Seizing Crypto: When Asset Recovery Goes Digital

In late March, the UK’s Crown Prosecution Service (CPS) announced the conviction of an ex-takeaway worker residing in a mansion in North London for laundering the proceeds of a multi-billion pound investment fraud. While the details of the prosecution were headline-grabbing, the case also marked a significant milestone: the largest Bitcoin seizure to date in the UK. An estimated £2 billion worth of Bitcoin was seized by the UK authorities, deemed to be the proceeds of crime.

When compared to other countries, the UK is regarded as one of the leading jurisdictions for cryptoasset seizures. While this case was undoubtedly a sizable success, it was not an easy task at all. The process took at least six years to complete from the initial raid of the suspect’s home in October 2018 to the confiscation of the assets following the criminal trial. Considering the limited number of crypto seizures that have taken place in the meantime, and the amount of illicit activity that is facilitated by the use of cryptoassets, this case feels less like a reason to celebrate and more an opportunity to discuss why cryptoasset seizures do not happen more often.

Seizing cryptoassets has its challenges, but it is not impossible. Given the data breadcrumbs left on the blockchain, it could be argued that it is actually much easier to detect and seize the proceeds of crime. However, it still requires training, resources, regulation and a good dose of political will. Put simply, the same sort of challenges that have troubled the asset recovery landscape for many years need to be overcome first before diving into the cryptoasset space.

A Matter of Control: What is Cryptoasset Seizure?

In this latest seizure, the Metropolitan (Met) Police seized the devices which held the private keys for the cryptoasset wallets in question from a house and deposit box connected to the convicted individual, thus giving them control over the wallets. This is just one way in which law enforcement can seize funds, and not all of them are as straightforward as simply seizing a physical wallet.

The most fundamental issue at play is who controls the cryptoassets once they have been seized. As investigations unfold, law enforcement agencies need to take control of the assets and transfer them to a secure government or third-party wallet. To do so, they need one of three things: the private key to gain access to the criminal cryptoassets stored on the blockchain, a seed phrase to access a wallet storing said private key, or the cooperation of a third party – like a centralised crypto exchange – that holds control of the private key and, therefore, has custody of the cryptoassets.

This happens either after the authorities obtain the information needed to access the cryptoassets or the criminal-owned wallet, like in the Met seizure case, or when the criminal assets reach centralised cryptoasset companies. In the first case, officers retrieve a self-hosted device, where the individual retains ownership of the private key and as a result has full control of the cryptoassets on the blockchain. This often happens with the cooperation of the defendant, as only on rare occasions does law enforcement directly retrieve information tied to a private key or a criminal-owned wallet.

In the second case, the funds are traced to centralised cryptoasset businesses. While criminals need these businesses to convert cryptoassets into fiat currency in order to purchase goods and services, they also give up custody of the private keys – and arguably the assets – to the intermediary. The latter can then work closely with law enforcement to freeze the funds. This process is very similar to finding an offshore account and instructing a bank to transfer the contents of a frozen account to a government account. While less straightforward, most cases typically involve law enforcement working with crypto exchanges to retrieve funds.

Regardless of the route taken to the seize the funds, the transferred assets are stored in a government- or third party-controlled wallet until a successful prosecution occurs or until the defendant gives consent to convert or realise the assets. It is not until after a confiscation order that authorities can realise the gains, allocating the funds to a government entity or victims. Then, the process of managing seized crypto follows a similar process to any seized asset. And, just like the seizure of a megayacht, for example, the recovery, storage and realisation phases will each have unique characteristics and most likely require specialist support.

What are the Obstacles?

In 2016, the CPS called for new legislation to allow law enforcement to more easily confiscate crypto proceeds of crime. While some seizures of significant value have taken place over the years, it took the UK government eight years following this initial request to finally pass cryptoasset seizure legislation. The UK is now regarded as a leading jurisdiction in terms of cryptoasset confiscation. Provisions in the recent Economic Crime (Corporate & Transparency) Act, such as the capability to seize crypto without the need to make an arrest or to seize a broader range of items that could help an investigation, make the UK one of the countries where confiscation should be quicker and easier. While it is likely too early to see the impact of the UK’s new legislative framework, there remain challenges in the process that the UK, and other countries, are likely to struggle with.

Jurisdictions face four main challenges that hinder effective crypto confiscation. First, front-line officers need robust training to be capable of tracing and seizing the assets. While most of the tools used during traditional investigations are still used in the context of crypto, officers need to learn how to access and use blockchain analytic tools, and how to identify cryptoasset information such as private keys or seed phrases. In most countries, despite the use of cryptoassets by criminals, crypto literacy is still low among authorities. This problem is exacerbated in cases where cooperation among multiple jurisdictions is needed. Cryptoassets are borderless, and often funds leave a country in less than an hour. If they move to a jurisdiction where crypto seizure responses are still absent or at an embryonic stage, then mutual legal assistance processes become even more complex.

Second, coordination and cooperation issues arise with crypto exchanges as well. Jurisdictions face the challenge of not receiving a response to requests for information – either because they fail to specify the information they need, or because the company does not have the capacity to respond to their request in a reasonable time. This issue is particularly acute in the case of unregistered exchanges. If the company is not registered in the jurisdiction – either because of the lack of regulation around cryptoassets or due to limited enforcement by the public sector – then it is not obliged to respond to law enforcement requests. Regulation of the industry should be in place to ensure that cryptoasset companies are registered or licensed where they provide services. However, this is a challenge in its own right, and should not be done without proper preparation.

Third, just like managing megayachts or art collections, the management of cryptoassets may present specific challenges for jurisdictions. For instance, a key factor that jurisdictions need to consider is the storage options available, as they pursue a careful balancing act between security and functionality. Liquidity when trying to manage funds can also be an issue: with more than 20,000 different types of cryptoassets, a significant portion of are arguably inactive, and only a small fraction of the remainder are liquid enough for authorities to be able to realise the asset.

Finally, it is one thing to freeze and seize cryptocurrency, and another to recover it. To release the funds, proper evidence of ownership by the criminal needs to be established, and thus the evidence chain needs to be robust to support the prosecutors. Without secure blockchain analytic evidence to prove ownership in court, prosecutors can be left grasping at straws.

Not Just a Crypto Problem, but an Asset Recovery One

Most of the issues highlighted above are not new, nor are they specific to cryptoassets. Whether it is a lack of training and knowledge to effectively trace and seize assets, issues in international cooperation and in coordination with private-sector stakeholders, or challenges in providing strong evidence and building waterproof cases to secure a conviction or a civil confiscation, these are all issues that are found in virtually every asset recovery case, regardless of whether they involve crypto or not.

What needs to be done, then? In a previous commentary, it was suggested that increased resources and training for law enforcement agencies, prosecutors and judges need to accompany creative legislative mechanisms to enhance the asset recovery response. This applies to crypto, too. To ensure these changes, a political desire to invest in capacity and resources is also desperately needed. Moreover, in the case of crypto, increased responsiveness from the private sector should accompany this political push. For both cryptoassets and other types of assets, what is also needed is a rethinking of what ‘success’ means in the asset recovery space. The perspective needs to shift from defining triumph as the amount of assets seized in one case to the quantity of cases brought to completion.

In conclusion, while an important case, the Met’s crypto seizure should not be where the work stops in the UK’s cryptoasset confiscation journey. Just like in general asset recovery, while it is doing better than other countries, the UK is still far from being successful at confiscating crypto. In the asset recovery space, cryptoassets appear to be just an additional layer in a series of well-known challenges. And, looking at the broader asset recovery picture, it is clear that there is a long road ahead to achieving success.

The views expressed in this Commentary are the authors’, and do not represent those of RUSI or any other institution.

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