Correspondence

004/2024: Economic Crime and Corporate Transparency Act – cryptoasset confiscation order provisions

Published 26 April 2024

Introduction

1. This circular is issued to ensure consistency in practice by law enforcement agencies in the operation of the new cryptoasset confiscation order powers. A separate circular 005/2024 is issued which covers the new cryptoasset civil forfeiture powers. This circular does not constitute legal advice. It is not a statement of law and is not intended to provide a comprehensive description or interpretation of the powers.

Summary

2. The Economic Crime and Corporate Transparency Act 2023 contains section 179 and Schedule 8, which amends the confiscation regimes in Part 2 (England and Wales), Part 3 (Scotland) and Part 4 (Northern Ireland) of the Proceeds of Crime Act 2002 (“POCA”). This reflects the devolved nature of criminal justice policy. However, this circular is issued to those exercising the powers in England and Wales under Part 2 of POCA.

3. Prior to the introduction of these measures, the powers provided for in the confiscation regime could be used to seize and recover cryptoassets. The new powers supplement and improve the pre-existing criminal confiscation regime – designed well before the advent of cryptoasset technology – to better cater for the incorporeal qualities of cryptoassets. This will enable these assets to be more easily confiscated. Specifically, the powers:

• Remove the requirement for a person to have been arrested before seizure powers can be used. This amendment applies to the seizure of all assets, but will be particularly useful in the context of cryptoassets.
• Enable appropriate officers to recover cryptoassets (intangible items) in a broadly similar way provided for tangible property. This involves tweaking the seizure and detention powers to make it clear that officers can take steps to recreate cryptoasset wallets and transfer “unhosted” cryptoassets, which are not in the custody of a third-party, akin to a bank, into a law enforcement-controlled wallet. It also includes introducing the concept of a “cryptoasset-related item” – a physical item – which may lead to the seizure of incorporeal cryptoassets.
• Provide the magistrates’ court (as the authority responsible for enforcement of confiscation orders) the powers to make enforcement orders in relation to third party cryptoasset service businesses, in the same way magistrates can already with funds in bank accounts.
• Provide for the destruction of cryptoassets if it is not reasonably practical to realise the cryptoassets, or there are reasonable grounds to believe that the realisation of the cryptoassets would be contrary to the public interest, having regard in particular to how likely it is that the entry of the cryptoassets into general circulation would facilitate criminal conduct by any person. This power can be used in relation to cryptoassets seized under a “relevant seizure power” which means one of the pre-existing powers specified in section 41A of POCA, including section 47C.

Definitions

4. A “cryptoasset” means a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically^{[footnote 1]}. This definition is broad enough to encompass a range of different technologies in use such as non-fungible tokens (NFTs), which are cryptographic token versions of a particular asset and cannot be swapped directly for other NFTs and Stablecoins, which are cryptoassets whose value is pegged to specific government-issued fiat currencies.

5. A “cryptoasset-related item” means an item of property that is, or that contains or gives access to information that is, likely to assist in the seizure of cryptoassets under Part 2 of POCA^{[footnote 2]}.That definition would cover a number of different types of property.

6. A “cryptoasset service provider” is a “cryptoasset exchange provider” or a “custodian wallet provider” as defined in POCA. These are third party businesses which provide access to cryptoassets for their customers^{[footnote 3]}.

7. A “crypto wallet” means— (a) software, (b) hardware, (c) a physical item, or (d) any combination of the things mentioned in that list, which is used to store the cryptographic private key that allows cryptoassets to be accessed^{[footnote 4]}.

8. In recognition that crypto technology and international standards are continuously evolving, the Secretary of State may by regulations amend the definitions of “cryptoasset” and “crypto wallet” in connection with Part 2 of POCA.

Seizure of property under section 47C and arrest requirement

9. 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 section 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 individuals’ rights because the grounds for arrest are not necessarily relevant to the necessity to preserve assets.

10. This applies in relation to all property, not just cryptoassets. The amendment bolsters the means by which law enforcement and the courts can seek to preserve the value of assets in anticipation of a confiscation order being made.

Seizure of “cryptoasset-related items”

11. To further protect the value of cryptoassets so that they are not dissipated by a defendant before a confiscation order is made, the concept of a “cryptoasset-related item” is introduced as a new class of seizable property and grants powers to retrieve physical items to assist in the seizure of property which has no physical presence. Examples of cryptoasset-related items could include:

• paper notebooks in which recovery seeds are written;
• electronic hardware wallets similar to memory sticks used to store a private key and/or recovery seeds;
• a piece of electronic hardware such as a mobile phone, tablet computer, laptop computer or desktop computer that has relevant information on it, or which has an application which gives the user control over a software cryptoasset wallet.

12. An appropriate officer may seize a cryptoasset-related item if they have reasonable grounds for suspecting that it is or that contains or gives access to information that is likely to assist in the seizure of certain cryptoassets under Part 2 of POCA. Those are cryptoassets which may otherwise be made unavailable for satisfying any confiscation order that has been or may be made against the defendant, or the value of which may otherwise be diminished as a result of conduct by the defendant or any other person.

13. Cryptoasset-related items may have a nil or nominal value. This is an important distinguishing feature of the revised regime. Prior to these amendments, the powers to seize items of property only applied in respect of that which would be otherwise be made unavailable for satisfying any confiscation order or where the value of the property may otherwise be diminished as a result of conduct of a person.  Cryptoasset-related items will not always satisfy those conditions.

14. Cryptoasset-related items can subsequently be seized in situations where they do not need to be seized as evidence in a criminal investigation (for instance under section 19 of the Police and Criminal Evidence Act 1984), or where a section 352 POCA search warrant is in place (such as during a confiscation investigation).

Obtaining information from ‘cryptoasset-related items’

15. Appropriate officers have the power to require a person to provide information which is stored in electronic form. The information in question must be accessible from the premises. Officers can make such a requirement for the purposes of either determining whether an item is a “cryptoasset-related item” or for enabling or facilitating the seizure of a cryptoasset. The person must provide the required information in a form in which it can be taken away and in which it is visible and legible (or from which it can readily be produced in a visible and legible form). If a person fails to comply with a requirement, then they may have committed an obstruction offence. The relevant offence will depend on which type of officer has made the requirement. Those offences are set out in POCA and other enactments, where relevant. However, the power does not authorise an officer to require a person to provide information that is subject to legal professional privilege^{[footnote 5]}.

16. Any information obtained from a cryptoasset-related item seized using the powers may be used to identify or gain access to a crypto wallet and by doing so enable or facilitate the seizure of cryptoassets (including their transfer to a crypto wallet controlled by an appropriate officer).

Reconstructing cryptoasset wallets

17. Having seized a cryptoasset-related item and obtained relevant information, an appropriate officer would use the information obtained from the physical item to open up the wallet on a law enforcement controlled cryptoasset wallet. This is in recognition that cryptoassets are a digital concept and sometimes only accessible using an electronic device.  This does not involve touching the cryptoasset owner’s device and it does not include subsequently moving the cryptoassets into a secure wallet, that would amount to the seizure of cryptoassets.

18. The approach would be carried out before the seizure of any cryptoassets, but it might occur a period of time after the original search and seizure of the cryptoasset-related items.

Detention, exempt property, and release of cryptoasset-related items

19. Any cryptoasset-related item seized by an appropriate officer may be detained for an initial period of 48 hours without further requirements and thereafter, for successive periods of six months by magistrates’ court order on application by an appropriate officer.

20. Provision is made for the further detention of cryptoasset-related items which are exempt property, pending the making or variation of a restraint order. Here, “exempt property” is that which is necessary either: for the holder of the property’s employment, business, or vocation; or for satisfying the basic domestic needs of them or their family. Further detention in these circumstances must be authorised by a “senior officer”^{[footnote 6]}.

21. The magistrates’ court may make an order authorising the further detention of cryptoasset-related items. Such orders may be sought by officers in situations where seized property is not subject to a restraint order, and no application has been made for a restraint order authorising its detention. A magistrates’ court must (in most circumstances) be satisfied of the following conditions before making a further detention order in respect of cryptoasset-related items:

(a) any of the conditions in section 47B is met (reading references in that section to the officer as references to the court),

(b) the property is free property, and

(c) there are reasonable grounds for suspecting that the property is a cryptoasset-related item.

22. There is also an extra condition where the cryptoasset-related item is “exempt property”. In those cases, the magistrates’ court must also be satisfied that the officer applying for the order for further detention is working diligently and expeditiously to determine whether the property in question is a cryptoasset-related item. Or, if it has already been established that it is such an item, the court must be satisfied that the officer is working diligently and expeditiously to seize any related cryptoassets using it.

23. Cryptoasset-related items which are not exempt property may be further detained for up to a period of six months, whereas cryptoasset-related items which are exempt property may only be further detained for a period of up to 14 days. Both periods of detention can be renewed by a further order where the relevant conditions continue to be met.

24. Provision is made to deal with property which has been released, but where there is no intention on the part of the owner to collect it. Property which is seized under Part 2 of POCA with a view to realising it will always be seized on the basis of officers perceiving it to have a monetary value. Hence, if investigations or proceedings cease and property is released back to the owner, then they have an incentive to collect it. However, with the introduction of powers to seize cryptoasset-related items, property may be seized which might have no or nominal value. It is therefore foreseeable that a defendant may not want to collect such items. Provision is therefore made for officers to retain, dispose of or destroy such property if it is not collected within a year of its release. Appropriate officers may only do so where they have approval from a senior officer and have taken reasonable steps to notify people with an interest in the property of its release. Any proceeds of a disposal of the item are to be paid into the Consolidated Fund.

Realisation and destruction of cryptoassets

25. Provision is made for the realisation or destruction of cryptoassets. Subject to any appeal rights against the realisation being exhausted, an enforcement officer must take steps to realise the cryptoassets or make appropriate arrangements for their realisation.

26. The magistrates’ court, as the authority responsible for enforcement of confiscation orders, is granted the powers to make enforcement orders in relation to third party cryptoasset service providers. Previously, these powers were only available in relation to bank and building society accounts. The magistrates’ court can order a “relevant financial institution”, to pay a sum over to the court on account of money which is payable by a defendant under a confiscation order. A relevant financial institution means a bank, building society, electronic money institution or a payment institution.

27. Similar provision is made for cryptoassets held with a “cryptoasset service provider” as for money held with a financial institution. The magistrates’ court is granted powers to order a cryptoasset service provider to realise cryptoassets and pay the resulting sum over to the court on account of money which is payable by a defendant under a confiscation order. Any realised sums should be paid in sterling currency.  A “cryptoasset service provider” is a “cryptoasset exchange provider” or a “custodian wallet provider” as defined in POCA. These are third party businesses which provide access to cryptoassets for their customers.

28. Powers are granted to the magistrates’ court to order non-complying businesses to pay an amount up to £5,000. A business subject to the provisions is absolved from liability for realising a sum different to that specified in an order provided that it took reasonable steps to obtain proceeds equal to the values specified.

29. Provision is made for the destruction of cryptoassets, where there are reasonable grounds to believe that the realisation of the cryptoassets may be contrary to the public interest in cases where it is (or is part of a class of cryptoassets which are) used predominantly or exclusively for criminal purposes such as money laundering. These powers are exercisable in two ways during the confiscation order enforcement process. First, powers are granted for the destruction of cryptoassets which are subject to an enforcement receivership appointed under section 50 of POCA. The court may only confer such a power on an enforcement receiver where it is either not reasonably practicable for the enforcement receiver to arrange for the realisation the cryptoassets in question, or where there are reasonable grounds to believe that the realisation of the cryptoassets would be contrary to the public interest (having regard in particular to how likely it is that the re-entry of the cryptoassets into circulation would facilitate criminal conduct by any person).

30. Detained cryptoassets may only be destroyed up to the amount outstanding under the confiscation order. It is reasonable for property that is seized and destroyed to ultimately be treated in the same way as that which is seized and realised. To do otherwise would risk double-recovery of benefit from a defendant.  The market value of any destroyed cryptoassets, as assessed by the court, will be treated as having been paid towards satisfaction of the confiscation order debt.

31. Destruction is introduced as a subset of “realisation”; thus, should the value of any cryptoassets increase between the time of the order for destruction and the execution of the destruction in practice, then section 21 of POCA would be relied on. If the prosecution applied for an order of destruction but noted that the value of the cryptoassets increased, the prosecution should make an application under section 21 to first increase the benefit figure, and then subsequently apply for the order to destroy the cryptoassets.

32. Secondly, powers to destroy seized cryptoassets are granted to the magistrates’ court, in its capacity as an enforcing court. This is to cater for the scenario whereby those assets would ordinarily be realised, but in the circumstances, it is either not reasonably practicable to do so (for example where no legitimate cryptoasset service provider offers the option of realising that particular type of cryptoasset on their platforms), or there are reasonable grounds to believe that the realisation of the cryptoassets would be contrary to the public interest.

33. Seized cryptoassets should only be destroyed up to the amount outstanding under the confiscation order. Third parties who have, or may have, an interest in the property have the right to make representations before an order is made. The market value of any destroyed cryptoassets, as assessed by the court, will be treated as having been paid towards satisfaction of the confiscation order.

1. Proceeds of Crime Act 2002, s.84A(1). ↩

2. Proceeds of Crime Act 2002, s.47C(5B) ↩

3. Proceeds of Crime Act 2002, s.67ZB(3. ↩

4. Proceeds of Crime Act 2002, s.84A(2). ↩

5. “Privileged information” is defined as: information which a person would be entitled to refuse to provide on the grounds of legal professional proceedings in the High Court or, in Scotland, legal privilege as defined by section 412 of the Proceeds of Crime Act 2002. ↩

6. This has the meaning given in section 47G(3) of the Proceeds of Crime Act 2002. ↩