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Is it legal to seize cryptocurrencies? Who retains the ownership of these coins? Is it the regulators? If you’re a crypto enthusiast, these are some of the questions you’ve probably asked yourself. While cryptocurrencies offer privacy and censorship resistance, this is only to a particular extent as government authorities can seize them if used to facilitate crime and finance terrorism. As crypto adoption continues to escalate, there has been a consequent rise in crypto seizes.
The first substantial confiscation of cryptocurrencies occurred in 2013 involving 144 000 BTC seized by the FBI from Silk Road, Ross Ulbricht. In 2020, the US authorities seized a further 69 369 Bitcoin and other coins connected to the Silk Road case. However, an even larger seizure of crypto occurred in the same year in May 2013. Bulgarian police, in cooperation with the Southeast European Law Enforcement Center (SELEC), arrested a group of scammers with 200 000 BTC worth $384 million at that time.
In 2013, the Australian authorities seized 3 electronic Bitcoin wallets containing 24,518.4777721 BTC, marking the first time the leading cryptocurrency was seized in Australia. In August 2020, the US Department of Justice announced the largest ever seizure of Al-Qaeda and ISIS-bound cryptocurrencies. The Justice Department seized over 300 cryptocurrency accounts, four websites, and four Facebook pages related to the ISIS and al-Qaeda terror finance campaigns.
Japan’s first seizure of crypto assets involved the seizure of $46 000 worth of Bitcoin (BTC) obtained through the Coincheck exchange hacking in 2018. However, following the increased government seizure of cryptocurrencies, what happens to seized digital assets
How are Cryptocurrencies Seized
Cryptocurrencies are seemingly decentralized, meaning that no central authority is involved in administering these assets. Being decentralized with no physical presence, there are obvious challenges in seizing digital assets.
Nonetheless, government authorities have developed frameworks for seizing cryptocurrencies. In June 2014, the United Nations Office on Drugs and Crime (UNODC) published a guide to locating and seizing cryptocurrencies.
The guide, termed “Basic Manual on the Detection and Investigation of the Laundering of Crime Proceeds Using Virtual Currencies,” indicated that crypto wallets constitute information relating to private keys, thus can be seized by transferring the balance in the wallet into the state control or by seizing the device, i.e., hardware wallets.
Crypto wallets essentially store users’ private keys- codes that give individual control over their digital assets. Therefore, getting hold of private keys is tantamount to seizing their crypto assets.
Determining the Value of Seized Crypto Assets
After seizing cryptocurrencies, government authorities would want to determine their market values. Through the Department of Justice Office of the Inspector General (OIG), the U.S. government established a means of determining the value of seized and forfeited digital assets.
The report dubbed “Audit of the Assets Forfeiture Fund and Seized Asset Deposit Fund Annual Financial Statements Fiscal Year 2019,” seized crypto-assets can be valued using cryptocurrency Web-based valuation tools such as CoinMarketCap.com. The report did not indicate other tools for valuing seized crypto assets.
How Do Government Authorities Store Seized Cryptocurrencies?
Depending on government laws, there are various ways in which seized cryptocurrency is stored. In the U.S., for instance, the Marshals Service contracts digital asset management companies to deal with the storage and disposal of confiscated crypto assets.
The contractor is tasked with managing customers, accounting, auditing, creating wallets, and handling other tasks relating to the digital assets’ confiscation. These contractors are required to manage large volumes of cryptocurrencies without restricting time or the type of coin.
In Finland, confiscated cryptocurrencies are stored on cold wallets and are treated as assets. Other countries are yet to develop clear frameworks for storing seized crypto assets.
What Happens to Seized Cryptocurrencies?
There is little information on what actually happens to seized cryptocurrencies. The U.S. has a clear framework for disposing of seized digital assets. The U.S. Department of Justice, in cooperation with the U.S. Federal Marshals Service (USMS), sells seized cryptocurrencies in auctions.
The U.S. Marshals Service is tasked with disposing or recycling seized items, including luxury cars, watches, jewelry, Yachts, and now cryptocurrencies via public auction departments. In recent years, the U.S. Marshals Service has held tens of auctions of Bitcoins where large buyers get bitcoins at a great discount. The BTC seized by the FBI from the founder of Silk Road Ross Ulbricht in 2013, was auctioned in 2014. Tim Draper bought 30 000 BTC for $18.74 million, i.e., $632 apiece. The remaining BTC confiscation was sold through an auction in 2017 for $48 million.
To take part in a seized crypto assets auction in the U.S., interested bidders are required to register with the USMS by mail and make a bid of $200 000. Seized crypto assets are divided into lots, with auction participants bidding on one or more lots. Auction participants cannot view other individuals’ bids or change their own.
How Do Governments Spend Proceeds from the Auction of Seized Cryptocurrencies?
For most governments, funds obtained from the sale of cryptocurrencies at auctions are channeled to various government agencies involved in the seizure of the digital assets. This is to enhance their capacity to fight crime. Most governments are usually transparent in spending the proceeds from the sale of confiscated cryptocurrencies. For example, the U.S. published every detail about digital assets’ seizure on the Ministry of Justice website.
Several governments don’t openly disclose the use of funds accumulated from the sale of seized cryptocurrencies. When Bulgarian police and the Southeast European Law Enforcement Center (SELEC) seized 200 000 bitcoins worth $384 million at that time, they reported the confiscation but later denied it. In December 2017, Bulgaria’s head of Special Prosecution, Ivan Geshev, denied the confiscation and didn’t give clear details.
While digital currencies are decentralized with no central authority, it’s possible to seize cryptocurrencies thought to facilitate terrorism, money laundering, or other forms of cybercrime. An effective way law enforcement authorities can seize cryptocurrencies is by obtaining private keys linked to an individual’s wallet or physically taking hold of the hardware wallet.
Currently, there are more than 453 000 confiscated digital assets in the world. Confiscated BTC in the U.S. has amounted to 198 000 BTC, representing 2.6% of all BTC in circulation. The Silk Road and SELEC confiscation represent the largest amount of seized cryptocurrency at 85.6%.
For most countries, including the U.S., confiscated digital assets are usually sold in public actions carried out by the mandated state authorities. Proceeds from the auction are typically channeled to state security bodies to enhance their capacities to fight crime.