Lack of institutional control and oversight has always been treated as the most prominent advantage of cryptocurrencies over traditional currencies. It is believed that, unlike traditional bank accounts, crypto funds can not be blocked or frozen by any third parties, and the private key is a guarantee that no one except for the true owner could access their cryptocurrencies. The reality happened to be not so idealistic, and the number of Bitcoins confiscated by authorities so far (over 450,000, around 2.5% of the total supply) is a proof that government authorities can get to your money, even if it’s crypto money.
This article will guide you through the main steps that confiscated crypto goes through: confiscation, storage, and auctioning. We will also provide details on some major cases of crypto seizure, and introduce institutions that are in charge of confiscating, storing and selling seized crypto.
Though it contravenes the very nature of cryptocurrencies, which are often referred to as censorship-resistant and fully owned by its holder, they can be seized. Multiple reasons for this include accusation of fraud, money laundering, and other crimes, and also tax evasion and non-payment of debts. If you get worried about your crypto and fear that authorities have a way to freeze it in your wallets or even take it from you, don’t panic, that is not how it usually works.
In some known cases, criminal defendants agreed to cooperate with law enforcement authorities and shared their private keys with them. In others, criminals were caught with their fingers on the keyboard, just like Grant West. He was sentenced to 10 years and 8 months in prison for unauthorized modification of computer material, conspiracy to defraud, and possession of criminal property. The judge, Joanna Korner QC, said: “I therefore order a confiscation of that amount, £915,305.77, to be paid as a way of compensation to the losers.” Though the Metropolitan police who arrested West were already in control of his crypto assets, he had to legally agree with the order. Which he finally did, because the judge said he would face four more years in jail if he refused to comply.
Illegally acquired crypto, if stored on exchanges’ accounts, may be blocked upon the request of authorities, especially on exchanges that tend to comply with regulations. For example, the support section on Coinbase, a licensed U.S. exchange, reads that, if required by law, customer funds might be blocked or frozen on the platform.
Coinbase reveals the cases when customer funds may be blocked or frozen.
A large number of institutions have the right to confiscate cryptocurrencies. For example, in the USA these are the Secret Service, the Internal Revenue Service, the Bureau of Alcohol, Tobacco, and Firearms, the Post Office, the FBI, and the police among others. As for storing and selling confiscated cryptocurrencies, the U.S. Marshals Service, which is part of the Department of Justice, is responsible for that.
The U.S. Marshals Service was the first law enforcement authority in the U.S. The first 13 Marshals were appointed by President Washington himself in 1789.
President Washington signs the Judiciary Act and appoints the first 13 U.S. Marshals.
Marshals have provided security and enforcement services, carried out fugitive operations, witness protection programs, prisoner transportation and the management of criminal assets. Those assets, including cars, yachts, jewelry, and other confiscated items, are available at public auctions on the Marshals’ official website. In the most recent 6 years, cryptocurrencies have joined the list. In 2018 alone, the U.S. Marshals Service held 8 auctions to sell confiscated Bitcoins.
So far, only Finland has released clear guidelines on how to store confiscated crypto. According to Finland’s government, law enforcement authorities should keep seized cryptocurrencies in cold wallets, off the Internet. Storing them in hot wallets or virtual exchange wallets is prohibited.
As for the U.S., it’s still not clear how the Marshals store confiscated crypto, but what is known is that they put it up for auction. It’s possible that custody and disposal of confiscated crypto has become a heavy burden for the Marshals recently. In March 2019 the U.S. Marshals Service was looking for a contractor to manage forfeited cryptocurrency. The request for information for legal procedures of the management and disposal of forfeited crypto assets was published on the Federal Business Opportunities website. According to the published drafts, the contractor will be responsible for custody, audit, accounting, exchanging crypto assets for fiat money or another cryptocurrency, and transferring them to their original owners. So far, there has been no news on the issue, and the USMS never published the request for proposal for this case.
Though little is known about the details, the following countries have confirmed that they held public auctions to sell confiscated cryptocurrencies:
Silk Road was an infamous darknet market that was launched in 2011 and operated till 2013 when it was shut down by the FBI. Silk Road served as an intermediary between vendors and buyers and collected a service fee. It had around 10,000 products for sale, especially drugs. The payments were conducted in Bitcoins. It was estimated that the site has processed over 1.2M transactions during its lifetime, totaling more than 9.5M Bitcoins in revenue and over 600k Bitcoins in commissions.
Silk Road payment system involving BTC.
In October 2013, Ross Ulbricht, the Silk Road founder, better known by the pseudonym Dread Pirate Roberts, was arrested by the FBI. He was convicted of eight charges including money laundering, computer hacking, and conspiracy to traffic narcotics, and was sentenced to life in prison. The FBI seized over 175k Bitcoins from him.
This confiscation had made the US government the largest Bitcoin holder for a while, as the Silk Road Bitcoins represented around 1.5% of total Bitcoins in circulation at that time. The US Marshals Service sold those confiscated Bitcoins in multiple auctions in 2014, 2015, and 2017. The reason for selling the Bitcoins in batches was the concern that selling such a large number of coins at a time might make the price plummet. Around 30,000 BTC were sold to Tim Draper, a famous investor and venture capitalist, for $632 apiece.
Bulgarian Bitcoin Seizure
This Bitcoin confiscation might be the biggest in history, if it really even existed, which is still up for debate. In May 2017, the Southeast European Law Enforcement Center (SELEC) reported that 213,519 Bitcoins were seized from 23 Bulgarian citizens who allegedly put a virus into Bulgarian Customs computers that allowed them to skip paying fees while sending goods to the country. Bitcoin was later used as an investment option by the fraudsters.
In November 2017, the Bulgarian government refused to provide any further details on the seized Bitcoins due to an ongoing investigation, and in December, surprisingly, the head of the special prosecutor’s office of Bulgaria, Ivan Geshev, claimed that no Bitcoins had ever been confiscated. Interestingly, this statement was revealed at a time when the Bitcoin price was teasing its all-time high. At the moment of confiscation, the reportedly seized Bitcoins were worth $500M, while in December 2017 they amounted to $4B. Bulgaria, as one of the poorest countries in the EU, had only $1.8B in gold holdings at that time. This, and also the fact that Bulgaria is one of the most corrupt countries in the EU, made rumors spread. The Bitcoins (which still have not been tracked) were supposed to have been sold by the Bulgarian Interior Ministry to fund a new air force squadron.
Infraud was another darknet marketplace where vendors could sell stolen credit cards, identities, and government documents. In 2017 the website was shut down, and later thirteen defendants of the Infraud case were arrested during multiple joint operations by U.S., European, Australian, and Asian law enforcement agencies. The most high-ranking suspect was a Russian national, Sergey Medvedev, allegedly the #2 person at Infraud after the founder, Svyatoslav Bondarenko. Medvedev was arrested in his house in Bangkok in February 2018 at the request of the U.S. authorities.
Detectives arrest Sergey Medvedev, an administrator of Infraud. Source: Bangkok Post
Thai authorities reportedly seized 100,000 BTC from Medvedev. Medvedev was expected to be extradited to the U.S., but there are still no reports that this actually happened. The future of the confiscated Bitcoins also remained unclear.
Law enforcement authorities have been seizing crypto since 2013, and are probably not going to stop anytime soon. As the statistics show, most of the forfeited cryptocurrencies were connected to dark web marketplaces, specifically the sale of narcotics, and money laundering cases. The Silk Road darknet market owner alone lost around 175,000 Bitcoins that had been confiscated by the FBI. Though, there are even some known cases of confiscating crypto from indebted people.
Thank you for reading,
The COIN360 Editorial Team