Cryptocurrency Investigations & Disputes

The lack of regulation of the multi-billion dollars crypto assets market has led to concerns that the virtual currencies are being favoured by criminals to conduct their business.

Areas of concern that have been highlighted include:

• The block chain technology enables the anonymous and borderless nature of transactions resulting in money laundering on a large scale
• The lack of ‘Know Your Client’ and ‘Due Diligence’ checks conducted by many cryptocurrency exchange providers attracts professional money launderers
• Criminals targeting innocent investors drawn to cryptocurrencies for the potentially large rewards from currency appreciation
• ‘Boiler room’ type operations offering Initial Coin Offerings (‘ICOs’) which prove to not exist at all or, if they do exist, prove to be worthless
• Theft of cryptocurrencies from personal wallets and from exchange providers as a result of cyber-attacks

The European Union’s 5th Money Laundering Directive (5MLD) came into force in January 2020 and defined a cryptocurrency as follows:

‘a digital representation of value that can be digitally transferred, stored or traded and is accepted…as a medium of exchange’.

Cryptocurrency, Bitcoin and other Crypto Assets

There are many hundreds of different types of cryptocurrencies and crypto assets, with Bitcoin being the most recognised.

A key feature is there is no centralised bank or nation state regulating a cryptocurrency. All transactions are conducted without such regulation.

A cryptocurrency is used in a variety of ways:

• A means of exchange, enabling goods and services to be paid for
• A payment platform
• A store of value and investment
• A sophisticated financial instrument, such as cryptocurrency derivatives

The underlying technology is blockchain which creates a unique one line ledger for each transaction made using the cryptocurrency.

The ledger can be accessed from anywhere in the world with multiple copies being available at any one time. All copies are automatically updated simultaneously. This is what makes the blockchain technology different to a traditional ledger.

The blockchain technology does not rely on a centralised server. The information is encrypted, stored and protected to the level that cyber-attacks are considered unlikely to be successful.

In January 2020, the EU’s 5MLD came into force in an effort to tackle the increasing levels of worldwide money laundering, terrorist financing and corruption.

It is estimated that £80-100 billion of laundered funds passes through the UK’s financial system each year with a detection rate lower than 1%.

It is widely acknowledged that the rise in digital currencies has significantly contributed to this problem.

As a result, the 5MLD has focused on bringing changes to the cryptocurrency sector to bring it into line in many respects with the traditional financial and professional services sectors.

As a result of the 5MLD, both cryptocurrency exchange providers and custodian wallet providers are classed as ‘obliged entities’ which means they will have to adhere to the same Anti-Money Laundering regulations as traditional financial and professional service providers.

A cryptocurrency exchange provider is a business that exchanges a virtual crypto asset into money or to other virtual assets.

A custodian wallet provider stores and administers the virtual crypto assets on behalf of the beneficial owner/customer.

In reality both exchange providers and wallet providers will need to:

• Conduct ‘Know Your Client’ Checks on their customers
• Conduct ‘Due Diligence’ Checks on customers
• Submit Suspicious Activity Reports (SARs) to the NCA as and when appropriate
• Register with the FCA within a certain time limit or lose the right to remain in business
• Provide on demand data sharing with law enforcement agencies which means customers names and addresses will need to be disclosed

As a result of the above regulations, the transactions will no longer be anonymous for customers.