On 18 May 2021 the German Regional Court of Dresden, Case No. 17 Qs 9/21, ruled that an asset freeze imposed on a crypto exchange is unlawful and must be revoked if "a paid transaction exists that precludes confiscation of the proceeds of the offence from others than the perpetrators or participants in the offence". As far as can be seen, this is the first decision by a German criminal court that deals more closely with criminal law potentially allowing confiscation of assets on crypto exchanges.
Dr Philipp Gehrmann and Dr Arne Klaas, defence lawyers at the German law firm, Krause & Kollegen, classify the legal background and the expected effects on the daily business of crypto exchanges active in Germany.
Crypto Exchanges: The Perspective of German Authorities
Trading of Bitcoin , Ethereum, Litecoin, and other crypto assets is getting popular. The downside of this boom in modern and freedom-securing payment methods is that criminals have also found an interest in the rapidly developing crypto market. The anonymous transaction possibilities make it easier to secure the proceeds of crime and to build up money laundering structures for this purpose. Law enforcement agencies have reacted quickly to this trend and have set up experienced 'cybercrime units' as well as their own 'official wallets' with the help of which crypto assets can be secured and stored.
Despite these efforts in combating cyber-crime, it remains the case that confiscating the proceeds of crime from offences with anonymous 'track of money' is tedious for the German law enforcement authorities. It is therefore not surprising that crypto exchanges in particular are being targeted by German prosecutors. After all, they are the interface to the conventional financial world. On crypto exchanges, users can exchange conventional currency units such as euros or US dollars ('fiat') for the daily financial equivalent of crypto assets. The exchange platforms charge a fee for this, which is regularly deducted via the exchange rate set.
Crypto exchanges thus essentially act like ordinary 'exchange offices'. Since they (have to) set up accounts at classic banking institutions for the safekeeping of the exchanged fiat, the law enforcement authorities can trace assets by using information from money laundering suspicious activity reports or corresponding requests for information at this starting point. Thus, the crypto exchanges, unlike the owners of the cryptos who act in the protection of anonymity, are accessible without these difficulties for the public prosecutors and police by means of the proven criminal investigation and confiscation measures.
The Far-Reaching Powers of the Public Prosecutor’s Office in the (Pre-trial) Confiscation of Assets
Under German law, public prosecutors and criminal courts may confiscate assets obtained from criminal offences. Such confiscation is not only possible for the (co-)perpetrator who has obtained something directly from the offence or for the offence. Any third party can also be affected by such a confiscation measure, provided that the acquired assets were transferred to him free of charge or without legal reason, or that he recognised, or should have recognised, that the assets are directly linked to an unlawful act.
In this context, such a measure can already be ordered by public prosecutors at the beginning of preliminary proceedings in order to secure the assets for later confiscation. The considerable practical consequences of such pre-trial measures are obvious: issued asset freezes prevent the person concerned from accessing bank balances that are needed for the payment of current operating expenses and, above all, in the case of crypto exchanges, the ongoing exchange of cryptos for fiat. Therefore, such measures often lead to Liquidity shortages that can jeopardise the entire business operation.
The Decision of the Regional Court of Dresden
In its decision, the Regional Court of Dresden makes it clear that the prerequisites for third party confiscation are regularly not given for a business model that is classic for crypto exchanges. Accordingly, confiscation measures are not possible as long as the prosecution authorities do not succeed in proving that they are involved in the (alleged) criminal offences of their users or must have known about them. This is because the retention of a fee by the crypto exchanges establishes the “paid character” of the exchange service. This means that confiscation is no longer possible because a third party – in this case, the crypto exchange – has not received assets with a (potentially) criminal background "transferred free of charge or without legal reason".
From a German legal point of view, it makes no difference whether either person is fraudulently induced to trade in crypto assets and injured parties turn to crypto exchanges to exchange fiat for the equivalent of a certain cryptocurrency before the actual investment; or whether the perpetrator themself exchanges fiat or cryptos that are already subject to criminal charges.
Remaining Risks and Outlook for Practice
The decision of the Regional Court of Dresden has a strong signal effect. The statements on the remunerative nature of the currency exchange service can be generalised and are not limited to the individual case decided.
Nevertheless, risks remain: crypto exchanges will still be seen as a potential target by prosecutors. It is easy to calculate that public prosecutors will argue that the crypto exchanges have recognised, or at least should have recognised, that the donated cryptos or fiats originate from an illegal act and can be confiscated. Therefore, in view of the decision of the Regional Court of Dresden, the following applies for the future:
Crypto exchanges may be subject to asset freezing and confiscation by the authorities. But, these risks can be mitigated. AML and business partner compliance are important for securing the business model and countering asset freezing and the associated suspicion of involvement in criminal offences by third parties quickly and consistently. So, the decision of the Regional Court of Dresden is therefore of considerable importance for crypto exchanges dealing with German counterparties and customers.
