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Proceeds of crime Services

Proceeds of crime

Crypto Wallet Freezing Orders (CWFOs)

As of 26 April 2024, Crypto Wallet Freezing Orders (CWFOs) provide a new tool in the UK enabling cryptoassets to be frozen quickly on the basis of suspicion alone, and without notice to the affected parties. If the investigator can subsequently prove that the cryptoassets are either recoverable property (i.e. obtained through unlawful conduct) or intended for use in unlawful conduct, a court can make a Crypto Wallet Forfeiture Order (CWForO).

CWFOs will almost certainly follow the same pattern as Account Freezing Orders (AFOs), in that few (if any) applications will be refused. Our experience of AFOs is that the court will rarely challenge an investigator’s assessment of whether the available evidence does in fact provide reasonable grounds to suspect criminality. This phenomenon will only be amplified when the additional complexity and inherent mistrust of cryptoassets is added to the mix. Even if a magistrate or district judge is minded to put an application to the test, it seems unlikely that he or she will have sufficient technical knowhow to properly interrogate the investigator’s analysis of the cryptowallet and related transaction. That being the case, the court is very likely to err on the side of caution and permit the assets to be frozen temporarily whilst further investigation is carried out, rather than risk the proceeds of crime being irretrievably dissipated.

What can I do if my assets are the subject of a CWFO?

CWFOs (like AFOs) can be granted without notice to the owner of the wallet or any other affected party. As such, whilst it is possible that the law enforcement agency may give notice of their application and the opportunity to make representations and present evidence against it being granted, it is far more likely that the first you will know of the investigation is when the CWFO is served on you. By this point, the relevant service provider should also have been given notice and frozen the cryptoassets.

Whilst this ‘ex-parte’ approach inevitably puts the subjects of CWFOs on the back foot, there is some hope. Whilst the threshold for granting a CWFO (reasonable grounds for suspicion) is extremely low, the threshold for forfeiture via a CWForO is more stringent (the balance of probabilities). In particular, whilst an investigator will be able to build a CWFO application around the need to conduct further investigation, a CWForO should only be granted after those investigations have been completed and there is evidence that the cryptoassets are (rather than merely suspected to be) recoverable property or intended for use in unlawful conduct.

What should I do once I have received a Crypto Wallet Freezing Order?

Once notice of a CWFO order has been received, work should begin not only to gather the relevant evidence as to the use and provenance of the assets, but to present them in a digestible and verifiable package that can be easily understood by both the law enforcement agency (LEA) investigator but also a Magistrates’ Court. It is also important to establish contact and rapport with the LEA investigator, in order to establish the basis of their suspicion and their further investigative plans. By engaging in this way, it may be possible to accelerate the process by providing material and explanation voluntarily, rather than waiting for the investigator to do so themselves. However, it is also important to keep up the momentum, particularly given the volatility in cryptoasset markets. If practice aligns with AFOs, CWFOs are likely to be made for at least three if not six months, and can last for up to three years if overseas enquiries are required. As such, time is on the side of the investigator. It is possible to put pressure on such investigations, by appropriate use of applications to vary or discharge orders, or to seek costs or compensation. However, the foundation of such tactics succeeding is to have a sufficiently well-prepared case to convince an investigator or the court that the suspicion upon which the application was granted can no longer be sustained.

What is a cryptoasset?

For the purposes of CWFOs, ‘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’.

There is no requirement for the cryptoassets to be fungible (i.e. equivalent to, or easily exchangeable for another asset) and so this definition goes beyond cryptocurrency tokens (such as Bitcoin and Ether, which can be exchanged for money and crypto-currencies at the same value irrespective of which individual tokens are used) and potentially includes more esoteric cryptoassets such as Non-Fungible Tokens (NFTs, which represent individual assets and the value of which can vary).

What is a crypto-wallet?

For the purposes of CWFOs, ‘crypto-wallet’ means anything (whether software, hardware or any physical item, or a combination thereof) used to store the cryptographic private key that allows cryptoassets to be accessed.

Which cryptoassets can CWFOs freeze?

A CWFO can only freeze cryptoassets held by a ‘UK-connected cryptoasset service provider’

A ‘cryptoasset-service provider’ means either a ‘cryptoasset exchange provider’ (i.e. enabling cryptoassets to be exchanged for money or other cryptoassets) or a ‘custodian wallet provider’ (i.e. providing services to safekeep or administer cryptoassets or private keys).

‘UK-connected’ can be established by various routes; for example, if the crypto-service provider has its registered office or head office in the UK, or if it holds data relating to customers in the UK.

Due to the ‘UK-connected’ requirement, the targets of CWFOs will be cryptoassets held with exchanges or wallet-providers operating from and/or providing services in the UK. By definition, this puts assets held in private wallets or with service providers with no UK connection out of reach.