Reporting and Governance

The president of the European Central Bank, Christine Lagarde, has warned that cryptocurrencies are being used by Russian actors to bypass sanctions. The G7 leaders, in a statement issued by the White House, have stressed that measures are in place to pursue those who attempt to use crypto assets to evade such sanctions. By Katie McDougall, Harriet Jones-Fenleigh, Adam Sanitt; and Emma Houldsworth at Norton Rose Fulbright 

The EU has introduced specific measures to target cryptocurrency held by Russian nationals and companies. Any person required to comply with EU sanctions law is prohibited from providing crypto asset wallet, account or custody services to Russian nationals or persons residing in Russia, or entities established in Russia, if the total value of the crypto assets of the person per wallet exceeds €10,000.

The US and UK sanctions regimes also include asset freeze/blocking restrictions which prohibit any form of dealing with a person targeted by these restrictions, including the freezing of crypto assets owned or controlled by an entity designated as an asset freeze target.  

US, UK and EU sanctions authorities may also designate cryptocurrency exchanges, miners or similar as asset freeze targets in their own right. The US has been especially proactive, blocking crypto mining host BitRiver’s assets on April 20 and mixer’s assets on May 6. The designation of is the first time the Office of Foreign Assets Control (Ofac) has designated a virtual currency mixer.

These regimes also include anti-circumvention provisions which are relevant to crypto activity. For example, in April 2022 the US imposed a penalty of five years in prison and a $100,000 fine on Virgil Griffith for his role in circumventing US sanctions. Mr Griffith funded and developed crypto asset infrastructure in North Korea and gave detailed instructions on using crypto assets to evade US blocking sanctions.

Ofac has published sanctions compliance guidance for private operators in the virtual currency industry, including recommendations on screening, using geolocation tools to monitor customer location, transaction monitoring tools and staff training.  

Private operators in the crypto industry, including two of the largest cryptocurrency exchanges, have recently taken proactive steps to ensure compliance with sanctions regimes. Coinbase has frozen 25,000 Russian accounts, while Binance has limited services available to Russian nationals, Russian residents and entities established in Russia that have cryptoassets exceeding €10,000.  Binance has also confirmed that it will not allow cardholders of sanctioned Russian banks to use them on the platform, and requires Russian users to complete proof-of-address.  

UK court cases

Recent interesting English court decisions are as follows:

• Birss J in Elena Vorotyntseva v Money-4 Ltd [2018] EWHC 2596 (Ch) granted a freezing order over bitcoin and ethereum due to a real risk of dissipation.

• In AA v Persons Unknown [2019] EWHC 3556, a specialist company tracked a bitcoin ransom paid to release a company from a malware attack. Bryan J held that cryptocurrencies could be treated as property under English law and required the exchange to provide information.

• In Ion Science Ltd v Persons Unknown (unreported, 21 December 2020), expert evidence was produced to trace the location of bitcoin paid to two cryptocurrency exchanges. The court granted a worldwide freezing order, a proprietary injunction and a Bankers Trust order against the exchanges requiring them to preserve the bitcoin (or its traceable proceeds) and disclose information to identify the alleged fraudsters. The court then went on to grant a third-party debt order – the first by the English courts in relation to cryptocurrency. As the company which executed the fraud and owned the account had been identified, the court granted a third-party debt order against the relevant subsidiary of the exchange. In Ion the court considered that the legal location of cryptocurrency – crucial for the availability of relief from English courts – was where the person or company who owns it resides or is domiciled.

• In Tulip Trading v Bitcoin Association [2022] EWHC 667 (Ch), Falk J clarified that it is likely to be residence which is relevant.  

However, these cases do not determine the practical steps that are needed to make a freezing order against crypto assets effective. If crypto assets are held in an account controlled directly by the owner, only moving them to a separate escrow account using the owner’s private key will prevent them from being transferred. Clearly, this requires the owner’s co-operation. English courts may seek to use contempt proceedings against individuals to compel co-operation, but this is still a serious limitation, especially where fraud is involved.

P2P challenge

Crypto assets transferred in breach of a freezing order might still be traceable. On-chain forensic research allows some crypto transactions to be traced, but transactions conducted peer-to-peer inevitably remain difficult to target. Similarly, while private crypto providers have stated that they are prepared to freeze cryptocurrencies in response to sanctions, this will not prevent asset freeze targets carrying out peer-to-peer transactions on public decentralised ledgers.

Other methods of freezing may be available where crypto assets are held in an account with an exchange. A freezing order may be served on an exchange, who may then be compelled not to allow the frozen crypto assets to be moved, similarly to a bank served with a freezing order over a customer’s bank accounts.

Overall, it is clear that the English courts are willing and able to freeze crypto assets, although there are significant practical difficulties in making freezing orders effective.

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