Cryptocurrency as Subject of Legalization of Proceeds of Crime: Current Status and Prospects

Cryptocurrency-related financial transactions have become increasingly relevant in Ukraine in recent years. While this is a relatively new phenomenon for our country, cryptocurrencies no longer raises any questions in most countries, though it should be noted that in the vast majority of countries, the position of States on the legal status of cryptocurrency is not monosemantic.

There is no law in Ukraine which contains provisions that establish the legal status of a cryptocurrency today.

In 2017, a joint statement by financial regulators on the status of cryptocurrencies in Ukraine was posted on the official website of the National Bank of Ukraine, which stated the following: “… The National Bank of Ukraine, National Securities and Stock Market Commission and the National Commission for Market Regulation of financial services are convinced that the complex legal nature of a cryptocurrency does not allow it to be recognized either by cash, currency or payment instrument of another country, currency or electronic money or securities or money surrogate.

Therefore, due to the lack of a consolidated approach to the classification and regulation of cryptocurrencies today, cryptocurrencies have no determined legal status in Ukraine”.

However, analysis of law-enforcement practice in recent years has shown that, despite the lack of legal regulation of cryptocurrencies, cryptocurrency transactions are those for which the actions of individuals may be qualified under the relevant article of the Criminal Code of Ukraine (hereinafter — the Criminal Code), that is, they are a crime and, accordingly, there are grounds for prosecution of persons, as well as all other legal consequences as a result of committing a crime.

Considering that during criminal proceedings, the persons against whom they are subjected suffer from a substantial restriction of their constitutional rights and freedoms this problem should, in our opinion, be clarified.

Thus, Article 209 of the Criminal Code of Ukraine provides for the composition of the crime, which is part of the criminal legislation and most foreign countries. In particular, it is about the legalization (laundering) of proceeds from crime. A prerequisite for qualifying the actions of persons under the said article is to commit them to other socially dangerous acts provided for by the Criminal Code of Ukraine, which preceded such legalization.

The Review of Law-Enforcement Practices provides an opportunity to identify the most common types of crimes that typically precede legalization, such as drug trafficking offences, trafficking offences, fraud and more. The increased social risk of such crimes necessitates a detailed consideration of issues related to the legalization (laundering) of proceeds from their commission, as well as the risks that will arise in the event of a lack of legal regulation of the issues outlined.

The object of this crime is money or property obtained through crime. Such funds can be obtained both in the currency of Ukraine and in foreign currency. According to Article 99 of the Constitution of Ukraine and Article 192 of the Civil Code of Ukraine, the currency of Ukraine is the legal payment instrument, obligatory for acceptance at nominal value throughout the territory of Ukraine. Foreign currency may be used in Ukraine in cases and in accordance with the procedure established by law.

As to the above position of the National Bank of Ukraine and the provisions of the Constitution of Ukraine, when a person attempts to legalize obtained proceeds, for example, from the sale of drugs, then legalization can be incriminated only when such funds have been obtained by it in national or foreign currency, or are subject to the property characteristics specified by the relevant legislation. However, when a person commits a crime in the form of a certain type of cryptocurrency, his/her actions cannot be qualified under Article 209 of the Criminal Code of Ukraine, as in this case there is no object of the crime.

By the way, the case law of Ukraine 2018-2020, as already mentioned, contains examples, albeit solitary ones, of criminal prosecution for the legalization of proceeds in the form of cryptocurrency obtained through crime. This, in fact, comes into direct contradiction with the provisions of the current legislation of Ukraine.

In this case, it is advisable to speak about the violation of the principle of the rule of law in terms of the clarity and predictability of the law, as well as the failure to fulfill one of the tasks of criminal proceedings, which is to apply due law procedure to each party.

Such criminal proceedings end with the conclusion of a plea agreement between the prosecutor and the accused. This situation is, in our opinion, not accidental. Despite the fact that the conclusion of the plea agreement is a mandatory condition of the voluntariness of such an agreement, the person’s understanding of its consequences and lack of coercion by the prosecutor to court its conclusion, a person, understanding the limitations that it will be subjected to, in particular, the application of preventive measures against it during the period of pre-trial investigation and trial, as well as the time of trial, which often do not meet the requirements of their reasonableness, chooses for himself/herself the method of concluding an agreement rather than the opportunity to use their own right to a fair trial. It should be noted that in the second case, such a person must be acquitted by the court regarding the charge under Article 209 of the Criminal Code of Ukraine.

The situation is illustrated by 11 sentences (as on February 2020) issued on the basis of a plea agreement between the prosecutor and the defendant in a criminal case for committing a criminal organization of drug trafficking, mainly in the territory of the Russian Federation (hereinafter — Russian Federation), partly in the territory of Ukraine and other CIS countries.

One example is the judgment of the Desnyanskiy District Court of Kyiv (Case No. 754/1786/18) of 26 February 2018. Thus, according to the body of pre-trial investigation unidentified persons, who were on the territory of the Russian Federation, at an undetermined time no later than January 2017, committed crimes related to the illegal sale of drugs in particularly large amounts, to an undetermined number of persons on the territory of the cities of the Russian Federation.

One of the unidentified persons was searching for Internet users and offered to exchange so-called electronic money of the QIWI Wallet trademark, namely QIWI rubles for the Bitcoin cryptocurrency for a fee of 15% of the amount of QIWI rubles. During the correspondence, the defendant learned from the latter that QIWI rubles, which he must convert to Bitcoins, obtained from drug trafficking on the territory of the Russian Federation, and the essence of his activity lies in the fact that he is engaged in the sale of drugs in the territory of the Russian Federation.

The accused agreed with the proposal on an ongoing basis to exchange QIWI rubles of drugs obtained on the territory of the Russian Federation for Bitcoins for a fee of 15% of the amount of QIWI rubles listed by him, as well as to provide technical support for setting up QIWI wallets and their attachments to special accounts in the Telegram messenger, for a monthly fee of a certain amount of Bitcoin equivalent to USD 300 per exchange date on so-called cryptocurrency exchanges.

Thus, from May to November 2017, the accused was in an undisclosed location on the territory of Kyiv and Kyiv Region, knowing that QIWI rubles were obtained as a result of the illegal sale of narcotic substances on the territory of the Russian Federation, being aware of the unlawful nature of his actions, acting intentionally, acting for the purpose of giving the appearance of the lawfulness of owning, using and disposing of QIWI rubles, has undertaken actions aimed at concealing and masking the illegal origin of QIWI rubles obtained as a result of committing a socially dangerous illegal act, possession, and the rights to such property, source of origin, location, movement, change its form (transformation), as well as the acquisition, possession and use of QIWI rubles derived from the commission of a socially dangerous illegal act. Having acquired approximately USD 7,500 in property in this way, and possessing a real opportunity to dispose of it, the defendant spent it on personal needs, then carried out the acquisition, possession and use of funds and other property obtained as a result of committing a publicly dangerous unlawful act that preceded the legalization (laundering) of income.

Therefore, the person was convicted under a plea agreement under Article 209 of the Criminal Code of Ukraine.

However, it is worth noting that the sentence under the agreement in criminal proceedings has the so-called truncated object of appeal. That is, the person is restricted in terms of the right of appeal, which is not covered by the content of the agreement, which is used by the bodies of pre-trial investigation, inciting the person to conclude such an agreement.

By way of conclusion, it should be noted that not all persons who agree to carry out transactions related to a cryptocurrency are aware of the source of its origin, as was the case in the above example. Current trends in Ukraine in criminal prosecution for the legalization (laundering) of proceeds in the form of a cryptocurrency should be considered even if it not in line with current national legislation. Nevertheless, it is important to keep in mind that cryptocurrency transactions are the subject of close scrutiny by law-enforcement agencies and are, therefore, dangerous in the absence of proper legal regulation in Ukraine. Yes, you may find yourself in a situation where a person will be held liable for actions that, although not criminally punishable under current Ukrainian legislation, but given the state of law-enforcement practice, may well be the basis for a conviction against such a person.