Since the introduction of Bitcoin in 2009, investing in cryptocurrency has steadily become more mainstream. Given the success of Bitcoin and other decentralised cryptocurrencies, people have increasingly looked on these investments as “safer bets”. The widening ability to pay for items using cryptocurrency has further added to its appeal. Whilst the everyday use of cryptocurrency is rapidly becoming the norm, the use of cryptocurrency within organised crime has also continued to rise. The extent of this rise is such that in recent years the Metropolitan Police have described cryptocurrency as playing an “endemic role” within organised crime.
In attempt to combat organised crime, the Government introduced the Economic Crime and Corporate Transparency Act 2023 which came into effect in April 2024. This gave the police and other enforcement authorities (such as the Serious Fraud Office and HM Revenue and Customs) the power to apply to a Magistrates’ Court for a Crypto Wallet Freezing Order (CWFO). If granted, a CWFO gives enforcement authorities the power to seize crypto assets belonging to an individual or a company; thereby allowing enforcement authorities time to investigate whether the crypto assets are the proceeds of crime.
Whilst these orders appear to be a useful tool in the crack down on organised crime and money laundering, there is an inevitable risk that owners of legitimately held crypto assets may find themselves under suspicion and become the subject of such orders.
What are CWFOs and how are they made?
The law states that before it makes a CWFO, the Court must satisfy itself that there are reasonable grounds to suspect that the assets in question are the “proceeds of unlawful conduct or intended for use in such conduct”. In practice, this sets a very low threshold. The enforcement authorities do not need to prove criminality; they merely need to establish a reasonable suspicion linking the assets with criminal conduct. The Courts have the power to grant CWFOs for up to six months upon initial application. However, these applications can be renewed by the enforcement authorities and so that the maximum time that assets can be seized is two years (a maximum of three years is allowed in circumstances where evidence is requested from overseas). Once granted by the Court, a CWFO prohibits the owner or operator from making withdrawals or payments or using the crypto wallet in any other way.
As a crypto wallet holder how will I know if an enforcement authority wants to apply to for a CWFO in relation to my crypto assets?
Often an enforcement authority will write to an individual or a company explaining that they have started an investigation into the legitimacy of identified crypto assets. The letter will ordinarily seek information as to the source of the assets and request relevant bank statements and transaction records. It is strongly advised that independent legal advice is sought promptly upon the receipt of this type of letter as the initial response can have a significant effect on the trajectory of proceedings.
Alternatively, an enforcement agency can make an application to the court for a CWFO without giving notice to the affected individual or company. In these circumstances the individual or company will likely only become aware of the matter once the CWFO has been granted.
What can be done to secure the release of crypto assets seized under a CWFO?
An application can be made to the Court for the release of crypto assets, or alternatively to vary a CWFO. For an application to succeed the affected party will have to will have to satisfy the Court that the specified crypto assets are not recoverable property (proceeds of crime) or not intended for the use in unlawful conduct. In circumstances where a CWFO was made ex parte (without notice), it may be possible to expedite the return of crypto assets by demonstrating to the enforcement authority the legitimacy of the crypto assets.
Our observations
After a slow start, enforcement authorities are increasingly making use of their powers under the Economic Crime and Corporate Transparency Act 2023 and applications for CWFOs are becoming more commonplace. Given the volatility of crypto markets, and the potential length of time that a CWFO can remain in place, these orders can result in significant hardship for the affected parties, even where the assets are ultimately confirmed to be legitimate. Whilst it is possible to challenge or attempt to reverse the grant of a CWFO, the chances of success are highly contingent on the affected party being able to demonstrate (in some detail) the true position surrounding the affected assets.
Contact Philip Kouvaritakis to find out how our team can assist you.