Since its invention in 2009, the government has paid increasing attention to cryptocurrency, such as the Bitcoin, and its associated risks. There are concerns it can facilitate tax evasion, money laundering, terrorism, fraud, evasion of sanctions and other crimes. Its rise in popularity and sophistication led the government to issue a call for evidence in November 2014 in a bid to examine the benefits and risks of the currency. Following this, the Budget Report of March 2015 proposed cryptocurrency should be regulated in order to support innovation by legitimate businesses and prevent criminal misuse. The proposals will be consulted on early in the next parliament.
Here we take a look at the key features of cryptocurrency, the government’s proposals for regulation, particularly in the context of anti-money laundering rules, and the current powers of law enforcement authorities where they suspect that cryptocurrency is being used for criminal purposes.
The Key Features of Cryptocurrency
Cryptocurrency is considered an ‘alternative’ digital currency, which is transferred entirely online and directly between users. Its users say it is a secure method to affect free, instant, and borderless transactions around the globe without having to go through banks. Each user has a private key associated with their specific account (known as a ‘wallet’) to affect their digital transactions and the transitions are permanently recorded and time-stamped in a public ledger that is updated by software. So far, the system has been completely untouched by banks or regulation.
However, there are two issues with the system that lead the government to believe regulation should be brought in:
- The decentralised nature of the system presents jurisdictional difficulties for the authorities, as there is no central point where accounts are located. This causes problems when an authority attempts to claim jurisdiction over a particular exchange.
- The identities of users are anonymous and many cryptocurrency addresses are merely a series of numbers attached to a wallet. This makes the transactions untraceable and therefore cryptocurrencies have been associated with illegal payments and purchases.
The Government’s Proposals for Regulation
The government’s current focus is clamping down on money-laundering and other financial crimes. To ensure cryptocurrency does not hamper these efforts, the Government intends:
- To apply anti-money laundering regulation to digital currency exchanges in the UK
- To ensure that law enforcement bodies have effective skills, tools, and legislation to identify and prosecute criminal activity relating to digital currencies, including the ability to seize and confiscate digital currency funds where transactions are for criminal purposes
- To work with the BSI (British Standards Institution) and the digital currency industry to develop voluntary standards for consumer protection.
The Application of Anti-Money Laundering Regulation
The government is considering extending existing EU legislation such as the Anti-Money Laundering Directive to those issuing cryptocurrency, although the parameters of the legislation are not yet clear. It could possibly cover all institutions handling or dealing with digital currencies, exchange businesses as the entry and exit points of the digital currency system, digital currency ATMs and wallet providers.
There are several arguments in favour of this move, not least that including wallet providers within the scope of regulation would increase the visibility of transactions, which is hoped would help curb the misuse of cryptocurrency. Another argument for the move is that it would dispel any uncertainty on whether the currency is covered by the law or not and it would thereby enhance its legitimacy, credibility and mainstream appeal.
However, consumers against regulation have argued that the lawlessness associated with the currency is the very thing that attracted them to it. The fact that it was first created to avoid the need for central authorities’ involvement means that the government should not interfere with it in any way. To do so would mean an unwelcome shift of power away from individuals and towards the government and banks. Amid news that the Bank of England is researching central bank-issued digital currencies with a view to obtaining a framework that could overhaul the current system, there is concern that the application of regulation would pave the way for the currency to be eventually transferred through banks.
Separately, the NCA have indicated there is not a particularly strong case for introducing regulation in the UK. Although the scale of the threat is difficult to assess, cryptocurrency has not been widely adopted as a means of payment for goods or services in the broader criminal community and there is little evidence to indicate use by established money laundering specialists.
The Powers of Law Enforcement
At present, UK law enforcement authorities do not have jurisdiction to freeze users’ accounts because there is no central repository for the currency. Whilst the online storage is an intrinsic feature of the currency system that cannot be easily reformed, the government is considering how to overcome the difficulties associated with asserting jurisdiction.
One option the government is examining is co-ordinating the powers of law enforcement at European or International level and having regulations covering the ability to seize and confiscate cryptocurrency funds where transactions are for criminal purposes. It is unclear exactly what regulation will be put into place, although account will likely be taken of the fact that courts in other countries such as Belgium and the Netherlands have ruled cryptocurrency a seize-able asset. Their authorities are also developing methods of storing confiscated currency. The public in these countries have largely welcomed the move, so the UK government may wish to follow these examples.
Arguments against the move, again, come from the libertarians who wish to preserve the lawless origins of the currency and the content of those arguments would be similar to those they provided against anti-money laundering regulation.
Consumer Protection
At present, there is no express consumer protection in relation to cryptocurrency. The government is considering creating a framework for consumer protection, involving voluntary rather than compulsory compliance with best practice standards.
Consumer protection is felt necessary to offer cryptocurrency users the same protections as those using conventional methods of payment. Complaints about cryptocurrency transactions include that they are irreversible and, unlike credit cards, users will not receive any cash back for payments made in error or because of fraud or theft. Where theft of cryptocurrency occurs, for example, because of computer hacking, no intermediary steps occur that could potentially mitigate the owner’s loss. The currency’s users therefore have a greater responsibility to protect their funds, as they cannot be assured of any recourse to a bank or regulator.
The other side of that argument comes from some users who have said they find being completely in charge of their money empowering as it provides a sense of personal control and freedom. In addition, some cryptocurrency providers have responded to the need for consumer protection by reviewing and upgrading their own systems to allow a third party to arbitrate in the event of a dispute and return any money due to the user. It remains to be seen whether these new systems will be deemed to provide sufficient consumer protection alone, or whether the government will still press ahead with its proposals to implement its own standards for consumer protections in any event. If it does, the fact the standards are voluntary rather than mandatory will cause uncertainty amongst consumers who may not be clear on whether a cryptocurrency provider has adopted the standards or not.
Going Forward
At this stage, it is difficult to assess whether regulation should be put into place, as more specific details from the government are needed. However, it appears the government are faced with striking a balance between providing regulations that effectively prevent the misuse of cryptocurrencies, and attempting to avoid compromising the features that make it attractive to its consumers.
Contact Lewis Nedas
At Lewis Nedas we have a long and successful history of advising clients concerned with cybercrime or money laundering investigation/prosecution. If you require advice, contact our expert specialist defence lawyers either by calling us on 020 7387 2032 or by completing our online enquiry form here.
