THE NEW POCA FRONTIER: BITCOIN AND ELECTRONIC CURRENCY, SHAPING ASSET RECOVERY IN THE 21ST CENTURY The question of whether the Proceeds of Crime Act 2002 (POCA) can be used to deal with Bitcoins¹ and electronic currencies has been the subject of some speculation by specialist practitioners recently. In my view it can be utilised, but it is not ideal. I will not deal with the technical difficulties in finding bitcoin accounts; what I will concentrate on in this article is finding the correct legal tools to recover the assets and what other options are available when it does not work. Bitcoins and electronic currencies are the future. Basing a currency around a digital code rather than the economy of a nation state allows freedom for users in a number of ways. In particular, it allows them to keep assets outside the conventional framework where no state can directly control them. This is exactly why these types of currencies raise issues in the current POCA regime. POCA is built around taking tangible assets that can be discovered and controlled through institutions. These assets might be money in a bank account found through asking financial institutions if it exists or in a property discovered through a search with the land registry. After these assets are found they can then be restrained, which will allow them to be realised later. DRYSTONE.COM

This is the standard model. However, with Bitcoins we cannot rely upon the mechanisms of a bank, land registry or other institutions to control the asset. Therefore, until other methods are developed, we need to focus on the tools that POCA offers and how they can adapt to this new challenge. I believe the key in responding to this currency is to be as simple as possible and put the emphasis on the defendant. This might lead to issues of fairness developing in future: but the point here is that bitcoin is property. Although it cannot be controlled in the classic manner through Restraint Order mechanisms the defendant is still subject to a Restraint Order and the penalties of breaching an order.

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Below I set out two possible responses that the prosecution can take to address electronic currency and discuss issues this might raise for the defendant. At present I am unaware if these principles have been tested in court, and until they have been they will remain theories. The following principles can be used not only in England and Wales but can be adapted to most jurisdictions with asset recovery legislation. I will also briefly ¹For the purposes of this article I will use the term Bitcoins for all electronic currency. 1

discuss possible ways in which legislation might be developed to deal with this new asset class. Potential Responses: Restraint Orders Bitcoins and electronic currencies come under section 84(1) of POCA. Restraint Orders can be drafted to include Bitcoins and make clear to the owner that if the owner does not maintain the current level of Bitcoins in his account then he will be in breach of the Restraint Orders. The Order should specify that no Bitcoins should be moved from that account. This will mean that the amount of Bitcoins should be kept at the level it was on the making of the order. It can mean that the value in pounds could vary as the electronic currency varies, which is the same for any offshore account. I also recommend that there is an offer for the money to be put into an escrow account while the case is ongoing. This is not within the power of the court under POCA 2002, but it is something the defendant might accept so they will not be open to criticism at a later stage if something happens to their account. Putting in place a restraint order is simple: the issue arises when the Bitcoins are dissipated, either during the case or if evidence comes to light of this at some point before proceedings finish. At this point the defendant would be in contempt of court and face imprisonment. The difficulty here is that it would be up to the defendant to show how much was in the account and how much was dispersed, as law enforcement agencies cannot 2

gather that evidence. This could lead to difficulties if the defendant claims they had lost the password or they cannot access that information from prison. How would the court quantify the contempt in those situations? It will be interesting to see how that develops, but in my view the emphasis will be on the defendant to explain why they can’t comply with the order and explain the situation. Reparation Orders The court can make a reparation order under section. 41 (7) of POCA. This was confirmed by the court in DPP v Scarlett [200] W WLR 515. The aim of reparation orders is to repatriate assets from other jurisdictions. In my view it can also be utilised, and is well suited, to order defendants to move their money to a standard financial institution. It should be easy to justify an order where money is kept in an electronic account. The difficulty is what happens when the order is not followed. Technically, it would be a breach of the order and the prosecution could seek to start contempt of court proceedings. However, in my experience there has been some reluctance to put in place contempt of court proceedings for breaches of reparation orders. I believe this will need to change if this type of order is to be used effectively in these circumstances. Issues for Defendants Both of these measures put the emphasis on the defendant acting. This is unlike the majority of other legislative measures under POCA, where the defendant is stopped from doing something

rather than commanded to do something on pain of contempt of court. The court will need to make sure that the powers are used in a proportional and fair manner. The court will have to ask if it is right that a defendant be subject to an order that requires them to move their funds or to provide material to show that they have not decreased the value of the account. This will be an area where proportionality under Article 1 Protocol 1 of the European Convention on Human Rights needs to be considered. The next step – future answers Legislation has two branches to follow in their response to electronic currencies. First, they can use technology and legislate for its use. It would be difficult to predict what form this would take but I imagine there will be much debate about possible solutions along these lines before the next round of legislation amending POCA. I believe the better option would be to boost restraint orders and reparation orders so that they explicitly cover electronic currencies. Although they can be used at present, the laws should be strengthened in the following ways. First, Restraint Orders have to include an option for the court to order that the proceeds of an electronic account be put into a physical bank account (probably an ESCROW account). This would mean that the funds could be brought into an account which will be controlled by a financial institution rather than the defendant. Failure to do this would then be a contempt of court matter.

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Second, to formalise reparation orders and make sure that they specifically cover electronic bank accounts. This could be via an injunction alongside my first recommendation. Although it might give more control to the defendant of where the asset is held, it will ultimately be up to those drafting the legislation whether the powers are spate or complimentary. Third, there needs to be a clear outline of the appropriate punishment for defendants who commit contempt of court. So if a restraint order or reparation order is breached, it needs to be clear what sentence the defendant will receive. It would be helpful if there is a sliding scale of sentence length depending on the amount DRYSTONE.COM

suspected to be held in the accounts. Conclusion Although it is not the purpose of this article to predict the future, I feel that electronic currencies are going to be a feature of the financial landscape. In time, they might even replace currencies backed by nation states. What is relevant to legal practitioners is how this jurisdiction and others will respond to it in the sphere of asset recovery. In my opinion the key is to put in place an order that places the onus on defendants. These powers exist in the current version of POCA 2002: but of course they can be strengthened. Clearly, a line will have to be drawn on what burden can be

placed on the defendant. What will be interesting is where the needs of the prosecution are balanced against the rights of a defendant. Only time will tell. Barnaby Hone Drystone Chambers

Drystone Chambers 35 Bedford Row London wc1r 4jh t: 020 7404 1881 e: [email protected] www.drystone.com

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BARNABY HONE [email protected]

Barnaby has a range of experience in fraud, international asset recovery, financial crime and professional discipline law, particularly in healthcare and sports law matters. He is regularly instructed in tax tribunal matters (in a POCA context) and civil recovery. Barnaby’s international asset recovery and financial crime practice includes experience of dealing with corruption, money laundering, fraud offences (that have an international angle) and recovering the proceeds of these offences. He has experience of all areas of the Proceeds of Crime Act both domestically and internationally. In addition to his busy practise, Barnaby writes the chapters on International Asset Recovery and Terrorism Finance for Millington and Sutherland Williams on POCA and recently completed a series of seminars and articles on changes to POCA under the Criminal Finance Act 2017. Barnaby is ranked in the Legal500 as a ‘leading individual’ in POCA and Asset Recovery law.