Cryptocurrency – super asset or ‘cryptonite’?

Millie Grant

Johnson Winter Slattery, Sydney, New South Wales

Millie.Grant@jws.com.au

Robert Wyld

Johnson Winter Slattery, Sydney, New South Wales

robert.wyld@jws.com.au

Introduction

Whilst cryptocurrencies were developed over a decade ago, countries around the world have only recently grappled with their varied and complex nature and sought to carve out a space for them in longstanding common law concepts and legislative regimes. Those efforts will no doubt expand significantly as there is a substantial growth in those who use such ‘currency’ as a legitimate trading tool and those who abuse the complex nature of cryptocurrency for their own gain. This article will discuss how Australia, the United Kingdom (UK) and the United States (US) have identified and categorised cryptocurrency as an asset or as property and the implications of that classification for regulatory and enforcement outcomes.

Cryptocurrency as property

The growing worldwide trend is for countries to treat cryptocurrencies as property in certain contexts, the most recent decision having been handed down on 31 March 2023 by a single judge of the High Court of Hong Kong finding that cryptocurrency was property and was capable of forming the subject matter of a trust.[1]

Australia

Australia has treated cryptocurrency as property for the purposes of:

• the Criminal Code, in the context of the offence of dealing with property thought to be the proceeds of crime[2];
• the Criminal Assets Recovery Act 1990 (NSW)[3] and the Proceeds of Crime Act 2002 (Cth) restraining a person from dealing or otherwise disposing of cryptocurrency;
• the Supreme Court (General Civil Procedure) Rules 2015 (Vic) to make a preservation order under rule 37.01(1);[4]
• the Corporations Act 2001 (Cth) to grant interlocutory disclosure orders and asset protection orders pursuant to section 1323(1) in Australia with respect to the affairs of any corporate entity.[5]

There has been no judgment available at the time of writing which clarifies how cryptocurrency would be treated under the common law in Australia, as there is no statutory definition currently available. However, it appears likely, given the position in the UK, that absent any statutory guidance, cryptocurrency would be treated as property.

United Kingdom

Although earlier decisions[6] appeared to accept that for the purposes of asset protection and freezing orders, cryptocurrency was property, it was the decision of Bryan J in AA v Persons Unknown[7] which first explicitly found that cryptocurrency was property.

In that case, an anonymised insurer made an application to the court seeking, among other things, a proprietary injunction with respect to certain bitcoin. In summary, the first defendant installed malware on the system of a Canadian insurance company and demanded a ransom to remove the malware (which had encrypted the system). The company made the ransom payment as requested in bitcoin which was traced to the third and fourth defendants. To decide whether to grant the proprietary injunction, the court considered whether the bitcoin was ‘property’ such that a proprietary injunction could be ordered. The court outlined the primary issue that English law conceived of two categories of property: choses in possession and choses in action. In Colonial Bank v Whinney (‘Colonial Bank’),[8] Fry LJ stated that there was no third category of property. Upon further examination, the court found that that particular statement of Fry LJ was not explicitly adopted by the Court of Appeal. The court considered a legal statement published by the UK Jurisdictional Task Force and concluded that the decision in Colonial Bank in fact offered support for the categories of property being flexible, as that case concluded that shares were choses in action for the purposes of the Bankruptcy Act. The court found that cryptoassets including bitcoin met the four criteria for property in National Provincial Bank Ltd v Ainsworth[9] as being (1) definable; (2) identifiable by third parties; (3) capable in their nature of assumption by third parties; and (4) having some degree of permanence.

However, that decision did not make clear the category of property into which cryptocurrency would fall. A consultation paper published in July 2022 by the UK Law Reform Commission proposed a third category of personal property called ‘data objects’ which would include cryptocurrency.[10] The Commission’s final report with its law reform recommendations is expected to be published later in 2023.

United States

The concept of property in the US is a matter for each state and this article does not propose to deal with each of those regimes. However, civil forfeiture proceedings are a federal matter and by nature of being ‘in rem’, necessarily involve property. It is, therefore, significant that civil forfeiture actions targeting cryptocurrency have become commonplace in the US.[11] Similarly, in the Bankruptcy Code, it is clear that cryptocurrency would fall within the definition of ‘property of the estate’ in section 541.

Cryptocurrency as proceeds of crime

The rise in the mining and purchase of cryptocurrency has created a corresponding need for regulation as criminals seek to exploit these currencies for their own personal gain. According to Chainalysis’ ‘Midyear Crypto Crime Update’, between January 2022 and July 2022, US$1.9bn of cryptocurrency was stolen, compared to just under US$1.2bn at the same time in 2021.[12] Consequently, countries have been developing their legislative and common law to ensure they are able to seize any cryptocurrency which is the proceeds of crime.

Australia

Seizures of cryptocurrency in the course of criminal investigations in Australia are becoming increasingly common. For example, on 1 February 2023, the Australian Federal Police (AFP) executed search warrants across premises in Sydney and seized AU$30 million in cryptocurrency.[13] Seizures of assets as part of ongoing criminal investigations are regulated by both Commonwealth and state statutes depending on whether the alleged offence is an offence under federal or state law.

Under the Proceeds of Crime Act 2002 (Cth) (POCA), the Commissioner of the AFP or the Director of Public Prosecutions (DPP) may apply to restrain a person from dealing with or disposing of property if the property is suspected of being the proceeds of an indictable offence or the person is suspected of or has committed a serious indictable offence. Forfeiture orders may also be made with respect to such persons or property. Those orders require the property to be surrendered to the Commonwealth.

There have been only two reported cases in Australia where orders have been made under the POCA in respect of cryptocurrency. Those orders include:

• orders restraining, disposing of or dealing with cryptocurrency;
• ancillary orders requiring handover of passwords and access to a cryptocurrency wallet; and
• orders placing cryptocurrency into the care of the official trustee.[14]

In light of recent high-profile cyber-attacks, the Australian Government introduced the Crimes Legislation Amendment (Ransomware Action Plan) Bill 2022 to Parliament. That Bill planned amendments to the POCA and the Crimes Act 1914 (Cth) which would ensure that:

• information gathering powers and freezing orders in the POCA extended to ‘digital currency exchanges’ so as to prevent any digital currency from being dealt with; and
• law enforcement agencies could seize cryptocurrency discovered during the execution of a warrant and suspected to be the proceeds of crime.

However, the Bill lapsed on 11 April 2022 due to the dissolution of the House of Representatives for the federal election. As a result of a change in government, it remains to be seen when such reforms will or may be reactivated.

Each state and territory in Australia has its own proceeds of crime legislation. However, the legislation is for the most part framed in a similar manner to the Commonwealth Act.

Below are observations on the major jurisdictions in the UK and the US. It is likely that Australian courts will continue to follow the proactive way in which our common law seeks to adapt to changing technology and assets. Indeed, the Singapore courts have also been at the forefront in Southeast Asia of focusing on the recognition of crypto assets as property amenable to court jurisdiction.

United Kingdom

The Proceeds of Crime Act 2002 provides for the restraint of, freezing of and confiscation of proceeds of crime. It also provides for civil power under which a prosecutor may seek to recover property that was is proceeds of unlawful conduct. This is proved on the balance of probabilities.

In DPP v Briedis,[15] the High Court, referring to AA v Persons Unknown (see above), held that there would be a ‘serious lacuna’ if crypto assets were not considered to be property pursuant to the Proceeds of Crime Act 2002 section 316(4)(c) which included a category of ‘things in action and other intangible or incorporeal property’ in the definition of ‘property’ in the Act. In that case, the DPP sought a freezing order under the civil recovery provisions (section 254A) against two respondents over, among other things, cryptocurrency.

English courts have not displayed reluctance in making restraint or confiscation orders. By way of example, in R. v Teresko (Sergejs),[16] upon the defendant’s conviction for drug and money laundering offences, police sought and were granted a restraint of the defendant’s crypto assets and permission to convert seized bitcoin into pounds. The court subsequently made a confiscation order over bitcoin worth £975,000.

To the extent there are inconsistencies or peculiarities in the application of the Proceeds of Crime Act 2002 to cryptocurrency, the UK legislature appears committed to redressing it:

• In 2015, the Proceeds of Crime Act 2002 section 67(7A)(b) was amended to give police the power to seize and retain cryptocurrency held by a defendant.
• The UK is now attempting to further strengthen its Proceeds of Crime Act in its civil and criminal jurisdiction by making provision for a system of recovery of crypto assets rather than simply cryptocurrency: see the Economic Crime and Corporate Transparency Bill which is presently before the House of Lords.

United States

The Department of Justice has made a number of high-profile seizures of cryptocurrency in recent years, the largest of which was in 2022 seizing US$3.6bn worth of cryptocurrency from two individuals in connection with the hacking of virtual currency exchange Bitfinex in 2016.[17]

Under US Federal law, there are three types of forfeiture: criminal, civil and administrative. Criminal forfeiture orders are in personam actions which require notice of the intent to seek an order. Such an order requires a conviction. Civil forfeiture requires no conviction; however, it must be established that the property subject of the order is linked to criminal activity. Administrative forfeiture allows law enforcement agencies to seize cryptoassets provided they are valued less than or equal to US$500,000 at the time of seizure. Unlike criminal and civil orders, these do not require judicial approval but do require notice to potential claimants of the assets. However, if no claimants come forwards, no judicial consideration is required.[18]

In September 2022, the US Attorney General submitted to the President (in response to an executive order) a report on the role of enforcement in detecting, investigating and prosecuting criminal activity related to digital assets including cryptocurrency.[19] That report outlined how fraud and market manipulation charges, no doubt some of the more commonly prosecuted offences relating to cryptocurrency, do not permit forfeiture of proceeds from criminal activity involving commodities such as cryptocurrency.[20] It then proposed amendments which would:

• To list commodities fraud under 18 U.S.C. section 1348 and 7 U.S.C. section 13(a)(2) (Commodity Exchange Act) as ‘specified unlawful activity’.
• To remove the US $500,000 cap on administrative forfeiture.

Proprietary injunctions and third-party disclosure

Proprietary injunctions are now commonplace in the UK even in cases where the identity of the person(s) holding the cryptocurrency is unknown. However, recent cases in both the UK and Australia illustrate that there is some difficulty in determining the appropriate jurisdiction in which to commence proceedings and making effective third-party cryptocurrency exchange disclosure.

The seminal case on jurisdiction is Ion Science v Persons Unknown (‘Ion’).[21] In that case, Ion Capital had fallen victim to a Ponzi scheme, paying money to an initial coin offering by Neo Capital (an entity whose location and identity were unknown). Expert evidence was used to trace the location of the bitcoin to two cryptocurrency exchanges. The English Commercial Court found that England was the correct jurisdiction in which to commence the claim because:

• England was the location in which the damage occurred;
• the bank account which funded the transfer was located in England;
• the computer through which remote access was granted was in England; or
• because the bitcoin was located in England and Wales prior to the transfer.

It concluded that the lex situs of a crypto asset was the place in which Ion Science was domiciled.

In the later decision in Tulip Trading v Bitcoin Assoc for BSV,[22] Falk J, obiter, refined the test in Ion, stating that if the domicile and the residence of a company are different, it is the domicile which will be relevant to determining jurisdiction.

Although courts in both the UK and Australia have been willing to order third-party disclosure from cryptocurrency exchanges so that persons may effectively recover assets, it remains unclear to what extent those have been effective—see Danisz v Persons Unknown[23] and Ion. Despite the 2022 introduction of a new disclosure gateway in the UK which expanded the court’s jurisdiction with respect to obtaining information from third parties, the issue regarding its enforcement remained. The new mechanism purported to allow claimants to seek information about the identity of persons who misappropriated their assets and locate the persons in possession of those assets. However, the court’s power to enforce those orders very much depends on the evidence available as to the underlying asset, meaning that the expansion in jurisdiction may have limited practical effect if assets cannot be located.

Overall, the identification and recovery of cryptocurrency remains an ongoing challenge, not only for regulators but for courts and private litigants seeking to identify such assets and hold them securely until the rights over them can be determined.