The UK's Economic Crime and Corporate Transparency Act 2023 received Royal assent this week. The Act was introduced in response to concerns over digital financial crimes.
The UK's National Crime Agency (NCA) estimates that in 2021, over GBP1B in illicit cash was transferred overseas in crypto-asset transactions. The UK's new legislation allows authorities to take prompt action to seize crypto-assets where there is strong evidence of criminal activities, without needing to wait for a conviction. Further, it introduces provisions to expedite freezing orders of crypto-assets associated with crime.
Part 4 of the Act, titled 'Cryptoassets', amends the existing confiscation regime under the Proceeds of Crime Act 2002, incorporating new powers in respect of orders involving crypto-assets. The Government's announcement states:
In exceptional circumstances, there will also be a power to destroy seized cryptocurrency.
This power arises when the seized crypto-asset, upon release, is not claimed back within a year and in circumstances where authorities consider it is contrary to the public interest to realise the crypto-assets. A crypto-asset is ‘destroyed’ if it is:
disposed of, transferred, or otherwise dealt with, in such a way as to ensure, or to make it virtually certain, that it will not be the subject of further transactions or be dealt with again in any other way.
Presumably the act of 'burning' crypto-assets, where an asset is transferred to an address which does not exist, would meet this requirement.
The Act provides that where crypto-assets are destroyed, the accused will be taken to have paid the amount equivalent to the market value of the crypto-assets ‘towards satisfaction of the confiscation order’.
An accompanying impact assessment by the Home Office emphasizes the rationale for this new forfeiture power:
[cryptoassets] cannot currently be recovered as easily…due to their unique technological qualities.
Law enforcement agencies will benefit from greater powers to seize, freeze and recover cryptoassets.
The UK Government's announcement highlights the challenge of ensuring that new legislation is fit for purpose when it comes to crypto-assets. The notion of "destroying" crypto-assets is something of a misnomer, and perhaps a relic of another era in which the proceeds of crime were, more often than not, physical objects that could be actually destroyed.
With the new legislation receiving Royal Assent, it will be interesting to see how the Government implements its new powers to "destroy" crypto-assets in practice. We would expect it to follow notions of "burning" but it may be that private keys or seed phrases to crypto wallets holding specific seized assets could be destroyed, rendering the wallet (in theory) inaccessible, but because anyone with a copy of the private key or seed phrase could transact using the wallet, it would seem better in practice for a traditional "burn" transaction to take place. Such a "burn" would be immediately
The new legislation follows stringent measures introduced by the UK’s Financial Conduct Authority (FCA) earlier this month around crypto promotions, which are intended to protect individuals from misleading or deceptive practices by crypto firms. The FCA has issued over 200 warnings to crypto firms to date, the overwhelming majority of which appeared to be investment or trading websites which had little to nothing to do with crypto-asset trading, but some crypto businesses were caught up in the warnings, including Binance temporarily suspending new user registrations in the UK while they reviewed compliance.
Written by K Kim, S Pettigrove and M Bacina