On May 18, 2021, the Dresden Regional Court rejected regular attempts by German investigative authorities to freeze cryptocurrency holdings in digital asset exchanges. The court asserted that the confiscation measures could not be applied if the prosecution failed to prove that the crypto exchange was linked to criminal activities and that the proceeds to be confiscated were based on “a paid transaction (…) which excludes the confiscation of the proceeds of the crime from other than the perpetrators or participants in the crime”. As far as is obvious, this is the first decision of a German criminal court on this issue more additionally relevant to crypto exchanges.
Powers of authorities to confiscate assets
In 2017, the German legislator strengthened the legal possibility of freezing assets and confiscating the proceeds of criminal activities. According to the German Criminal Code, prosecutors and criminal courts can now confiscate assets obtained from criminal offenses not only if the perpetrator obtained something directly from or for the offense. On the contrary, any third party may be subject to confiscation measures if the assets acquired have been transferred to him free of charge or without legal reason, or if the third party has recognized, or should have recognized, that the assets are directly linked to an illicit act. . Such measures may already be ordered by prosecutors at the start of investigations in order to pre-secure assets for later confiscation at a later stage.
Given the rise of cryptocurrencies, the number of criminal investigations involving cryptocurrencies and crypto exchanges is also increasing. Since authorities often cannot get their hands on individual wallets, it has become a more regular habit to try to confiscate assets on crypto exchanges instead.
In its decision of May 18, 2021, the Regional Court of Dresden clarified that the preconditions for third-party confiscation are regularly not met in the case of crypto exchanges, in particular in the case of a remunerative business model in which the exchange charges fees to clients and therefore acts on a remunerative basis. The court said confiscation is illegal if the prosecutor fails to prove that the crypto exchange itself is involved in or must have had knowledge of the (alleged) criminal offenses of their users.
Risk Mitigation Insights and Best Practices
The landmark decision of the Dresden Regional Court sends a strong signal to investigative authorities to rethink their current practices. Nevertheless, crypto exchanges will still be considered a potential target by prosecutors because it could still be considered relatively easy for them to argue that the crypto exchange acknowledged, or at least should have acknowledged, that the given cryptos or fiats come from an illegal act and can therefore be confiscated (or simply ignoring the Dresden judgment).
Crypto exchanges must therefore constantly ensure that:
- Anti-Money Laundering and Business Partner Compliance Preventative Measures:
Crypto exchanges can mitigate the risks of being subject to third-party confiscation measures if they can demonstrate appropriate AML and trading partner compliance to quickly and systematically counter any potential suspicion of involvement in criminal offences.
- Rapid responsiveness in the event of imposed (pre-trial) measures:
If confiscation measures have been imposed on a crypto exchange, immediate action is required to have the imposition of the confiscation revoked.