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What does the ECCT mean for crypto? – London Business News | Londonlovesbusiness.com

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The passing of the Economic Crime and Corporate Transparency Act 2023 (ECCT) earlier this year has given law enforcement agencies and investigators a raft of new powers with which to investigate financial crimes.

Among these measures are new powers related to cryptocurrency and cryptoassets, which were ambiguously defined and difficult to account for in the existing legal framework.

While there are plenty of legitimate applications for the technology, cryptocurrencies also play a significant role in funding organised crime and terrorism. This was just one factor that highlighted the urgent need for new powers.

Under the ECCT, cryptoassets can be handled in much the same way as bank accounts or physical assets during an investigation. This means that they can be frozen, put under investigation and ultimately earmarked for recovery. If digital assets are found to be the proceeds of criminal activity, or intended for use in committing a crime, UK authorities will now be in a much stronger position to cut off this source of funding.

To help investors in cryptocurrency understand what to expect, we will outline the new powers and how we expect them to function. From there, we will examine the potential consequences for investors if their wallets are frozen or their access is withdrawn, and the legal options they can use to fight back.

Why were the new powers introduced?

Cryptocurrency gained international prominence in 2021 after several years of development outside the mainstream. While its popularity has shrunk once again following this boom period, it became clear to UK law enforcement agencies that the law was ill-equipped to deal with these technologies. Rectifying this was important because crypto transactions are unregulated and decentralised, which means that they have frequently been associated with organised crime groups.

By separating funds and carrying out many transactions in quick succession, organised crime groups or individuals can make it difficult to trace funds and hide the proceeds of their crimes. Popular interest in cryptoassets (such as NFTs) also resulted in widespread scams designed to steal from inexperienced investors.

‘Pump and dump’ schemes were particularly popular, wherein the creators of a cryptocurrency artificially inflate its value by encouraging investors to buy in, then sell their own shares at the highest price and allow the coin to collapse.

Finally, the ability to move funds without oversight from any regulatory authority has meant that cryptocurrencies have been used to fund terrorist activities. Naturally, this demanded new powers that law enforcement agencies in the UK could use to freeze, seize and recover digital, decentralised assets.

What are the new powers?

The ECCT sought to introduce comprehensive measures for the management of cryptoassets, with specific reference to counter-terrorism efforts and the role that deregulated currencies play in organised crime. To summarise, the key provisions of the ECCT are as follows:

  • Seizure and forfeiture: Law enforcement agencies can now seize, freeze, and recover cryptoassets in much the same way they would freeze bank accounts or seize physical assets. This includes cryptoassets that are not hosted online or through a third-party exchange or wallet provider. Police and other authorities will be able to take possession of cryptoassets stored on hard drives or memory sticks if they find these devices during searches. These provisions will also allow the police to act more quickly in response to suspicions about the provenance of digital funds.
  • Sale and destruction of assets: The ECCT allows enforcement agencies to sell seized cryptoassets under the authorisation of the Magistrates’ courts. Cryptoassets that have been detained or frozen can now be converted to cash while awaiting the outcome of forfeiture or criminal proceedings, which may preserve the value of these assets and protect them from the severe fluctuations of the crypto market. In exceptional cases where the sale of seized cryptoassets would be inappropriate – such as if this might lead to further criminal activity – the new rules allow for them to be destroyed​​.
  • Counter-terrorism: The ECCT extends existing counter-terrorism laws to include cryptoassets. As we have noted, this update reflects the growing use of digital currencies in terrorist financing and aims to provide the tools law enforcement organisations need to address this threat​.

These changes signify a substantial enhancement of the regulatory framework governing economic crimes involving cryptoassets, and give UK authorities more powers to combat these crimes. However, as with any new powers given to police and other authorities, there are also important concerns about how they might be used.

Given that the new powers granted by the ECCT reflect many of the existing provisions of the Proceeds of Crime Act 2002 (POCA), the implementation of the original legislation can offer us some insights into how the new measures might be enforced. While there is significantly more scope to tackle criminal finances and economic crime, there is also room for innocent people to be negatively affected.

How might the ECCT affect investors?

POCA introduced the Account Freezing Order (AFO), which restricts access to a bank or building society account owned by an individual or a business. AFOs are often implemented without notice and are relatively easy for investigators to secure, which means that innocent people frequently find themselves subject to an order out of the blue.

With the addition of similar powers over crypto accounts within the ECCT, we expect that crypto wallet freezing orders will become more widely used in the next few years, which could have serious consequences for people who have done nothing wrong.

Because the new powers aim to be comprehensive, we are concerned that there will be very little oversight of law enforcement officers seeking to freeze and seize assets. This could create serious problems for people who are not even under investigation. The effective implementation of these measures and the mitigation of risk to innocent investors relies almost solely on the competence of UK authorities.

The primary impact for those placed under investigation is likely to be the inconvenience and cost of mounting a suitable defence. Enforcement agencies will need to make more cross-jurisdictional requests for information about crypto transactions, which will take time and can delay any investigation. For investors, it will be more difficult to prove that assets are legitimate in origin because of the way that crypto transactions (and the technology that underpins them) work.

As such, anyone who is made the subject of an AFO or crypto wallet freezing order should seek legal advice immediately. It may be possible to have these orders discharged or varied, which can sometimes allow you the money you need for living expenses, business operating expenses, and legal fees. We hope that the new powers will be used judiciously and that legal action will not be necessary, but the approach that authorities will take towards implementing the ECCT remains to be seen.

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