At the end of June, the FCA - arrested two people suspected of running an illegal cryptoasset exchange. Their digital devices were seized and the investigation is ongoing.
Unregistered exchanges like these are illegal in the UK, as they have not proven compliance with anti-money laundering regulations; namely the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (the Regulations). Only providers that are registered with the FCA have proven compliance. The FCA’s list of registered crypto-assets firms is published on their website.
Since 10 January 2020 firms carrying out specific cryptoasset activities in the UK need to comply with the amended Regulations and register with the FCA.
The FCA keeps a list of businesses which it suspects are operating without the FCA registration.
However, some people are still investing in assets on unregistered providers. In this article we look at the risk of doing so, in light of the recent arrest.
High Risk of Losing the Assets
Law enforcement agencies can recover money or assets which are thought to be property obtained through unlawful conduct, or intended for use in unlawful conduct, under the Proceeds of Crime Act 2002 (POCA).
As unregistered exchanges are operating illegally, crypto-assets bought and sold on the platform are vulnerable to seizure. After that, the assets could be confiscated by law enforcement, following a criminal trial.
Low Chances of Recovering Seized Assets
Owners of crypto-assets that are detained or frozen can apply to the Magistrates’ Court for some or all of the crypto-assets to be released to them.
This is possible under section 303Z17A in Part 5 of POCA, which makes provision for the release of money frozen under Chapter 3B to its true owner. A person who claims that some or all of the funds rightfully belong to them, and they were deprived of them through unlawful conduct. i.e. if the funds were stolen from that person. If the court is satisfied, it may order the release of the funds to that individual.
Investors who willingly invest on these platforms may struggle to prove that the funds were stolen from them, unless they have clear evidence that they were scammed.
POCA also now has provision for the case of any other true owner who is not the person from whom the money was seized. Here, if the court is satisfied, the funds may be released – but only if the person from whom they were seized does not object. That relies on the agreement and cooperation of the managers of the unregistered exchange, which is by no means guaranteed.
Key Takeaways for Investors in Cryptoassets
Investors should be weary about which providers they use for their crytoassets, and make sure they only use providers who are registered with the FCA. Compliant providers are listed on the FCA’s website.
If cryptoassets have been seized as part of the shutdown of an unregistered crypto exchange, investors might not be able to get them back.
