The state & digital asset enforcement powers
Written by James Ramsden KC King’s Counsel at Astraea Group
Relatively quietly and in the less trailed and headline-grabbing parts of the Economic Crime & Corporate Transparency Act 2023, the provisions of the now familiar Proceeds of Crime Act 2002 (“POCA”) were amended to introduce new powers in the hands of the police, HMRC and the NCA.
On 26th April 2024 the Home Office issued an anodyne looking circular entitled “Cryptoasset Confiscation Order Provisions”. The title is the first give-away. Law enforcement agencies in the UK and US continue to speak loosely of “cryptoassets” without an adequate distinction between digital currencies and the numerous other traded digital assets and measures of value that constitute digital finance. The Home Office Circular even speaks of “cryptoasset-related items” in an attempt to describe wallets and other forms of storage or proprietary and control mechanisms in digital finance. This adds yet more imprecision.
Lady Justice by sculptor F. W. Pomeroy at The Old Bailey
Source: Teamblockchain
What this is all about is what the Home Office calls a mere “tweak” of the existing law that applies to conventional currencies and bank accounts which allows UK law enforcement to seize and confiscate cash.
So, what is wrong here;
Firstly, the failure to reflect the UK common law is stark; in the introductory summary to the explanatory Home Office Circular, it describes the “tweak” to the law as intended to enable “appropriate officers to recover cryptoassets (intangible items) in a broadly similar way to tangible property.” There are (at least) two problems with this; The present state of the common law in England & Wales is that digital assets are property. Even more puzzling is that if the UK Law Commission’s recommendations become law in the next few months digital assets will be designated as a new asset class of their own; neither conventional money nor property. The Home Office “tweaks” to the state’s powers of seizure and confiscation therefore manage to ignore both the current and intended state of the law as to what constitutes a “cryptoasset”.
If this was not bad enough, the amendments to POCA set out the “conditions for exercise of [these new] powers”. Under S.47B of POCA police can now “seize” “cryptoassets” from a “suspect” before making any arrest. The Home Office reassurance is that this is what they can already do with cash and the change to the law merely aligns their powers in relation to “cryptoassets”. If law enforcement don’t have a sufficient basis to arrest, it is always questionable whether they have a sufficient basis to seize assets.
In an apparent attempt to address this concern the Home Office Circular manages somehow to mingle candour with confusion. Explaining the new pre-arrest powers it states: “The requirement in the first and second conditions of section 47B of POCA for a person to have been arrested for an indictable offence before property may be seized under the power conferred by section 47C of POCA is removed. This allows the S.47B conditions to be satisfied during the investigatory stage (before proceedings have been initiated) without the requirement for arrest. This does not remove safeguards for individual’s rights because the grounds for arrest are not necessarily relevant to the necessity to preserve assets.” [Emphasis added]
That is one of the more remarkable explanations I have ever seen from a lawmaker. The last sentence contains a bizarre disjoint which appears to result from deductive thinking that would have alarmed Aristotle. It is precisely because the state’s wish to seize assets may not coincide with the state’s requirement to have a proper evidential basis to arrest and charge the asset’s owner with a criminal offence that their “individual rights” are most certainly removed.
The reality for a “suspect” under this new law is that they have no rights. The mere fact of an investigation will prevent any realistic chance of an application to the Magistrates Court to discharge the seizure order. That reality will persist however unjustified, ill-judged or ill-informed the investigation might be. Experience tells us that this is sadly commonplace.
The safeguard should be oversight by senior police officers (hardly confidence inspiring) or the Magistrates Courts, where most applications will be heard. Underfunded and equipped only with superficial Home Office guidance the Magistrates Courts cannot be expected consistently to understand the present state of digital finance when those making and articulating this new law appear not to do so.
By talking loosely of “cryptoassets” as the target class (presumably focusing on cryptocurrencies NFTs and Stablecoins)) the legislation fails to grapple with the numerous other forms of digital asset, such as tokenization and CBDCs.
Under S.47C(5C) of POCA the Home Office blithely states that “officers” will be able to “transfer” illicit “cryptoassets” into an electronic wallet which is controlled by law enforcement. Well, no one at the Home Office appears to have read and understood the Bitcoin developers defence of the claim in Tulip Trading Ltd v Van Der Laan & Others [2023] EWCA Civ 83. Good luck with any attempt at the unilateral and non-consensual transfer of Bitcoin to a wallet controlled by the Metropolitan Police.
Under S.67AA(2)© of POCA the Home Office states that “officers” may further destroy “cryptoassets” which have been seized if returning them to “circulation” is “not conducive to the public good”. Stripping away the pompous language, what does this actually mean? Even if you work that out you run into precisely the same problem as would arise (certainly in the case of Bitcoin) at the point you try to move coins to a “wallet” controlled by the police.
S.67AA(4) of POCA provides that “victims” may apply for cryptoassets which they claim to be theirs to be released to them. Once again isn’t that precisely what Tulip Trading tried and spectacularly failed to achieve? As the English Court of Appeal observed in that case, the test of whether a financial platform is truly decentralised is whether such mandatory and compelled transfers are given effect to. The consensus view of those that operate those systems is that they cannot take place if the system is truly decentralised.
So far as I can see the legislator does not even have the excuse that this amounts to urgent, less still emergency legislation, which the UK is notoriously bad at getting right.
What then is the explanation for these pretty startling new powers? With the current political class it is a difficult choice between deliberate and cynical mission creep in an area where most consumers don’t fully understand and sympathise even less, and a now familiar lack of insight and cohesion by lawmakers.
Maybe there is no choice at all and it is an alarming combination of the two.
