Asset recovery to regulation: Legal experts from Rajah & Tann comment on crypto law in S’pore

Despite the crypto downturn in 2022, interest in cryptocurrencies remains high in Singapore.

An OCBC study reported that millennials and Gen Zs remain bullish on the crypto market, with around 40 per cent of them still planning to invest in crypto within the next 12 months.

However, it’s not just investors who are becoming interested in the crypto market. 2022 saw advancements in government regulations surrounding crypto, and legal recognition of cryptocurrencies and NFTs as property. 

As questions for what it means to hold or trade digital assets require a legal dimension, law firms have been setting up departments to deal with cryptocurrency lawsuits and Rajah & Tann — one of the largest law firms in Singapore — is no different. 

Earlier this week on January 18, they held a seminar on cryptocurrency, and several lawyers who have been involved in cryptocurrency cases spoke about the state of cryptocurrency law, as well as its future.

The session was led by Jansen Chow, co-head of fraud, asset recovery, and investigations at Rajah & Tann, alongside other speakers including Justin Lee, a partner from the Technology, Media, and Telecommunications department, Yam Wern-Jhien, a partner from the fraud, asset recovery, and investigations department, and Samuel Lim, a partner from the financial institutions department. 

Crypto assets are unlike anything the law has seen before

According to Yam, cryptocurrencies present a unique challenge when it comes to investigations and asset recovery. 

For one, digital assets are not tangible. In many cases, tracking down stolen cryptocurrencies can mean having to trace corporate structures to see who holds which private keys to the wallet, before identifying where they are or compelling them to return to a place where the court has jurisdiction.

Unless this is done, Yam says that it can be virtually impossible to recover the assets in question.

To make things even harder, since not all companies have been following rigorous Know-Your-Customer (KYC) procedures, there are times when an investigation yields very little information.

We have had cases where we approach an exchange for information about an account, and we realise the account was opened by e-mail. Some accounts have hundreds of sub-accounts as well, and we have to find out who opened the wallet.

– Jansen Chow, co-head of fraud, asset recovery, and investigations at Rajah & Tann

All of this assumes that the exchange even decides to cooperate — some exchanges may choose not to reply to requests for information, or take a long time to attend to such requests. 

Even after assets have been recovered, new questions arise as to what can or should be done with the assets. 

The volatile nature of cryptocurrency prices presents new questions for us to think about as liquidators as well. Do we sell recovered assets? Can we be faulted for selling these assets too early?

In the cases when crypto assets are held on trust, do we provide tokens to claimants? Or should we provide fiat currency, and how much? All of these are new questions that we have to find answers for in the cryptocurrency industry.

– Jansen Chow, co-head of fraud, asset recovery, and investigations at Rajah & Tann

It’s not all bad news for lawmen

However, the transparency of crypto also presents new opportunities for investigators.

Transactions on the blockchain, while anonymous, are not private. Instead, they are publicly viewable, which means that during an investigation, investigators are able to track stolen funds in real-time, and freeze accounts that stolen funds are held in.

With fiat currency, the process was far more laborious. In the traditional way, you had to go to each jurisdiction to get an order of disclosure, which you then present to the bank.

The process is slow and ensures that we are always two steps behind when it comes to recovering stolen funds. Blockchain technology means that we can now monitor and directly freeze accounts.

– Jansen Chow, co-head of fraud, asset recovery, and investigations at Rajah & Tann

Beyond that, the trends within cryptocurrency crime also seem to indicate that the final destination for most stolen funds seems to be exchanges. 

Fraudsters will often try to cover their tracks with ‘layering’. They send stolen cryptocurrency in small batches to different wallets, before sending them to an account registered with a cryptocurrency exchange. 

The reasons why exchanges are so often selected as the final destination is because fraudsters need to realise their gains. Often, they want to convert stolen crypto assets into other assets, and exchanges often have the liquidity to help them with such conversions.

– Yam Wern Jhien, partner, fraud, asset recovery and investigation, Rajah & Tann

As such, Chow and Yam say that they simply wait for stolen funds to reappear on exchanges.

Attitudes within the cryptocurrency industry are also changing

Ultimately, these problems must be dealt with before a widespread crypto spring can come about, says Lee.

Given the high-profile crashes of crypto companies last year, he believes that investment in the cryptocurrency industry “will see a flight to quality and away from poor quality token projects”.

This means no more NFTs that are purely based on hype, or un-fun games that end up just being all about the grind to earn tokens for profit. 

Instead, what we will see is an increased adoption of blockchain technology in established industries, where it will be used to enhance existing business models, or in the tokenisation of new asset classes.

Meanwhile, the industry can expect an increase in state regulations and adoption as legislation is already being considered in several major jurisdictions.

The European Union is set to vote on their landmark markets in crypto assets regulation in April, and the Australian Treasury is embarking on a token mapping project to identify, track, and record crypto activity within Australia.

“There will also be a need to address the information and transparency gap,” said Lee. “Mandatory disclosure requirements, due diligence service providers, and crowd-sourcing of information can help here.”

Lim notes that Singapore has not been idle in its regulations either. Crypto companies are mainly regulated under the Payment Services Act as Digital Payment Token Service Providers, and currently, there are regulations for anti-money laundering and KYC obligations 

At the same time, however, the Monetary Authority of Singapore (MAS) has been trying to avoid seeming like it is legitimising crypto, which explains why its approach has been cautious. 

MAS has consistently warned the public on the hazards of crypto, and has introduced guidelines for companies like prohibiting crypto companies from advertising their services. They also released two consultation papers on proposed regulatory measures for crypto companies last year.

– Samuel Lim, partner, Financial Institutions, Rajah & Tann

Lim expects that regulations on consumer access, business conduct, and market integrity may be put in place in the future. Crypto exchanges that have lax internal controls may soon have to draw up plans for proper risk management, and ensure that their private keys are properly kept as well. 

Ultimately, it seems that the days of ‘yolo-polo’ style crypto companies are over. Instead, regulation and the rule of law are now in vogue.

Perhaps, it isn’t what crypto fanatics imagined when they spoke of how legal codes and regulators needed to catch up to crypto. But nevertheless, it is something that the industry sorely needs. 

If a widespread crypto spring is to emerge, confidence in crypto companies must be restored, and regulations will be vital in bringing on board companies and consumers who have yet to express confidence in the new technology. 

Featured Image Credit: Rajah & Tann