Crypto crime: what's next?

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Crypto crime: what's next?

Crypto crime: what's next?

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July 27, 2023

So far, 2023 has proved a largely positive year for cryptoassets. With the value of Bitcoin up 80% compared to 2022, new rules on "markets in cryptoassets" (MiCA) being adopted by the Council of the European Union and HM Treasury publishing a consultation into "Future financial services regulatory regime for cryptoassets", crypto is increasingly cemented as a means of payment of the future.

It is, however, still frequently dogged with the label of "currency of choice" for illicit activity, with a recent blockchain data provider reporting that the volume of certain illegal transactions was around US$20.1 billion in 2022¹.

In this insight, we take a look at: (i) what we mean by "crypto crime"; (ii) how UK regulators and prosecutors are responding; and (iii) new enforcement powers on the way.

A modern crime

Cryptocurrency-related crimes vary in notoriety, from hacking a victim's device or holding personal data to ransom, to the lesser-known activity of "cryptojacking" – the practice of deploying malware to a visitor on a website to "mine"/create cryptocurrency, using the victim's machine's processing power without their consent (and often, their knowledge). Interpol has noted that the ability to generate a vast volume of cryptocurrency (often, Monero) makes this a lucrative crime. Enforcement crypto taskforces have also identified this as a prevalent area back in 2018.

A continued rise in usage of cryptocurrency brings with it a rise in related criminal offences. In March 2023, three men were prosecuted by the Crown Prosecution Service (CPS) and convicted for the orchestration of one of Britain's largest counterfeit drug cases on the dark web, where the defendants used Bitcoin to receive payment for the drugs and other cryptocurrency to launder the proceeds of their crimes. They were sentenced to a combined total of 20 years' imprisonment at the Crown Court.

Investment in cryptoassets has often been regarded as a volatile landscape and over recent years there has been an increase in global regulatory oversight. Speculation continues over what this will look like in future years to come in the UK and US markets, with different agencies tackling and defining cryptocurrency. In the UK, we highlight below what we have been noticing from the Financial Conduct Authority (FCA), CPS and the Serious Fraud Office (SFO), all of whom have (or are soon to have) new directors in charge, which will bring with it a potential revised approach in leadership and strategic direction in all three of these agencies.

UK regulators and prosecutors limbering up

FCA

Notably, earlier this year, the FCA used its investigatory powers, together with the local police Digital Intelligence and Investigation Unit, to search several sites in England suspected of hosting illegally operated crypto ATMs.

Crypto ATMs are machines that allow customers to buy or convert funds into cryptoassets. In the UK, cryptoasset exchange providers (which includes these ATM operators) must be registered with the FCA and comply with the UK Money Laundering Regulations.

The FCA has widened its remit to include all cryptoasset firms marketing to UK consumers, including firms based overseas. This will be in place from 8 October 2023 and brings with it a significant step-up in compliance obligations for crypto firms.

NCA

However, as noted in the 2023 Economic Crime Plan, increased regulation is only part of the solution to tackle illicit use of cryptoassets. The plan envisages investment in expert-led multi-agency cells – one such example being the National Crime Agency's (NCA) new "crypto cell" made up of a small team of dedicated officers with a "proactive cryptocurrency remit" to tackle crypto and digital asset criminals.

CPS

Cryptoassets are firmly on the agenda for the CPS, with the question of how investment in cryptocurrencies and Non-Fungible Tokens will affect the nature of financial crimes identified as an "area of research interest" in April 2022, in line with its 2025 Strategic Priorities. Awareness of the exploitation of cryptocurrencies is also woven into a new cross-sector money mules action plan, aiming to disrupt money mule activity and protect the public, as anticipated by the 2023 Fraud Strategy. Additionally, as above, the CPS is prosecuting cyber-related crimes and tackling confiscation proceedings to remove the ill-gotten gains from unlawful criminal conduct.

SFO

Whilst the SFO is increasingly vocal on the matter of tackling crypto crime, there is little to report on what action they have taken in this space so far. In its June 2023 response to the topic of "illicit and emerging finance" to the Foreign Affairs Committee, the SFO highlighted the increasing number of referrals relating to cryptoassets and stressed the importance of mutual legal assistance when it comes to cross-border investigations and cryptoassets. Unlike the NCA, FCA or CPS, cryptoassets/currency were not included within the 2022-2025 Strategic or Business Plans for the SFO, putting it markedly behind its other UK agencies in tackling cyber or crypto-related crime.

Increased tools in the prosecution box

The Economic Crime and Corporate Transparency Bill 2023 currently contains four key proposals that recognise crypto as an asset fit for the proceeds of crime asset forfeiture and seizure powers. These proposals include:

in certain circumstances, a person will no longer need to have been arrested before seizure powers can be used (earlier seizure will include cryptoassets);
the addition of a specific provision for officers to recover intangible cryptoassets in a broadly similar way provided for tangible property by tweaking their search, seize and detention powers;
providing the magistrates' court with the powers to authorise the sale of any cryptoassets, in the same way magistrates do with cash, funds in bank accounts and other types of personal seized property; and
providing for the destruction of cryptoassets in exceptional circumstances.

Crypto firms and their legal advisers alike will be watching these developments with interest, as prosecutors are likely to want to prove their appetite once the powers come to fruition. Given the speech by the Chief Investigator of the SFO, Michael Gallagher, on the "development of cryptocurrency investigations" earlier this year, we suspect it will not be long until we start to see more action.

Key takeaways

Cryptocurrency usage and crypto-related crime continues to rise.
Recognition of cryptoassets in the upcoming Economic Corporate Crime and Transparency Bill 2023 expected to be in force by the end of this year.
Expect to see cryptoassets making more of an appearance in proceeds of crime applications and search warrants.
From 8 October 2023, the FCA remit will include all cryptoasset firms marketing to UK consumers, including firms based overseas.
Do not underestimate the financial impact and prevalence of the "cryptojacker".