Can Cryptocurrency and Cryptoassets be Frozen?
There is an ongoing legal problem with the use of cryptocurrency and cryptoassets when it comes to building wealth and protecting funds from seizure. Lawyers and those seeking legal counsel need to be prepared to deal with new laws and precedent regarding the use, discovery, recovery, and freezing of cryptoassets as part of trial investigations.
Are cryptocurrencies properties?
Before any question is raised to cryptocurrencies being subject to a freezing injunction, first it must be established if cryptoassets can be considered property at all.
When compared to other traditional assets, such as fiat currency, real estate, trusts and etc., cryptocurrencies are revealed that:
- They are not a chose in possessions (i.e., a tangible personal property that can be possessed or transferred), since they are virtual and not tangible items. It is not possible to posses a single cryptocurrency coin, but only to be granted access to said item via a wallet key that may be stored on more traditional media such as storage drives or printed out.
- They are not a chose in action (i.e., assets that carry with them rights to recover money or debt, such as titles, inheritances, bank accounts and bonds) since they do not contain or provide any enforceable right to the bearer to be repaid or transformed into other forms of property.
Therefore, to enable cryptocurrency to be defined as a ‘property’ that possesses value that can be pursued in court, it may be required to create a classification for intangible property.
Fortunately however, there are case precedents that establish that cryptocurrency can be considered property by international courts. Cryptocurrency –
“meet the four criteria set out in Lord Wilberforce’s classic definition of property in National Provincial Bank v Ainsworth  1 AC 1175 as being definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence.”
Therefore cryptoassets are subject to a freezing injunction.
The question therefore becomes, are cryptoassets at all enforceable to being frozen under an injunction?
Finding value in pairs of random numbers
The most famous example of cryptocurrency is Bitcoin. Essentially, a Bitcoin is a piece of cryptography – a unique sequence of lines and numbers – that is then encoded into a blockchain, a line in a distributed ledger. This ledger is stored independently in potentially millions of computers all over the world, without any one person or organization to claim ownership or identify the owner of a particular bitcoin. This anonymity and resilience against government-backed currency manipulation and unlawful seizure of property is supposed to be the main selling point of cryptocurrency.
A piece of cryptocurrency on the blockchain is composed of two codes – a public key, which is broadcast to the system, and a private key that is known to no one but the sender. This key opens the ‘wallet’ which decrypts the public key using the private key as proof of ownership facilitating transfer. The private key is a string of numbers that can be stored anywhere, from a text file, on usb device, embedded onto a physical coin, or written out on a piece of paper.
The private key enables anyone knows of it to deal with the cryptocurrency in the wallet. At no point in the transaction are personally identifying details such a name or location ever involved (in contrast to bank transfers which require account details). Once a digital token or coin is transferred, it is irreversible. The inability to force a freeze or refund nor to identify the recipient presents problems to anyone who hopes to recover from a cryptocurrency-based scam.
When considered part of a portfolio, cryptoassets do have their value and growth potential. For cryptocurrency to be viable as investment properties, the owner must retain possession of the private key for their crypto wallets.
In practice, a piece of cryptocurrency is as valuable as only what someone else may pay for it in fiat currency. Its value can vary greatly, more than stocks, which is why some prefer to use it as a vehicle for speculation as much as its traits of secrecy and security.
Standardized Freezing Orders Adapted to Handling Cryptocurrency
It is required to use a standard form of wording when writing a proprietary freezing injunction to restrict the use of specified assets. Any departure from the standard wording must be drawn to the attention of the judge. Accordingly, a freezing order ought to feature the words –
- Until the return date or further order of the court,
- the respondent must not remove from England and Wales
- or in any way dispose of, deal with or diminish the value of the following assets
- which are in England and Wales, namely:
- [specify in detail]
Therefore, when dealing with cryptocurrency, there are special considerations compared to traditional assets:
- Immediately it must be proven that the person has possession of these cryptoassets via the physical possession of the public key, whether it be in the form of emails, registration in a cryptocurrency exchange, a usb device, or any other storage medium.
- Being that cryptocurrencies are stored in a blockchain, which simultaneously exist in many computers all over the world, there is no need to prove that the asset exists in England and Wales,
- The respondent and others must be prevented from moving cryptoassets around, which can only be done by securing their possession of the public key and preventing this public key from being used in any other computer. Remember, anyone with the public key can manipulate the wallet containing the crypto-assets.
- Ironically, the same fact that cryptocurrency must be taken for granted to exist in England and Wales also means that moving them means removing them from England and Wales because once any transfer is done, those digital tokens become anonymized and could be anywhere under a new private key or converted to fiat currency.
- Cryptocurrency assets must not be referred to in terms of monetary value, since their prices in the exchange vary heavily and suddenly, but instead must be noted in specific amounts of tokens and coins.
Exerting Control over the Cryptocurrency Assets
The difficulties regarding the intangibility and highly complicated nature of cryptoassets would require orders that deal with disclosure and the instruction of experts. Since the identification of cryptoasset holdings rely on the possession of private keys, it is correct that the first thing to do is to obtain physical possession and analysis of devices which may contain the relevant ‘wallets’.
Should the respondent be using a wallet provided by a cryptocurrency exchange, it is possible to order a freeze on these account. A company that provides such a financial service would comply under the force of law. Obtaining the respondent’s passwords to cryptocurrency exchanges would also allow monitoring of the assets held in place.
A cryptocurrency exchange usually serves also as a means for speculation, buying and selling cryptocurrency the same way as foreign exchange speculation takes advantage of fluctuating differences in currency value. Cryptocurrency, as property, can even be included in trusts. Cryptoassets used as a legitimate investment vehicle that require identification information can more easily be frozen.
Cryptoassets held as a reserve however need more aggressive measures.
An order for the seizing, custody, and preservation of devices that may contain the private keys is sanctioned by certain sections in the Family Procedure Rules 2010. It may be more important to obtain this custody immediately than just a conventional freezing order.
Disclosure of Crypto-Assets
As cryptoassets are valid property, they must be disclosed under an order. This order may precede the freezing order. Disclosing the existence of crypto assets to an Expert instructed by the court may be the only way to get those devices which may contain access to the ‘wallet’ returned.
As long person subject to the investigation and freezing order does not;
“sell, transfer or otherwise deal with the cryptocurrencies whose details are stored on the USB devices [and (other devices)] returned by the Expert save with the written consent of the applicant or pursuant to a further order of the court, and the respondent must not instruct, encourage or otherwise permit any other person to do so on his behalf.”
If the respondent actively attempts to hide and transfer assets rather than disclose them, they would be subject to a criminal charge of perjury, have their assets continually be examined and again in the future for signs of malfeasance, and once discovered would possibly be subject to other criminal charges such as tax evasion, etc.
Article by hadaway.co.uk solicitors North East UK