectively held within digital wallets which are online platforms providing storage services. A digital wallet cannot be accessed without a private key (an alphanumeric password) which is typically stored in a digital wallet. There is no centrally controlled registry recording ownership to a cryptoasset, meaning they are essentially owned by whoever has the private key.

Cryptoassets are easy to move globally and difficult to trace making it attractive to criminals seeking to conceal the proceeds of crime. It is unarguable that measures are needed to tackle the increasing use of cryptoassets to launder the proceeds of crime.

The amendments to POCA bring cryptoassets within the scope of civil forfeiture powers in the civil forfeiture regime, which are described in the Explanatory Notes to the Economic Crime and Corporate Transparency Act 2023 as “simple and user friendly for law enforcement agencies.”

The amendment includes an extension to the investigative powers contained in Part 8 of POCA so that applications for production orders and search and seizure warrants can be made where property specified in the application is subject to a cryptoasset investigation.

The New Cryptoassets Provisions in Part 5 of POCA

Cryptoassets are defined widely 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.” Enforcement officers will be able to apply for the forfeiture of cryptoassets where they have been detained by magistrates’ court order or where this is a crypto wallet freezing order in effect.

They cover both custodial wallets where the private key is managed by a third party (typically an institution such as Kraken, Coinbase or Binance, and non-custodial wallets where the management of the private key is the responsibility of the individual.

The provision for the search, seizure and detention of cryptoassets mirrors the existing seizure and detention provisions for cash and listed assets; except that because cryptoassets cannot be physically seized, seizure occurs where a cryptoasset is transferred into a crypto wallet controlled by an enforcement officer.

After seizure, the cryptoasset can only be detained for an initial period of 48 hours, thereafter the detention must be authorised by an order of the magistrates’ court upon an application by the enforcement officer. The test for the magistrates’ court is whether there are reasonable grounds to suspect that the cryptoassets are recoverable property or intended for use in unlawful conduct.

Enforcement officers are assisted in their efforts to locate cryptoassets by the provisions permitting the seizure and detention of item of property providing information likely to assist in the seizure of cryptoassets.

An enforcement officer is permit upon seizure to use any information obtained from the seized item to gain access to a crypto wallet with a view to the seizure of cryptoassets. As with cryptoassets, the initial seizure only lasts for 48 hours and thereafter detention must be authorised by an order of a magistrates’ court.

Custodial wallets are covered by crypto wallet freezing orders which prohibits any person who administers the crypto wallet from making withdrawals or payments from it or from using it in any way, making it similar to account freezing orders.

These can be applied for by an enforcement officer in respect of cryptoassets held in a crypto wallet administered by a UK-connected cryptoasset service provider. A crypto wallet freezing order will be made by the magistrates’ court if there are reasonable grounds to suspect that cryptoassets held in a crypto wallet are recoverable property or intended for use in unlawful conduct. Applications can be made for their variation and for setting them aside.

Cryptoassets which have been detained and those frozen pursuant to a crypto wallet freezing order can be converted upon an application by either the enforcement officer or the affected person.

In deciding whether to order conversion, the court must have regard to whether the cryptoassets are likely to suffer a significant loss in value; although quite how a court will be able to come to such a conclusion given the volatility of many cryptoassets is unclear.

Victims and other owners of the cryptoassets will be able to enter the fray to assert the proprietary rights in relation to both detained cryptoassets and crypto wallet freezing orders and converted cryptoassets.

The practical implications: will they work?

At first blush, these provisions appear to be a necessary addition to the current forfeiture regime given the prevalence of cryptoassets. By any measure these are complicated legal provisions, which are likely to involve a complex factual matrix. There is every likelihood that the relate to high value cryptoassets.

The forfeiture regime permits in summary proceedings, which the government describes as simple and user friendly. Such complex proceedings involving high value assets are not suitable for determination summarily; their very nature demands the kind of detailed evidence which the High Court expect in civil recovery proceedings.

On a practical level, magistrates’ court are already at capacity, they are unable to find the court time needed to hear contested applications for account freezing orders, leaving respondents without an effective mechanism to challenge these applications. The cryptoassets provisions will stretch the magistrates’ court even further.

The court system needs to be able to deal with these applications efficiently and fairly. In the absence of a dedicated court, significant investment will be needed to provide the additional court capacity needed to deal with the applications these new provisions will create. Without this expenditure, the success of these provisions is far from certain.