Confiscation, Restraint & e-currencies - Is my Bitcoin Wallet safe?

Anoushka Shepherd

When we say ‘Bitcoin’ we tend to think of a seedy online underworld of shady characters using anonymous e-currencies to trade illicit goods. The seizure of $28 million worth of Bitcoins from the alleged owner of online criminal marketplace “Silk Road” has done little to change Bitcoin’s sinister reputation. Nor the recent great Bitcoin ‘heist’ which saw MtGox, one of the leading Bitcoin currency exchanges, file for bankruptcy following the ‘theft’ of $500 million worth of Bitcoin.

But, despite the negative media attention and potential for illegal use, the concept of e-currency is a serious and legitimate affair. Around 20,000 online merchants accept Bitcoin and in some countries it is possible to receive your salary in e-currency. The HMRC consistently review their position in relation to e-currencies and have recently stressed that investment will give rise to capital gains tax, corporation tax and income tax (though VAT is not currently charged on Bitcoin trading).

Of all the e-currencies which have materialised over the last decade, Bitcoin has emerged as by far the most popular and is rapidly gaining momentum. But from a criminal defence perspective, it’s only a matter of time before some important questions of law come to head in the UK; in particular, how far does the current regime of confiscation and restraint in England and Wales accommodate the Bitcoin?

What exactly is Bitcoin?

Bitcoin is a peer-to-peer digital currency and payment system. Sound fancy and complicated? It is.

Bitcoin is a ‘cryptocurrency’, meaning that it uses complex cryptography to control the creation and the transfer of the currency. Bitcoins are created by a process known as ‘mining’ in which transactions are verified and recorded into a public ledger in exchange for transaction fees and newly mined Bitcoins. Users send and receive Bitcoins via their ‘Bitcoin wallet’ which will be held on their personal computer, mobile device or online.

The main point of using Bitcoins is to allow transactions to take place without a central organisation (i.e. a bank) monitoring and controlling what’s going on. Whether this is a good or bad thing is the subject of a whole different debate.

The value of Bitcoin

The value of Bitcoin has fluctuated wildly, particularly over the last year as e-currencies have become more mainstream. When Bitcoin first launched in 2009, it was worth only a few cents. Last year, value peaked at over $1000. As at 7 March 2014, the average value of one Bitcoin was $650.

To a savvy investor (or gambler!), a carefully timed Bitcoin investment in 2009 could be worth millions in today’s currency. But what does that mean for a Defendant facing criminal proceedings?

Restraint Orders

Where a criminal investigation has commenced, even if a charge has not yet been laid, the Proceeds of Crime Act 2002 (POCA) states that a Restraint Order may be granted if there is reasonable cause to believe that the alleged offender has benefited financially from the alleged criminal conduct.

A Restraint Order will be made to prohibit a specified person (usually the offender) from dealing with any of the property indicated within the Order.

Confiscation Orders

The point of any Restraint Order will usually be to preserve the value of an offender’s assets so that they can form the basis of future confiscation proceedings.

Following a conviction, and where the prosecution believe the defendant benefited financially from the crime, the prosecution can ask the court to make a ‘Confiscation Order’. This means that the offender will be ordered to pay back any money which the prosecution say the offender has gained from their involvement in criminal activity. In certain circumstances, the prosecution can argue that an offender has a ‘criminal lifestyle’ and seek to assume that all property gained in the period of 6 years prior to the date of proceedings has originated from criminal activity and should be included within the Confiscation Order, unless proven otherwise.

As such, defendants can often find themselves facing long confiscation proceedings, resulting in hefty Confiscation Orders.

Where do Bitcoins fit in?

Under POCA, a Restraint Order and subsequent Confiscation Order may apply to ‘all realisable property’ held by the accused. So the question is, are Bitcoins ‘realisable property’?

‘Property’ is defined within the Act as ‘all property, wherever situated’ and expressly includes (a) money, (b) all forms of real or personal property, and (c) things in action and other intangible or incorporeal property, whether here in the UK or offshore.

The broad brush definition within the Act is intended to ensure that as much property as possible can be ring-fenced by the Restraint Order to form part of a Confiscation Order following a conviction.

Given the wide scope afforded to the definition of ‘property’ it is likely that prosecutors will seek to argue that Bitcoins fall firmly within, whether as ‘money’ or as ‘intangible property’.

Civil Recovery?

Another possible option for prosecutors is to circumvent long confiscation proceedings entirely and seek recovery via civil means. A Recovery Order applied for in the civil courts will, if granted, allow for the recovery, of ‘recoverable property’, that is, property or cash obtained through unlawful conduct. An interim Freezing Order can also be obtained to freeze the owner’s ability to deal with the assets, thereby ring-fencing them for the final Recovery Order.

Where the court is satisfied that, on the balance of probabilities, unlawful conduct has occurred, or that any cash is intended to be used in unlawful conduct, a Recovery Order for that property or cash will be made. ‘Unlawful conduct’ is any conduct which is unlawful under the criminal law.

We may find that this proves to be a more popular option for the courts to get hold of an offenders’ e-currency.

Let’s wait and see…

We have yet to see any confiscation or restraint proceeding which include a defendant’s online currency portfolio, however, given that the face value of a Bitcoin wallet can be potentially enormous, e-currencies are likely to form an irresistibly attractive target for prosecutors. That is, of course, in a system of anonymous transactions, if they can be found!

Anoushka Shepherd is a member of the Business Crime and Regulation team at JMW Solicitors.

For further information, please contact 0345 872 6666.

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