Crypto regulation starts to de-crypt

After a long time of smiling quietly and gazing into the distance, the new face of crypto regulation is starting to show some teeth. Given this, any business with any involvement in crypto-assets needs to sit up and pay attention.

The evolution of the regulatory landscape

Cryptocurrencies were developed as a peer-to-peer digital currency able to operate outside central state regulation. There are many different types of cryptocurrencies, but Bitcoin (2008) is the most prominent. Partly due to the still maturing global regulatory regimes, criminals and terrorists have taken advantage of them. Indeed, cryptocurrency is the most common form of payment on the dark web, as well as featuring in many scams. It has long been recognised that regulation is overdue.

From 10 January 2020, firms carrying out specific crypto-asset activities in the UK were required to comply with the amended Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and register with the Financial Conduct Authority (FCA). In July 2024, a crypto-asset trading platform was fined £3,503,546 as part of a settlement for repeatedly breaching a requirement that prevented the firm from offering services to high-risk customers contrary to the money laundering provisions.

On 26 April 2024, the Economic Crime and Corporate Transparency Act 2023 (Schedules 8 to 10) amended the Proceeds of Crime Act 2002 to make the confiscation and recovery of crypto-assets from criminals easier. In particular, it created a framework which effectively de-mystifies crypto-assets and related tools from any suggestion that they are intangible bits of code which cannot be classified as property and seized or converted. Even prior to the new provision coming into force, proceeds of crime legislation was used. For example, in March 2024, the CPS convicted Jian Wen of money laundering and seized in excess of £2 billion worth of bitcoin wallets.

The changes make it easier for law enforcement to seize, freeze and recover crypto-assets that are connected to criminal activity. Perhaps most significantly, the new powers enable the police to seize a range of different crypto-related assets from a suspect prior to an arrest, as well as the conversion of crypto into money before a forfeiture hearing.

This trajectory, punctuated by an earlier recognition by HMRC that crypto-assets could be deemed to be property, was marked by the notable case of AA [2019] EWHC 3556 (Comm) [52] (which built on earlier case law), in which the court had to decide whether bitcoin could be considered ‘property’ for the purpose of granting an injunction. The court adopted the approach set out in the UK Jurisdiction Taskforce’s Legal Statement on Crypto-assets and Smart Contracts (2019) that, whilst crypto-assets might not meet the classic definition of property as thing in possession or action, they meet the broader principles of being: definable, identifiable by third parties, capable in their nature of assumption by third parties and having some degree of permanence. The unique characteristics of cryptocurrencies (intangibility, cryptographic authentication, the use of a distributed transaction ledger and decentralisation) were deemed to not take them outside the scope of a definition of property.

The approach by the Scottish courts

On 2 September 2024, Scottish courts adopted this approach for the first time following the conviction of John Ross Rennie for involvement in a cryptocurrency robbery. A total of 23.5 of his bitcoins were seized as criminal property and converted into £109,601 of cash.

On 10 September 2024, there was a further development in this space when the FCA announced its first criminal prosecution relating to unregistered crypto-asset activity, having charged an individual with running a network of crypto ATMs (which allow you to buy or convert money into crypto-assets) without FCA registration. It is alleged that some £2.6 million in crypto transactions were processed.

The new legislative framework, and the new appetite of law enforcement and the courts, is likely to generate a very different regulatory atmosphere not just for crypto-asset service providers, but for any business dealing in such assets. Businesses may now face a range of interventions and court orders as part of regulatory enforcement action involving the assets of third parties even prior to any arrest or conviction. Knowing your client, and your clients’ clients, and helping clients get the right advice and create clear regulatory frameworks has never been so important.

Copyright & permissions