Navigating Crypto Due Diligence in Conveyancing

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As the landscape of finance continues to evolve, the emergence of cryptocurrencies has brought about both excitement and apprehension among professionals in the legal sector, particularly those involved in conveyancing. In a recent webinar, HiveRisk delved into the intricacies of client due diligence (CDD) concerning cryptoassets with a focus on conveyancing firms in the UK. 

The webinar, which marked the third instalment of a series brought to conveyancing firms by X-Press Legal Services and HiveRisk, aimed to provide insights into managing the risks.

Founder of HiveRisk and solicitor, Kate Burt, began by addressing the increasing prevalence of cryptoassets in the financial landscape. Highlighting statistics from a 2023 FCA research note, Burt emphasised the rapid growth in both awareness and ownership of crypto assets among UK adults. With such widespread adoption, understanding the implications of cryptoassets that arise in conveyancing matters becomes imperative.

Legal regulators, including the Law Society of England and Wales, the Law Society of Scotland and the Council of Licensed Conveyancers, have begun to provide guidance on navigating crypto assets in the context of law firms’ AML obligations. Emphasising the importance of conducting thorough source of funds inquiries, these guidance notes underscore the need for conveyancers to delve into the legitimacy of crypto assets held by clients.

Gavin Ball, HiveRisk’s Technical Director, shared insights gleaned from his experience as a former Money Laundering Reporting Officer (MLRO) for a mid-tier law firm. He highlighted common scenarios in which cryptoassets may manifest in conveyancing matters, such as deposits from crypto exchanges and clients’ desire to pay in funds generated from the purchase of cryptoassets like Bitcoin. Ball stressed the importance of tracing the origin of cryptoassets back to their fiat currency source, highlighting the necessity of meticulous due diligence.

Tony Brown, an expert in financial crime compliance and crypto regulation and dedicated crypto consultant for HiveRisk, provided an in-depth exploration of cryptoassets and blockchain technology. Brown demystified the concept of cryptoassets, explaining their decentralised nature and the underlying principles of blockchain technology. He distinguished between various types of crypto tokens, including security tokens, stable coins, and utility tokens, elucidating their respective purposes within the crypto ecosystem.

Addressing common misconceptions surrounding cryptoassets, Brown challenged the notion that they are solely associated with illegal activity. While acknowledging their potential misuse on platforms like the dark web, he emphasised that the vast majority of crypto transactions are legitimate. 

Kate Burt highlighted the need for legal professionals to understand at least a basic level of the evolving financial landscape for consumers, likening an attitude of complete avoidance to the issues involved with cryptoassets with a refusal not to deal with or do business relating to the use of the internet in the late 1990s.

Practical considerations

Throughout the webinar, the speakers underscored the importance of proactive risk management and compliance measures in mitigating the risks associated with cryptoassets. From conducting thorough due diligence to updating internal policies and procedures, conveyancing firms were urged to stay abreast of regulatory developments and technological advancements in the realm of cryptocurrencies and engage CDD experts like HiveRisk to avoid missing AML red flags. 

Before dabbling in this area, consider whether you need external expertise to advise on your AML procedures from those who have the expertise to understand and interrogate cryptoassets.

  • Consider your firm’s appetite for risk in this area and deal with this in your practice wide risk assessment (PWRA)
  • Your policies controls and procedures (PCPs) should flow from your PWRA to set out how your firm will deal with this
  • Once you are comfortable with your approach, train your staff and AML officers on the risks relating to cryptoassets and your PCPs 
  • Consider lender requirements, there are a limited number of ‘crypto friendly’ mortgage providers
  • Speak to your PII broker to ensure that there are no coverage issues and show that you have fully considered and mitigated the risks before proceeding

In conclusion, the webinar provided conveyancing firms with valuable insights and practical strategies for navigating the complexities of crypto assets due diligence. As the adoption of cryptocurrencies continues to grow, it is imperative for legal professionals to embrace innovation while ensuring robust risk management practices to safeguard the integrity of conveyancing transactions.

Watch the full webinar here: