This blog will explain what a crypto wallet freezing order ("CWFrO") is before outlining potential steps for the various parties affected by a CWFrO to respond effectively.
Where has the Crypto Wallet Freezing Order come from? The Economic Crime and Corporate Transparency Act 2023
This Economic Crime and Corporate Transparency Act (the "ECCT") aims to strengthen the UK's fight against economic crime and tackle terrorist financing.
One of the ways it intends to do this is by introducing amendments to the Proceeds of Crime Act 2002 (POCA) to support the recovery of cryptoassets. These amendments have the aim of assisting law enforcement in more effectively investigating, seizing and recovering the proceeds of crime involving cryptoassets.
Although these amendments are wide-ranging (and we have covered them more generally in an earlier blog entitled: How will measures in the Economic Crime and Corporate Transparency Act 2023 assist law enforcement in seizing and recovering cryptoassets), one specific amendment enables the introduction of a CWFrO.
This is intended to work broadly in the same way as an account freezing order ("AFrO") (which we have considered in a previous blog entitled What is an account freezing order?), but addressing the unique features of the technology underpinning cryptoassets.
This blog will explain what a CWFrO is before outlining potential steps that various parties affected by a CWFrO can take to respond effectively.
What is a Crypto Wallet Freezing Order?
A Crypto Wallet Freezing Order ("CWFrO") in an order made by a Court to freeze some or all cryptoassets held in a crypto wallet administered by a UK-connected cryptoasset service provider.
A CWFrO is therefore made by a Magistrates' Court (the "Court"). The Court will issue the CWFrO if a senior officer at a relevant agency (including the Serious Fraud Office, Her Majesty's Revenue and Customs, the National Crime Agency or the Police) can persuade the Court that some or all of the cryptoassets held in the crypto wallet are:
- the proceeds of crime (either within or outside the UK), or
- intended for use in criminal conduct.
Reasonable grounds to suspect that the cryptoassets are the proceeds of crime
For the CWFrO to be granted, the relevant agency must persuade the Court on the balance probabilities (i.e. more likely than not) that there are reasonable grounds to suspect that some or all of the cryptoassets held in the crypto wallet administered by a UK-connected cryptoasset service provider are the proceeds of crime or are intended for use in criminal conduct. Usually, this is not a significant obstacle for law enforcement to overcome. The evidence which law enforcement need to provide the court at this stage is very limited.
An application for a CWFrO may be combined with an application for an AFrO where a single entity is both the relevant financial institution for the AFrO and the UK-connected cryptoasset service provider, and operates or administers for the same person.
Length of CWFrO
If the Court does grant the CWFrO, then the cryptoassets in the crypto wallet can be frozen for up to two years. This allows the relevant agency time to investigate the legitimacy of the cryptoassets in the crypto wallet. However, in recognition of the borderless nature of the technology, if there is an outstanding request with an overseas jurisdiction (i.e. a mutual legal assistance request), then the period can be extended for up to three years.
In recognition of the volatile nature of cryptoassets, there are also provisions enabling the conversion of the frozen cryptoassets into cash and then continuing to freeze the cash.
What is a Crypto Wallet Forfeiture Order?
If, following the imposition of a CWFrO, the relevant agency concludes from its investigation that some or all of cryptoassets held in a crypto wallet administered by a UK-connected cryptoasset service provider are the proceeds of crime, or are intended for use in criminal conduct, then the relevant agency can apply for some or all of the cryptoassets to be forfeited.
The forfeiture process involves offering various parties a chance to object to the forfeiture. If no objection is received within 30 days, then the cryptoassets in the cryptowallet are forfeited.
If a respondent does raise an objection, then the relevant authority must make an application to the Court for a Crypto Wallet Forfeiture Order ("CWFO") to forfeit the cryptoassets in the crypto wallet.
Funds are the proceeds of crime
At this stage, for the CWFO to be granted, the relevant agency must persuade the Court on the balance of probabilities that the cryptoassets in the crypto wallet are the proceeds of crime (either within or outside the UK), or are intended for use in criminal conduct. This is a higher standard of proof for law enforcement to satisfy than for the standard of proof required for the original CWFrO. There is no requirement for an ongoing criminal investigation or any criminal conviction against the respondent.
Who may be affected by a Crypto Wallet Freezing Order or a Crypto Wallet Forfeiture Order
Several parties may be affected by a CWFrO or a CWFO. These include the UK-connected cryptoasset service provider and various individuals who claim ownership of the cryptoassets frozen in the wallet.
How to respond to a Crypto Wallet Freezing Order or a Crypto Wallet Forfeiture Order
A CWFrO may be made with or without notice; as such, the first time you may become aware of a CWFrO is when you are notified that one has been granted.
Applying for a CWFrO, and if applicable a CWFO, involves the relevant agency taking a staged approach, and it is important to adopt a strategic response accordingly.
As such, the most effective response will often involve a combination (or all) of the following (non-exhaustive) steps:
- Engaging with the relevant agency;
- Attending an interview (if appropriate);
- Making written representation accompanied by evidence;
- Trying to establish that there are (or were) insufficient grounds to persuade the Court to grant the CWFrO and/or that there are insufficient grounds to persuade a Court to grant a CWFO; and
- Establishing any procedurally incorrect actions taken by law enforcement.
Given the higher standard of proof which law enforcement need to satisfy at the CWFO stage, it may be better for the account holder to contest the matter at this stage.
It is critically important that the appropriate steps are taken during the investigation stage, as these should bolster representations made if the matter does end up at a full forfeiture Court hearing. As such, early expert legal advice is always recommended.
It is also important that those who claim a right of ownership over cryptoassets frozen in the wallet seek expert legal advice as soon as possible.
The new powers permit victims and innocent parties to potentially recover cryptoassets which have been frozen.
There are circumstances where you can make an application for your cryptoassets to be released. Again, expert legal advice is always recommended.
Gherson's white-collar crime team brings experience from both sides of the fence through experience leading investigations into financial crime and also representing individuals subject to such investigations. As such they are able to offer a bespoke and insightful strategy to offer the best chance to head-off any investigation at an early stage as possible.
Increased reports of crypto fraud and scams – More from Gherson
The team have previously written a blog entitled What to do if you think that you have been victim to a crypto fraud or scam. This followed an earlier blog entitled What can you do to try and help avoid a crypto fraud of scam and a blog entitled What to do if your NFT has been stolen.
Reports of crypto frauds and scams remain on the increase. A recent article by Cyber reports How around £1 million-worth of cryptocurrency scams are being reported by Santander UK customers each month. This article quoted Thomas Cattee, Solicitor in Gherson's criminal litigation, investigations and regulatory department
Criminal investigations and litigation
Gherson's solicitors criminal litigation, regulatory and investigatory team combine an expert knowledge of criminal and regulatory law underpinned with a firm understanding of digital assets and blockchain technology. As such, the team is able to provide expert strategic advice to anyone wanting to investigate and pursue a potential theft of crypto assets.
The team is also able to provide advice to anyone facing investigation in relation to any allegation of criminality involving cryptoassets.
Regulation and compliance
In these constantly changing times, firms that deal with cryptoassets, and additionally have exposure to firms that do, will need to carefully consider all their systems and controls to ensure that they are able to comply with all relevant AML and sanctions regulations. Gherson's white-collar crime and regulatory team are able to provide advice and assistance with AML and sanctions compliance, including in situations involving cryptoassets.
Additionally, the team has recently started a series on the regulation of crypto, with the aim of advising those who work in the compliance of this sector. In addition, for those who would like advice on relevant issues, including those who have had issues with the FCA registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.