The legal risks for businesses in accepting crypto payment

Many businesses, from fashion to cars, are accepting cryptos as an acceptable form of payment. This could expose them to a higher risk of liabilities if the payment turns out to involve misappropriated cryptos.

Once in a while, there is a crypto exchange or investment platform allegedly misappropriating clients’ cryptocurrencies to buy luxury items or properties. Usually, the swindler either has absconded or become insolvent, leaving nothing for the clients-victims.

Can the clients-victims go after the unknowing payee, who received the cryptos—as a legitimate business—for selling their services or goods to the payor-swindler? 

My paper ‘Liabilities for Unknowingly Being Paid with Misappropriated Cryptocurrencies’ models a hypothetical scenario based on recent incidents, and use it to examine the suitability and adequacy of English law. Essentially, it involves a legitimate business-payee who conducts business with a payor-swindler for, e.g., advertisement services promoting the investment platforms, professional/consultancy services, luxury goods, etc. The payor can be the crypto company or its personnel (e.g. CEO). The payee-business has no actual knowledge of the payor’s use of misappropriated funds. However, crypto payment is more prone to suspicions (than cash), for example because the payor’s crypto/tech company often involves some investment schemes claiming dubiously high return—which could actually be true but could also turn out to be a scam or Ponzi.

Besides, unlike fungible cash, there are technical ways to investigate the source of the cryptos, commonly known as ‘blockchain monitoring’ or ‘blockchain analysis’ which utilizes the public nature of blockchains (i.e. anyone can view). For example, one can look at the digital address (a unique string of numbers) of the cryptocurrency wallet. If the wallet address used for payment is the same as the wallet used for collecting clients’ money, it could suggest inappropriate mingling and/or misappropriation of funds.

However, usually there is no conclusive evidence as to whether there has been mingling or misappropriation of funds. The pseudoanonymous nature of crypto precludes a third party, like the payee-business, to verify who owns the paid sum comprising of multiple tokens. Only the flow is traceable, but that itself could already give rise to suspicions.

The question is: Can criminal and/or civil liabilities be preliminarily established based on the existence of suspicion?

Money laundering

A payee-business could, in theory, be charged with money laundering, which, under English law, does not require the proof of dishonesty. ‘A person commits an offence if he enters into or becomes concerned in an arrangement which he … suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person’. The notion of 'suspicion' under English law has a low threshold, which is established when the payee thinks ‘that there is a possibility’ that the property is criminally tainted. This is why crypto payment could be legally riskier than cash when the nature of crypto investment and blockchain analysis could more easily substantiate such a ‘possibility’.

The expansive nature of the crime has resulted in the courts urging the prosecution to rely on this offense only ‘in serious cases’, and a defendant should not be ‘over-charged’. This is a business risk on paper as the payee-business liability might depend more on prosecutorial discretion than the low-threshold principles.

Civil liabilities

The payee could also be privately sued by the victims for restitution and knowing receipt. Constructive knowledge can be established where ‘a reasonable person with their attributes … should either have appreciated that a proprietary claim probably existed or should have made inquiries or sought advice, which would have revealed the probable existence of such a claim’.

Furthermore, the English courts will ‘impute knowledge, on the basis of what a reasonable person would have learnt, to a person who is guilty of commercially unacceptable conduct in the particular context involved’.

The meaning of ‘commercially unacceptable conduct’ for the present context is moot, particularly when the courts will refer to the ‘reasonable person’ parameter. For example, a reputable sport car company uses a payment processing intermediary to verify the source of cryptos. It is unknown if using a payment intermediary would constitute the market benchmark. The courts might expect that a reasonable business in accepting this type of novel (riskier) form of payment ‘should have made’ inquiries via some blockchain analysis.

The way forward

These general causes of actions involve broad notions, such as ‘suspicion’ and ‘commercially unacceptable conduct’, whose meanings are uncertain for crypto payment.  English commercial law and courts are known to be market-friendly. It would depend on them to construe these broad notions suitably for this developing market practice.

The author’s article can be accessed here.

Yat-Cheung Kwan is Honorary Fellow at the Asian Institute of International Financial Law, University of Hong Kong.