September 29, 2022
Around the world, policymakers are beginning to carve out their approaches to crypto assets and financial crime. The US recently announced a Plan of Action to better understand and defend against their illicit finance risks, and the EU is progressing its AML Package as well as finalizing the text of MiCA, its landmark regulation that will establish the framework for digital assets in the EU.
Last week, the UK joined these ranks by introducing its latest Economic Crime and Corporate Transparency Bill, expanding the powers of law enforcement to seize crypto assets linked to criminal activity.
But this isn’t the UK’s only ongoing work in the digital asset space– we took a look at all of the crypto-asset and financial crime-related legislative and regulatory activity in the UK right now.
Economic Crime and Corporate Transparency Bill
Introduced to Parliament last week, this bill builds on an Act (of the same name) passed in March 2022 in response to Russia’s invasion of Ukraine, which brought a renewed urgency to the UK’s need to tackle its dirty money problem by closing decades-old legislative loopholes. This second bill specifically aims to strengthen the integrity of the UK’s company registry, Companies House, by expanding the powers of the registrar and improving the identification of company directors.
The second focus of the bill is on improving the ability of UK law enforcement agencies to investigate, seize and recover crypto-assets. This is achieved via amendments to the UK’s Proceeds of Crime Act, and will create the mechanisms for criminal and civil crypto asset recovery in the UK.
Amendments to the criminal regime will allow for:
- In certain circumstances, the removal of the requirement for a person to have been arrested before seizure powers can be used for crypto-assets
- Officers to ‘recreate’ crypto asset wallets and transfer assets into a law enforcement-controlled wallet
- Magistrates to authorize the sale of seized crypto assets
- In exceptional circumstances, the destruction of seized crypto assets
Amendments to the civil regime allow for:
- Law enforcement agencies to take control of and recover crypto assets that are ‘unhosted’ whilst executing a search warrant
- Law enforcement to recover crypto assets directly from exchanges and ‘custodian wallet providers’
- The conversion of crypto assets into cash pending the outcome of a final forfeiture hearing to protect against price volatility
- The destruction of crypto assets in exceptional circumstances
- The ability to return fraudulently obtained crypto assets to victims
The bill also covers information sharing between private sector entities to establish suspicion, powers of the Serious Fraud Office and the powers of the Solicitors Regulatory Association.
The second reading of the bill will take place on October 13 2022, with it poised to be codified by early 2023.
Financial Markets and Services Bill
The Financial Markets and Services Bill seeks to set out the necessary changes to the UK’s legislative framework following Brexit to ensure the competitiveness of the UK’s economy. An element of this is to ‘harness the opportunities of innovative technologies in financial services’. For digital assets, this means bringing stablecoins that are used for payments under the existing electronic-money and payment system regulatory frameworks, which would make them regulated by the FCA for financial crime purposes. The bill is currently at the committee stage and is due to report on 3 November.
The Law Commission Review of Digital Assets
Although not directly related to financial crime, the Law Commission's review of Digital Assets will be an important event in the development of the UK’s framework. The consultation is designed to consider whether the UK’s current legal framework on personal property sufficiently recognises and protects digital assets under UK law. In doing so the Law Commission hopes to create a legal framework that allows the digital asset sector to flourish. The Review is open to responses until 4 November.
Treasury Select Committee Review of Crypto Assets
The Treasury Select Committee is currently undertaking a review of the crypto-asset sector. The review will ‘examine the potential risks and opportunities associated with the use of crypto-assets, their impact on social inclusivity and the possible need for regulatory change in the future’. The call for evidence included a question which asked ‘how effective have the regulatory measures introduced by the government - for instance around advertising and money laundering - been in increasing consumer protection around crypto-assets?’. The overall tone of this review is focused on ensuring the responsible adoption of digital assets that strikes a balance between prosperity and consumer protection.
The call for evidence is now closed and the committee will hold evidence sessions throughout the fall.
Crypto APPG Inquiry into Crypto Assets
In addition to the Review by the Treasury Select Committee, the all-party parliamentary group (APPG) on Crypto and Digital Assets is holding its own inquiry into the sector. It has a broadly similar remit to the Treasury Select Committee but looks more broadly at the role and approach of UK regulators in the space. Submissions are now closed and will be used to inform a report that will make a set of recommendations for the government later this year.
Economic Crime Plan II
By early next year at the latest, the UK government is expected to publish its second Economic Crime Plan (ECP). The ECP is a public-private initiative which sets out the UK’s priorities for tackling economic crime. It is expected that the second ECP will have a focus on crypto-assets and will further explore how the public and private sectors can work together to combat crime in this sector.
Any focus on crypto-assets in the ECP will have to complement the amendments made to the Money Laundering Regulations earlier this year, which clarified obligations on ‘unhosted wallets’ and introduced the Travel Rule into UK law. The Travel Rule will formally come into effect from September 2023.
What does all of this mean?
The new Truss government has confirmed its commitment to ensuring that the UK becomes a crypto hub, with the aforementioned bills and inquiries empowering the UK to move the needle on this goal.
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