In the past, the U.S. government auctioned bitcoin and other cryptocurrencies as a side gig. In the past, Uncle Sam has been terrible at timing the market.
According to CNBC, it received 2018 approximately $5 million for 500 bitcoin it sold to Riot Blockchain? This is now worth more than $23 million. Again, in 2014, Tim Draper bought 30,000 bitcoins for $19 million from the billionaire venture capitalist. That is the equivalent of over $1.3 billion today.
Bitcoin and other high-profile assets have been seized by the government as part of a high-profile criminal sting operation. Those assets are then sold off very similarly.
“It could be 10 boats, 12 cars, and then one of the lots is X number of bitcoin being auctioned,” explained Jarod Koopman, the IRS’s cybercrime unit director.
On the auction block, authorities sold cryptocurrencies worth $56 million that they confiscated from the offshore crypto lending program BitConnect as part of a Ponzi scheme case. In contrast to other auctions used for redistribution of proceeds, the proceeds of this crypto sale will be used to repay those who were victimized.
In order to manage its hoard of crypto tokens, the government recently enlisted help from the private sector to manage the storage and sales of its crypto hoard.
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The American Government Seizing and Stocking Bitcoin
U.S. law enforcement has largely relied on existing techniques to track and seize cryptographically built tokens, which are designed to evade detection.
“The government is usually more than a few steps behind the criminals when it comes to innovation and technology,” according to former federal cybercrime prosecutor Jud Welle.
“This is not the kind of thing that would show up in your basic training,” Welle stated. However, he believes that will happen in three to five years.
“There will be manuals edited and updated with, this is how you approach crypto tracing, this is how you approach crypto seizure.”
In the U.S., there are currently three main points of entry into the criminal justice system for bitcoin and other cryptocurrencies.
There is the search and seizure stage. After that, the raided cryptocurrency will be liquidated. Finally, the proceeds of those crypto sales will be deployed.
Koopman explained that in practice, the first stage is a team effort. In fact, his team often works with other agencies on joint investigations. Federal Bureau of Investigation, Homeland Security, the Secret Service, the Drug Enforcement Agency, or the Bureau of Alcohol, Tobacco, Firearms, and Explosives are some possible examples.
“A lot of cases, especially in the cyber arena, become…joint investigations because no one agency can do it all,” Koopman explained.
Crypto Pass in Tax Shelters
In addition to investigating tax evasion, false tax returns, and money laundering, Kooperman’s division at the IRS handles crypto tracing and open source intelligence. Members of his team are sworn law enforcement officers carrying firearms and badges, as well as executing search and arrest warrants.
More wealthy or resourced agencies focus on technical components.
“Then we all come together when it’s time to execute any type of enforcement action, whether that’s an arrest, a seizure or a search warrant. And that could be nationally or globally,” he explained.
To ensure proper oversight, multiple agents are involved during the seizure process. They include managers who secure seized crypto using hardware wallets.
“We maintain private keys only in headquarters so that it can’t be tampered with,” Koopman continued.
A record amount of crypto has been brought back by the government in recent years.
“In the fiscal year 2019, we had about $700,000 worth of crypto seizures. In 2020, it was up to $137 million. And so far in 2021, we’re at $1.2 billion,” Koopman explained to CNBC in August.
Cryptocurrency coffers are expected to increase even more as cybercrime – as well as the haul of digital tokens – increases.
Crypto Auction Shop
After a case has been closed, the marshals’ service holds the government’s crypto assets for auction. Over 185,000 bitcoins have been seized and auctioned to date. Many of these coins were sold in batches well below prevailing prices, but their current value is around $8.6 billion.
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Early this year, the General Services Administration added confiscated cryptocurrencies to their auction block.
The General Services Administration typically sells surplus federal assets, like tractors, at auction.
Anchorage Digital, based in San Francisco, was hired this summer by the Department of Justice as its custodian for cryptocurrency seized in criminal cases following a more than yearlong search. Anchorage is the first federally chartered bank specializing in crypto, and it will provide the government with a platform for storing and liquidating its digital assets. Previously, BitGo was awarded the contract.
“The fact that the Marshals Service is getting professionals to help them is a good sign that this is here to stay,” said Sharon Cohen Levin, leading authority on anti-money laundering.
In Koopman’s opinion, the process of auctioning off crypto, in blocks, at fair market value, is likely to remain the same.
“You basically get in line to auction it off. We don’t ever want to flood the market with a tremendous amount, which then could have an effect on the pricing component,” he stated.
Aside from spreading out sales, Koopman said trying to “time” the market for cryptocurrency price peaks is not his goal.
“We don’t try to play the market,” he said.
Silk Road-related bitcoin worth $1 billion was seized by the government in November 2020. These bitcoins are still sitting idle in a cryptocurrency wallet while the case is still pending. When bitcoin’s price peaked above $67,000 last month, the government’s coffers would have been a whole lot larger than now if it had liquidated at the price today.
Where are the Funds Delivered to?
The feds divide the funds after a case is closed and the crypto has been converted to fiat.
Treasury Forfeiture Fund or Department of Justice Assets Forfeiture Fund are the two accounts in which the proceeds of the sale are typically deposited.
“The underlying investigative agency determines which fund the money goes to,” Levin noted.
Approximately 60% to 70% of the Treasury Forfeiture Fund comes from the crypto traced and seized by Koopman’s team, making it the single largest contributor.
Liquidated crypto can then be put to use for a variety of purposes after it is placed into one of these two funds. Congress can, for instance, rescind the funds and allocate them to other projects.
“Agencies can put in requests to gain access to some of that money for the funding of operations,” Koopman explained.
“We’re able to put in a request and say, ‘We’re looking for additional licenses or additional gear,’ and then that’s reviewed by the Executive Office of Treasury.”
The amount Koopman’s team receives in any given year varies depending on the initiatives. Sometimes, Congress rescinds all the money out of the account, so they get nothing.
The process of tracking the whereabouts of money isn’t straightforward, says Alex Lakatos, a partner at Washington, D.C. law firm Mayer Brown.
On Forfeiture.gov, the Justice Department provides some information about current seizure operations. A case from May, for example, details how 1.04430259 bitcoin was taken from a hardware wallet owned by a Kansas resident. In April, 10 bitcoin were taken from a Texas resident. Although it’s not certain if the list encompasses all active cases.
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“I don’t believe there’s anyone place that has all the crypto that the U.S. Marshals are holding, let alone the different states that may have forfeited crypto. It’s very much a hodgepodge,” Lakatos explained.
“I don’t even know if someone in the government wanted to get their arms around it, how they would go about doing it.”
Meanwhile, there is no central database of cryptocurrency seizures, a Department of Justice spokesperson told CNBC.
The public seems to be receiving more information on crypto seizure cases.
As an example, the FBI breached a bitcoin wallet earlier this year that belonged to Colonial Pipeline hackers.
“In my experience, folks that are in these positions in high levels of government, they may be there for a short period of time, and they want to get some wins under their belt,” Welle said.
“This is the kind of thing that definitely captures the attention of journalists, cybersecurity experts.”