While many businesses in the UK are caught up in speculating about what a new Labour government could mean for them, those in the crypto space should take care not to miss the biggest story that has arisen already this year. The Economic Crime and Corporate Transparency Act 2023 (ECCT) entered into force at the start of the year and brought with it a raft of new powers for law enforcement agencies and investigators. Among the primary aims of the legislation was to help tackle fraud and criminal financing involving cryptocurrencies and cryptoassets, but it may make it harder to protect your crypto wallet.

The headline story for crypto investors will be the ECCT’s amendments to the Proceeds of Crime Act 2002 (POCA), which sets out a framework for freezing, seizing and recovering assets that are proven (or in some cases, believed) to be connected to criminal activity. This means either that they are the proceeds of a crime, or are intended for use in perpetrating a crime. The ECCT amends POCA to extend existing powers to cover cryptocurrencies, which were much harder to regulate under the previous legislation.

Some crypto investors might wonder why they need to know about the new rules under the ECCT if they are not involved in illegal activity. Unfortunately, certain powers granted under POCA have been used with abandon by UK law enforcement, and there is now a real risk of overreach by UK law enforcement, which could have significant consequences for many innocent people in possession of crypto tokens or assets. Here, the expert criminal defence solicitors explain the new ECCT powers over cryptoassets, how the police and other UK authorities might use them, and what you can do to defend yourself if control of your cryptoassets is taken away.

What are the new crypto powers?

With the ECCT, the powers that allowed authorities to control cash and physical assets during investigations and criminal proceedings have been broadened to include cryptoassets. Under POCA, this was typically done through the use of Account Freezing Orders (AFOs), which are relatively easy for authorities to secure and which restrict access to a bank or building society account. The new rules work in much the same way, and if authorities want to recover digital assets they can freeze cryptowallets and digital accounts just like bank accounts.

The ECCT establishes a civil recovery regime for these crypto assets. This is wide-ranging and includes both cloud-based digital crypto assets, and crypto assets stored on external devices (such as hard drives) that investors may hold in their possession. As such, law enforcement agencies will be able to search for and seize these physical digital crypto assets from premises in order to gain control of the assets.

These freezing orders are not indefinite, and should only be used for authorities to determine the provenance of assets or the funds in frozen accounts. There is also scope to have them varied or discharged in some cases. If you find that access to your crypto funds has been frozen, it may be worthwhile to speak to an experienced cryptocurrency solicitor for advice on your next steps.

How could this affect investors?

The biggest risk to crypto investors is the permanent loss of their tokens, assets and coins, but the fluctuations of various crypto markets also pose a risk to the value of assets. The new powers enable authorities to convert cryptocurrencies into cash, provided they secure authorisation from a Magistrate’s court. This is designed to protect against crashes, which could render the value of seized assets worthless by the time authorities decide to try to recover them. However, if the market soars after your assets have been sold, you could lose significant potential gains by the time they are returned to your control.

The permanent loss of cryptoassets does not only mean that they might be recovered. In some cases, investigators may be permitted to destroy digital coins and assets. This is only expected to happen in rare cases - such as where there is a risk of other criminal actors purchasing the assets, or where they might be used to fund acts of terrorism - but it emphasises the need for crypto investors to take swift action if they are faced with an Account Freezing Order or placed under investigation. The ECCT also expands definitions of terrorist financing to include the role cryptocurrencies can play.

Given the infancy of the legislation it is not clear how the following points will be addressed in the future. Specifically:

• Where there is a considerable difference in the value of crypto assets, if law enforcement agencies convert the assets into cash and ultimately this cash is returned to the investor but would be worth considerably more if it had been kept as a crypto asset; and
• The tax implications for investors if crypto assets are converted and later returned to the investor, including when and how the capital gains would be calculated for the purpose of the investor.

Only time and case law will reveal the answers to these points.

As we noted above, AFOs have been applied regularly in investigations that did not result in any criminal convictions. With this expansion of their powers to include cryptocurrencies, there is a risk that UK authorities will use AFOs indiscriminately to freeze and investigate cryptoassets, simply because of public scrutiny about these emerging technologies. It is vital for crypto investors to know that, under an AFO, there is sometimes the option to vary the order so that you can access funds for living expenses or the costs to keep running a business. It may also be possible in some cases to have the order discharged, which means it is essentially withdrawn. You should seek legal advice as soon as possible to protect your investments if you are facing an investigation.