The US government did a pretty bad job of timing the market wrong, selling 500 Bitcoins to Riot Blockchain in 2018 for about $5 million. This Bitcoin is currently worth about $23 million. Another example is 30,000 Bitcoins that went to billionaire venture capitalist Tim Draper for $19 million in 2014, which would be more than $1.3 billion today.
The US government regularly holds auctions for seized Bitcoin, Ethereum, Litecoin and other cryptocurrencies.
However, it is worth mentioning that all of the above huge amounts of Bitcoin were seized by the US government from high-level criminal activities. Then, sell at a similar discount through an auction. One of the subsequent seizures was $56 million worth of cryptocurrency, as part of a Ponzi case involving the BitConnect offshore crypto lending program.
The US government’s crypto holdings and sales are growing so fast that they only need to ask for assistance from the private sector to manage the storage and sale of hoarded tokens.
Hold and Reserve Bitcoin
The US government has largely used the old crime-fighting tool to deal with tracking and seizing tokens, which are designed to evade law enforcement. “Governments are often several steps behind criminals when it comes to innovation and technology. This is not something that comes with basic training,” said former federal cybercrime prosecutor Jud Welle. However, he predicts in three to five years, “there will be revised and updated guidelines”.
There are currently three major junctures in the flow of Bitcoin and other cryptocurrencies in the criminal justice system in the US. The first stage is search and seizure. Second, is the liquidation of the stolen cryptocurrency. Third, is the implementation of the proceeds from the sale of that cryptocurrency.
According to Jarod Koopman, director of the Internal Revenue Service’s (IRS) cybercrime unit, the first phase is a team effort. His team often conducts joint investigations with other government agencies. It could be the Federal Bureau of Investigation (FBI), the Department of Homeland Security, the Secret Service, the Drug Enforcement Administration, or the Bureau of Alcohol, Tobacco, Firearms and Explosives. Many cases, especially in the cyber sector, have become joint investigations because no one agency can do it all.
Koopman said his department at the IRS typically deals with cryptocurrency tracking and open source intelligence, including investigating tax evasion, false tax returns, and money laundering. His team consists of sworn law enforcement officers, those carrying weapons, and those executing search, arrest, and seizure warrants. Other agencies have more money and resources focused on the technical component. “Then we all work together when the time comes to take any form of enforcement, whether it is an arrest, detention or search warrant, be it on a national or global scale. “.
In recent years, the US government has collected record amounts of cryptocurrencies. “In fiscal year 2019, we had around $700,000 worth of crypto seizures. In 2020, this number reaches 137 million USD. By this point in 2021, we’re $1.2 billion,” Koopman told CNBC in August 2021.
Once the case is closed, the US Marshals Service (USMS) is the main agency responsible for auctioning the government’s crypto holdings. That’s a huge responsibility for a government organization, and it’s part of the reason why the USMS can no longer shoulder the task alone. The Public Service, which typically auctions off surplus federal property, such as tractors, earlier this year added confiscated cryptocurrency to its auction catalog.
According to Koopman, the cryptocurrency auction process, by block, by fair market value, is likely to remain unchanged. “Basically, we have to schedule the right time for the auction. We never want to flood the market in large quantities, which can affect the price factor.”
In November 2020, the US government seized 1 billion USD worth of Bitcoins related to the online black market Silk Road. Since the case is still pending, those Bitcoins are not active in the crypto wallet.
Where does the money go?
Once a case is closed and the cryptocurrency has been exchanged for fiat money, the federal institutions split the spoils. The proceeds of the sale are usually deposited into one of two accounts: the Treasury Foreclosure Fund, or the U.S. Department of Justice’s Foreclosure Fund. The primary investigative agency will determine to which funds the funds were transferred.
Once transferred into either of these funds, the liquidated cryptocurrency can be put into a variety of categories. “Agencies can make requests to get access to that money as funding for operations. For example, we might make a request and say: We are looking for additional licenses or additional equipment. This will then be reviewed by the Office of Treasury Operations,” said Koopman.
Tracking where all that money goes is not a straightforward process, says Alex Lakatos, partner at law firm Mayer Brown in Washington DC. It is known that the US Department of Justice has organized a list of Forfeiture.gov, to shed light on some current seizure activities. For example, this document outlines a case from May 2021, where 1.04430259 Bitcoin was obtained from an individual’s hardware wallet in the state of Kansas. However, it is not clear whether that list is an aggregate of all active instances.
“I don’t believe there is any place that has all the crypto that the US Marshals Service (USMS) is holding. I don’t even know if anyone in the government wants to fully understand it, and how they’re going to do it,” Lakatos said.
A spokesperson for the US Department of Justice told CNBC that he is “quite certain” that there is no central database of cryptocurrency seizures. But it’s clear that there are many cases of crypto seizure being made public, like the case where the FBI broke into a Bitcoin wallet held by the hacker who carried out the Colonial Pipeline attack earlier this year.