What Happens When Cryptocurrency is Seized by the Government?

Suppose you’ve been keeping up with crypto news lately. In that case, you’ll probably see many articles about crypto being seized across the globe, whether it be giant crypto mining facilities in China or crypto being swept up in bankruptcy claims. Ever since the Silk Road was taken down in 2013, the IRS and CIA have found themselves coming across cryptocurrencies more and more and have had to create a method of storage, liquidation, and disbursement of crypto. Crypto seizures have a strict and efficient process thanks to cross-department thinking and almost a decade of planning. 

The IRS has seized $1.2 billion in crypto this past fiscal year, including bitcoin, Ethereum, Litecoin, and others. When this crypto is seized, the government holds auctions for the “stockpile” that is accumulated, similar to how the government will sell repossessed items such as cars or planes.

The difference between crypto and physical items in how they are held is that crypto must be held in specific ways, liquidated, and then transformed into fiat money. In contrast, a car auctioned off is a simple trade of goods, a car for fiat money, art for fiat money, etc. Crypto becomes fiat money when it is sold by the holder for fiat money based on the fluctuating value of whatever crypto coin it is. The government, however, is not interested in dealing in the crypto market and simply wants to liquidate the crypto to a buyer for fiat money right off the bat. 

Before being liquidated, the seized crypto is held in crypto wallets, which are essentially digital wallets that store crypto securely, much as a real-life wallet would hold your cash and cards securely in your pocket. These can be in the form of apps on your phone, online websites, and more for easy access to your cryptocurrencies. 

When crypto is seized, it is tracked and taken by the IRS Cybercrime unit, to which they are usually operated as high-profile criminal sting operations. Jarod Koopman, Director of the IRS’s cybercrime unit, said that these operations “could be 10 boats, 12 cars, and then one of the lots is X number of bitcoin being auctioned.” When the federal government took down the Silk Road, it exposed just how advanced and powerful cryptocurrency, specifically bitcoin, had become, as the dark web market was operating entirely in bitcoin. 

When the Silk Road went down, the government made many quick sales to get rid of the plethora of items the market was selling, some of which was bitcoin. One buyer bought a bitcoin wallet with approximately 30,000 bitcoin, now valued at over $1.1 billion. However, the U.S. Government is not interested in playing the crypto markets, only regulating it and selling seized wallets for fiat money. 

The Department of Justice has hired San Francisco-based bank Anchorage Digital to be its “custodian” for any crypto seized or forfeited to the government. It is the first federally chartered bank for crypto, and it will help the government store and liquidate its digital property. Once the crypto is sold, liquidated, and fiat money is received from a buyer, the funds are divided into two funds: The Treasury Forfeiture Fund and the Department of Justice Assets Forfeiture Fund. 

These two funds are used essentially as dipping funds for multiple organizations, whether the Treasury, Department of Justice, or Congress. Congress, for example, will rescind money from one of these funds and put it towards funding projects, the same way that government agencies can request access to money for funding operations. From a criminal’s wallet to protecting democracy, seized crypto lives quite a rollercoaster of a life.

References:

Seizing a suspect’s Bitcoin: A step-by-step guide | NGM Lawyers. (2018, March 5). Nyman Gibson Miralis Criminal Defence Lawyers. https://ngm.com.au/seizing-bitcoin-guide/

Sigalos, M. (2021, August 4). The IRS has seized $1.2 billion worth of cryptocurrency this fiscal year – here’s what happens to it. CNBC. https://www.cnbc.com/2021/08/04/irs-has-seized-1point2-billion-worth-of-cryptocurrency-this-year-.html

Townsend, K. (2021, July 12). Seizing Cryptocurrency: How is Law Enforcement Tracing and Recovering Bitcoin Payments? | SecurityWeek.com. Www.securityweek.com. https://www.securityweek.com/seizing-cryptocurrency-how-law-enforcement-tracing-and-recovering-bitcoin-payments

United States files a civil action to forfeit cryptocurrency valued at over one billion U.S. dollars | Internal Revenue Service. (2020, November 5). Www.irs.gov. https://www.irs.gov/compliance/criminal-investigation/united-states-files-a-civil-action-to-forfeit-cryptocurrency-valued-at-over-one-billion-us-dollars