The world is only just waking up to the brand new opportunities and challenges posed by cryptoassets and cryptocurrencies; especially those in the legal sector. Entirely new crypto regulation frameworks are being developed from base principles around the world because existing financial approaches are not fit for purpose. Solicitors specialising in the area of asset recovery, who are used to tracking and recovering traditional asset classes also face a new technological barrier when it comes to cryptoassets. In this article, we will discuss whether cryptoassets and cryptocurrencies are legally considered property, the challenges of Cryptoasset tracing and recovery and how these can be overcome, and whether interim remedies such as freezing orders can be applied to crytoassets.
Are cryptoassets and cryptocurrencies property?
For an asset to be traced, recovered, or another form of remedy applied such as a freezing order, it must be legally recognised as property in law. Traditional legal definitions of property in England and Wales, such as that used in the case of Colonial Bank v Whinney in 1885, do not easily apply to cryptocurrencies. Using this definition, cryptocurrencies such as Ethereum are neither a ‘chose in possession’ or ‘chose in action’ and hence do not qualify as property.
Thankfully, this quandary was largely resolved after a legal statement was commissioned by the UK Jurisdiction Taskforce in 2019. The taskforce sought to clarify the law of property or contract as it applies to cryptoassets and smart contracts. The legal statement confirmed that the novel and characteristic features of cryptoassets are:
- cryptographic authentication;
- use of a distributed transaction ledger;
- decentralisation; and
- rule by consensus.
Despite these novel characteristics, the taskforce affirmed that historically “courts have found no difficulty in treating novel kinds of intangible assets as property”. They concluded that sticking to the English common law definition of property is simply too rigid when it comes to other asset classes such as crypto; “we conclude that the fact that a cryptoasset might not be a thing in action on the narrower definition of that term does not in itself mean that it cannot be treated as property”.
cryptoasset tracing and Recovery
Many believe that the ownership of cryptocurrencies and assets can be hidden or obscured. While it is possible for blockchain users to achieve some level of anonymity, it is also the case that blockchain records are publicly available and cannot be deleted. The benefit of this public blockchain record is that everyone can see the sequence of ownership from its initial inception to the current day. Those who want to avoid being associated with cryptocurrency can use cryptocurrency tumblers and cryptocurrency mixing services to mix ‘tainted’ funds with others, hence making the process of tracking assets of this class more difficult. In this case, specialist crypto currency recovery analysts have the tools and expertise to map complex transactions and trace their source.
Crypto tracers have another vital ally; cryptocurrency exchanges. Cryptocurrency exchanges play a key role in the management of cryptoassets around the world. It is estimated that around 60% of Bitcoin investors have wallets hosted on these exchanges. As custodians of cryptoassets, exchanges can play a key role in providing information to investigators and crypto analysts. Those tracking assets of this type can request due diligence documents from cryptocurrency exchanges or other crypto institutions. This can be done on a voluntary basis or exchanges can be compelled to disclose information by the courts. Exchanges can also be put on notice that a freezing order is in place for one of its clients. This is more effective where the exchange is a custodian of the wallet in question.
The biggest challenge as it stands is tracing and recovering non-custodial cryptoassets held outside exchanges, and especially where deliberate attempts have been made to mix those assets with others.
Can interim remedies be applied to cryptocurrencies?
It is one thing to say that cryptocurrencies and assets are property, and can, therefore, be tracked, recovered, or subjected to interim remedies such as freezing orders, but how would this work in practice? When completing a freezing order application form, it is necessary to state how much the asset/s to be frozen are worth, what they are, and where they are located. Asset tracing & recovery practitioners have to understand the nature of the cryptoasset they are dealing with to make this as specific and enforceable as possible. In the case of a cryptocurrency, they would need to find out additional information such as:
- The public addresses of any cryptocurrency wallets to be frozen
- Whether the cryptocurrency wallets are held by exchanges, and if so, which one/s
- The technical details of the cryptocurrency wallet in question, including whether it is custodial or non-custodial. This is important because custodial wallets require the oversight of the relevant exchange in addition to the owner.
- Who has a private access key for the wallet (i.e. any third parties)?
- Whether the cryptocurrency to be frozen is subject to any form of legal arrangement (e.g. contract or equitable rights). In this case, the details of the contractual arrangement or rights are essential to enforce the freezing order.
The field of cryptoasset tracing & recovery will undoubtedly grow substantially in the coming years. It is likely that this will become a lucrative career in its own right. In the same way that governments and regulators are playing catch up when it comes to regulation of the crypto industry, especially in the UK, the legal sector need to betters understand the challenges it faces in this area. Throughout 2022 and 2023, law firms will likely experience an increase in the number of enquiries from clients seeking assistance with tracing and recovering cryptoassets and cryptocurrencies. Those firms with specialist cryptoasset tracing and recovery expertise and technology that is ready to go, whether inhouse or through a trusted third-party, will be best placed to satisfy this growing demand.
If you require any assistance with cryptoasset tracing and recovery, our specialist cryptocurrency Solicitors are here to help. You can contact us through our contact page here.