Background

Cryptocurrency is essentially virtual money in a digital currency. It can be used as a bank free method of transferring and obtaining wealth. It is stored in a digital wallet. Instead of relying on a ‘middle-man’ such as a bank, crypto holders can make peer-to-peer transactions through the use of private and public keys, and track information about such transactions and assets. One of its many appeals comes from the level of security it provides. Cryptocurrency uses blockchain technology. Blockchain is a system of recording information in a way that makes it difficult or impossible to hack or cheat. It is a self-maintaining database. A blockchain is a digital ledger of transactions that records the origin of a digital asset and ensures it cannot be double spent.

Examples of cryptocurrencies include:

• Bitcoin
• Ethereum
• Ripple
• Litecoin

Legal Challenges

Criminal proceeds

Cryptocurrency is difficult to regulate, partly because the new technology does not fit within traditional classifications. Cryptocurrencies can facilitate tax avoidance due to the traders of the product being able to remain totally anonymous. Crypto can also be used on the dark web to buy and sell illegal items, with essentially no way to trace them. Criminals also utilise cryptocurrency as an alternative to traditional methods of laundering cash from criminal proceeds. Just this month £180 million in cryptocurrency connected to illicit activities was seized in London.

Jurisdiction

Blockchain technology creates privacy for its users in that it does not pinpoint a ledgers actual location or country of residence. This makes it difficult to determine the governing law for crypto transactions. As crypto transactions span across multiple locations, the transactions may be subject to contradictory laws and frameworks.  This makes blockchain disputes particularly difficult to litigate.  

Traceability

The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 introduced Customer Due Diligence obligations on exchange platforms and wallet providers. The regulations require them to identify their customers using official documents and to monitor and report any suspicious transactions or customers. In Ion Science Ltd v Persons Unknown, a Bankers Trust Order was made against the exchange platforms, requiring them to disclose information about their customers. Sophisticated users will of course be able to obstruct traceability. As a result, tracers may require specialist firms that analyse the Blockchain and look for patterns in the data.

Data protection

Blockchain’s immutability is often presented as its main selling point, with many users drawn in by the promise of anonymity. Data recorded on the chain about transactions cannot be altered. Whilst this may facilitate the concept of trust in the system, from a legal standpoint it creates difficulties. If the data is an individual’s personal data, it cannot be amended or deleted at their request. 

Compilations of data also constitute property under common law. Therefore, a chain database containing the personal information of crypto users may be sold to a third party. However, if such a buyer wants to use the data for a different purpose, they must get consent from the individuals concerned to comply with data protection regulations.

Legal remedies

One of the main ways fraud victims can seek protection is by obtaining freezing orders and other injunctive reliefs. A freezing order over assets may be appropriate to protect assets which could otherwise be disposed of. Injunctions are often sought before a trial to prevent injustice in this interim period. When it comes to damages however, the extreme volatility of cryptocurrency will have a huge impact of the value. Unlike flat currencies, crypto is not regulated by the Central Bank.

Conclusion There is no doubt that cryptocurrencies are increasing in popularity. Although there is currently limited regulation of cryptocurrency exchanges and custodians, more regulation is needed to prevent money laundering, criminal activity and to identify risks. The lack of intermediary or exclusive authority to settle crypto disputes is of growing concern. There are no mechanisms in place to settle disputes given the decentralised nature of crypto and therefore it is difficult for victims to be compensated for losses especially given the volatility of crypto value.

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