For years, the US government has had a parallel auction activity for bitcoins and other cryptocurrencies. Historically, Uncle Sam has done a poor job timing the market.
Were 500 bitcoins sold to Riot Blockchain in 2018 for around $ 5 million? It is now worth more than $ 23 million. Or the 30,000 bitcoins that were given to billionaire venture capitalist Tim Draper for $ 19 million in 2014? It would be more than $ 1.3 billion today.
The government got all of this bitcoin by seizing it, along with the usual assets one would expect from large-scale criminal operations. Everything is sold in the same way.
“It could be 10 boats, 12 cars, then one of the lots is X amount of bitcoins being auctioned,” said Jarod Koopman, director of the Internal Revenue Service’s cybercrime unit.
One of the upcoming foreclosures on the auction block is worth $ 56 million in cryptocurrency that authorities have seized in a Ponzi scheme case involving the overseas cryptocurrency lending program BitConnect. Unlike other auctions where the proceeds are redistributed to different government agencies, the money from this crypto sale will be used to reimburse the victims of the fraud.
The government’s cryptocurrency sale and foreclosure operation is growing so rapidly that it has just enlisted the help of the private sector to manage the storage and sale of its token treasure.
FBI agents finished loading materials into a truck outside the home of United Auto Workers President Gary Jones on Wednesday, Aug. 28, 2019.
Michael Wayland / CNBC
Enter and store bitcoins
For the most part, the United States used legacy crime-fighting tools to deal with the tracking and seizure of cryptographically constructed tokens, which were inherently designed to evade law enforcement.
“The government is typically more than a few steps behind criminals when it comes to innovation and technology,” said Jud Welle, a former federal cybercrime prosecutor.
“It’s not the kind of thing that would show up in your core training,” Welle said. But he predicts that in three to five years, “there will be textbooks edited and updated, this is how crypto tracing is approached, this is how crypto seizure is approached.”
There are currently three main stages in the flow of bitcoin and other cryptocurrencies through the criminal justice system in the United States.
The first phase is the search and seizure. The second is the liquidation of the sought crypto. And the third is the release of the revenue from those cryptocurrency sales.
In practice, the first step is a group effort, according to Koopman. He said his team often worked on joint investigations alongside other government agencies. It could be the Federal Bureau of Investigation, Homeland Security, the Secret Service, the Drug Enforcement Agency, or the Bureau of Alcohol, Tobacco, Firearms, and Explosives.
“Many cases, especially in the cyber realm, turn into … joint investigations because no one agency can do it all,” said Koopman, who has worked on the government’s 2017 Silk Road and L cases. The AlphaBay investigation, which resulted in the closure of another popular and massive dark web market.
Koopman said his IRS division typically deals with encryption tracking and open source intelligence, which includes investigations of tax evasion, false tax returns and money laundering. His team is made up of sworn police officers, who carry weapons and insignia, and execute search, arrest and seizure warrants.
Other agencies that have more money and resources focus on technical components.
“So we all get together when it comes time to carry out any kind of execution, be it an arrest, a seizure or a search warrant. And it can be national or global, “he said.
During the seizure itself, multiple agents are involved to ensure proper vigilance. This includes managers, who establish the hardware wallets necessary to secure seized crypto.
“We only keep the private keys at headquarters so they cannot be tampered with,” Koopman said.
In recent years, the government has brought in record amounts of crypto.
“In fiscal year 2019, we had approximately $ 700,000 in crypto foreclosures. In 2020, they reached $ 137 million. And so far in 2021, we’re at $ 1.2 billion, ”Koopman told CNBC in August. The fiscal year ended on September 30.
As cybercrime increases, and the transport of digital tokens with it, the government’s crypto vaults are expected to increase further.
The cryptocurrency auction block
Once the case is closed, the US Marshals Service is the primary agency responsible for auctioning the government’s cryptocurrency holdings. To date, it has seized and auctioned more than 185,000 bitcoins. This stash of coins is currently worth around $ 8.6 billion, although many have been sold in lots well below the current price.
This is a huge responsibility for a government entity, which partly explains why the Marshals service no longer takes on the task alone.
The U.S. General Services Administration, an agency that normally auctions surplus federal assets, such as tractors, added confiscated cryptocurrencies to the auction block earlier this year.
In July, after more than a year of searching, the Justice Department hired San Francisco-based Anchorage Digital as custodian of seized or confiscated cryptocurrencies in criminal cases. Anchor, the first federally authorized crypto bank, will help the government store and settle this digital property. The contract had already been awarded to BitGo.
“The fact that Marshals Service is bringing in professionals to help them is a good sign that it is here to stay,” said Sharon Cohen Levin, who worked on the first Silk Road search and spent 20 years as head of money and asset laundering. . forfeiture unit of the United States Attorney’s Office for the Southern District of New York.
It is unlikely to change the auction process for cryptocurrencies, in blocks, to fair market value, according to Koopman.
“You basically stand in line to auction it off. We never want to flood the market with a large quantity, which could have an effect on the price component, ”he said.
But aside from the sales spacing, Koopman said, trying to “sync” the market to sell at the higher crypto prices is not his goal. “We are not trying to play the market,” he said.
In November 2020, the government seized $ 1 billion in Bitcoin linked to Silk Road. Because the case is still ongoing, these bitcoins are inactive in a crypto wallet. If the government had sold its stake in bitcoin when the token’s price peaked at $ 67,000 last month, the coffers would have been much larger than if they had been liquidated at today’s prices.
Where does the money go
Once a case is closed and the crypto has been exchanged for fiat currency, the authorities share the loot. The proceeds of the sale are generally deposited in one of two accounts: the Treasury Confiscation Fund or the Asset Confiscation Fund of the Ministry of Justice.
“The underlying investigative agency determines to what fund the money goes,” Levin said.
Koopman said that the crypto found and seized by his team represents around 60-70% of the Treasury Forfeiture Fund, making him the largest individual contributor.
After being placed in one of these two funds, the settled crypto can be assigned to multiple line items. Congress, for example, can write off the money and turn it over to other projects.
“Agencies can submit applications to access some of that money to fund operations,” Koopman said. “We can apply and say, ‘We’re looking for additional licenses or additional hardware,’ and then that is reviewed by the executive office of the treasury. “
Some years, Koopman’s team receives varying amounts based on proposed initiatives. Other years they get nothing because Congress decides to cancel all the money in the account.
Tracking where all the money is going is not a straightforward process, according to Alex Lakatos, a partner at the Mayer Brown law firm in Washington, DC, which advises clients on seizure.
The Department of Justice hosts Forfeiture.gov, which offers insight into current foreclosure operations. This document, for example, describes a case in May in which 1,04430259 bitcoins were mined from an individually owned hardware wallet in Kansas. Another 10 were taken from a Texas resident in April. But it is not clear if the list is a complete compilation of all active cases.
“I don’t think there is a single place that owns all the cryptocurrencies that the US Marshals have, let alone the individual states that may have lost the cryptocurrencies. It’s really a hodgepodge, “Lakatos said. “I don’t even know if someone in the government wanted to do it, how they would do it. “
A spokesperson for the Justice Department told CNBC he was “pretty sure” that there was no central database on crypto seizures.
But what seems clear is that more cryptocurrency seizures are reaching the public, such as the FBI’s breach of a bitcoin wallet held by the Colonial Pipeline hackers earlier this year.
“In my experience, people who hold these positions at high levels of government, they can be there for a short period of time and want to get victories under their belt,” Welle said. “It’s the kind of thing that definitely grabs the attention of journalists, cybersecurity experts. “
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