Binance and other crypto exchanges will be made responsible for stopping criminals from moving assets off their platforms to avoid scrutiny, after a UK High Court judge ruled that exchanges should be recognised as trustees of stolen cryptocurrencies.
A 24 June ruling made public on 12 July gives a clear direction of travel on UK crypto laws.
The decision also means that where British citizens are affected by scams, exchanges will be subject to UK laws, even if they and the stolen assets are based abroad.
Crypto industry players are in sharp focus amid a meltdown in the sector and daily calls for urgent rules to tame the market’s ‘Wild West’ image.
Bank of England deputy governor Jon Cunliffe and the incoming chair of the Financial Conduct Authority Ashley Alder have both spoken out about the need for tighter regulation of the industry recently. The latest decision from the UK’s courts brings exchanges further in line with similar rules which govern traditional financial platforms.
Why does it matter?
Regulated exchanges in traditional finance – tradfi – have long been subject to rules which force them to keep hold of stolen money so it can’t be laundered through other assets. For crypto exchanges, however, this is new territory.
Charley Cooper, managing director at blockchain firm R3, said that on a practical level, the ruling would not cause problems for Binance or other exchanges like OKX. “Most of these exchanges are pretty sophisticated – they would have no trouble holding these monies,” he said.
But Cooper, who is a former chief operating officer at the US Commodity Futures Trading Commission, said that it gives Binance and other firms a clear indication that crypto “is beginning to be treated like the old world of finance and being held to the same standards”.
In the absence of regulation from the FCA and other watchdogs, more examples of this are likely to follow as courts take matters into their own hands, Cooper added.
“If exchanges haven’t thought about it already, they will need to figure out how they’re going to comply with more mainstream financial regulations,” he said.
What else did the High Court say?
The ruling also included an order that would now allow for court documents to be served over the blockchain, in the form of a non-fungible token, a UK first.
Going forward, exchanges will be forced to reveal who the alleged scammers are when they are taken to court.
Ari Redbord, head of legal and governmental affairs at blockchain intelligence firm TRM Labs, said this would “make it easier for those trying to recover funds stolen from an unknown wallet address on the blockchain”.
What does it mean for victims?
Joanna Bailey, an associate at Giambrone & Partners, the firm which worked on the case, said it was “an amazing judgement for consumers who have been defrauded”.
This is because victims of crypto scams could be able to sue thieves, where in the past they could not, by serving documents upon previously unknown fraudsters to their digital wallets.
Before, they would only have been able to bring a case against anonymous thieves, who were able to hide behind aliases and online accounts connected to the crypto wallets. In legal terms, this is defined as “persons unknown”.
The process is effective because of the nature of an NFT, Redbord said, in that it is both impossible to replicate, and it is attached permanently to a specific location on the blockchain.
That “makes it a perfect vehicle for legal process as it allows for proof of effective service,” said Redbord, who is a former senior adviser on financial intelligence to the US Treasury.
“As we see the NFT space evolve from digital art and collectables — think Bored Apes and CryptoPunks — this is a great use case.”
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