The U.S. Marshals Service (USMS) held three auctions for the sale of confiscated cryptocurrencies in 2017, and eight in 2018. Obviously, more such deals are planned. In this connection, in March of this year, the USMS announced that it was looking for a contractor to manage and liquidate seized cryptocurrency. We figured out where the confiscated digital assets are stored and what the proceeds from their sale are spent on.
Is It Legal to Seize Cryptocurrencies?
As far as we know, no one has yet confiscated cryptocurrencies solely because those are not fiat funds. The authorities seize cryptocurrencies from criminals who use them to launder funds or get them for their crimes. Cryptocurrencies can also be withdrawn in payment of debt or taxes.
For example, in the U.S., cryptocurrencies are seized by the Secret Service, the Internal Revenue Service, the Bureau of Alcohol, Tobacco, and Firearms, the Post Office, the FBI, and the police, among other agencies. There is no exact data on the amount of cryptocurrencies confiscated; however, according to open sources, the amount of the proceeds from sales is approaching a billion dollars.
The first significant confiscation of cryptocurrencies was 144,000 BTC seized by the FBI from the founder of Silk Road Ross Ulbricht in 2013. It made the U.S. government one of the largest Bitcoin holders in the world at the time. A smaller part of the Bitcoins was sold at four auctions in 2014 and 2015. Nearly 30,000 BTC was auctioned in 2014 to the well-known venture capitalist and crypto enthusiast Tim Draper for $18.74 million ($120 million now), at $632 apiece. Draper has not yet sold the Bitcoins, noting that he does not want to trade in the future for the past. The remaining Bitcoins were sold in September 2017 for $48 million. The marshals sold the Bitcoins in batches to avoid falling prices.
The largest confiscation of cryptocurrencies occurred in May of the same year. The Bulgarian police together with the Southeast European Law Enforcement Center (SELEC) detained a group of fraudsters with 200,000 Bitcoins worth $384 million at the time ($4.9 billion at peak prices and $0.8 billion today). But this story is not clear since, in May 2017, SELEC officially announced the seizure of Bitcoins (the official press release to which the media referred is no longer available). And in December, the head of the special prosecutor’s office of Bulgaria, Ivan Geshev, said that there was no confiscation and the details were not clarified. It is possible that SELEC simply did not gain access to the private keys and limited itself to the forfeiture of the servers with the coins.
In May 2018, the authorities in Bavaria seized cryptocurrencies from the platform LuL.to, which was accused of piracy. The police confiscated 1,312 BTC, 1,399 BCH, 1,312 BTG, and 220 ETH, selling coins at an auction for $14 million.
According to The Block, since 2013, the total amount of Bitcoins confiscated in the United States amounted to about 198,000 BTC, which is 2.6% of all coins in circulation. The amount is received from at least 100 different federal criminal, civil, and administrative cases. The U.S. government currently owns at least 4,100 BTC, but probably no more than 10,000 BTC. The authorities sold 98% of the seized Bitcoins for $151 million, that is, an average of $780 each.
In total, there are more than 453,000 confiscated coins in the world. 85.6% of this amount falls on the two largest cases, the Silk Road and SELEC.
How Are Confiscated Cryptocurrencies Stored?
Presumably, seized crypto is stored on separate servers and cold wallets; however, there is little information on this issue today. For example, the government of Finland ordered to store confiscated cryptocurrencies not on the exchanges, but on cold wallets (it is not known how the coins were kept before), and treat them as assets.
At the same time, in the U.S., the Marshals Service is now looking for a contractor who would be in charge of storing and disposing of crypto assets confiscated as part of USMS investigations. The contractor will have to deal with accounting, customer management, auditing, creating wallets, and fulfilling other tasks related to the liquidation of confiscated digital assets. They should be able to work without time limits and volumes with any coins and exchange them for fiat funds and have procedures for exchanging for fiat. If the marshals find a suitable firm, the auctions are likely to be held more regularly.
It is unclear how the confiscated cryptos are stored in other countries, but it is known that they are also put up for auction.
How Are Cryptocurrency Auctions Held?
Confiscated cryptocurrencies are sold at auctions. The first to do so was the U.S. Federal Marshals Service (USMS) and the U.S. Department of Justice. Other countries took over the American experience and auctions were held in Germany, Great Britain, South Korea, Israel, Italy, Australia, Bulgaria, Finland, and Spain.
The U.S. Marshals Service is the oldest law enforcement agency in the country responsible for recycling items seized by federal law enforcement agencies. Yachts, cars, watches, jewelry, and other confiscated items—everything is available at public auction departments. Over the past few years, the agency held about ten auctions for Bitcoins. Such auctions are a good opportunity for large buyers to get Bitcoins with a great discount.
In the United States, bidders must register with the USMS by email, make a deposit of $200,000, and the registration must be approved by the Marshal’s office. Lots are divided into several parts; auction participants can bid on one or more of these lots but cannot view other bids or change their own. Foreigners can also bid, but all payments must be made from a U.S. bank account.
Wilsons Auctions, the largest auction company in the U.K. and Ireland, offers “government and law enforcement agencies around the world a safe solution to the ever growing problem of captured cryptocurrency” in the U.K., Ireland, Belgium, Malta, the Balkans, Nigeria, and Malaysia. In March 2019, their auction for the sale of cryptocurrencies confiscated by the Belgian authorities attracted bidders from 110 countries around the world who bought out coins for $420,000. By the way, the selloff of confiscated crypto assets required Belgium to first implement the laws governing them, as is the case with the traditional financial industry. The Belgian government contract allowed Wilsons Auctions to expand their cryptocurrency offer and “eliminate the risks that can be associated with trading on unregulated virtual currency exchanges.”
What Are the Proceeds from the Sale of Seized Crypto Spent On?
Proceeds from the sale of cryptocurrencies at auctions are usually returned to various government agencies that help fight crime or are transferred to crime victims.
But in this matter, the actions of the authorities are often opaque. For example, the U.S. government reports in detail about the confiscation of coins on the website of the Ministry of Justice. But a lot of time often passes between the date of withdrawal and its appearance in the report, and the reports themselves are not archived on the Internet. Every day, when a new one appears, the old one is removed. Therefore, it is possible to track how much property was arrested and how much was sold only through the press and by following the auctions.
By tracking the registry of court records and crypto confiscation notices, Fortune found several instances where coin confiscation was documented and the sale was not, as well as a valuation of confiscated funds at $0 instead of the real value. Some of these coins may still be evidence in cases, but since the Marshals Service does not comment on its internal processes, it is unclear whether there is a valid reason for the fact that the fate of the coins is still not known. Also, until now, no one has information about the 100,000 BTC seized by the U.S. authorities in February 2018 in Thailand from Russian Sergei Medvedev, who is suspected of organizing the Infraud Darknet platform. The coins have not been sold, and nothing is heard about them.
As It Is Here: If There Are Laws, There Will Be Auctions
Until now, there is no clear definition of cryptocurrency property, asset, or means of payment in Russian jurisdiction, and, accordingly, there is no regulatory mechanism. Therefore, while cryptocurrencies are confiscated (and there have already been such cases), they are kept by law enforcement agencies. Also, the persons responsible for the storage and sale of confiscated cryptocurrency are not identified.
Judging by the text of the draft law “On digital financial assets,” cryptocurrencies will be regarded as “other property.” “If in the final, third reading, coins and tokens are indeed deemed property, then the sale of cryptocurrencies is possible through auctions. After all, now there is such a practice with other confiscated property in the Russian Federation. In the meantime, confiscated cryptocurrencies will be kept by law enforcement agencies (cold wallets, computers with passwords for wallets, etc.),” said Andrei Peshkov, CEO of USDX Wallet.
Viktor Pershikov, a leading analyst at the MINE crypto corporation, adheres to a similar opinion: “In Russia, the Federal Property Management Agency, which has long been engaged in the sale of debtors’ property and seized goods, can undertake such auctions. But officials do not yet have the tools for this, nor, it seems, even the desire and their department has discredited itself by many scandals.”
Ekaterina Malyarova, Ph.D. in Law, lecturer of the BCL supplementary education program, also believes that it is advisable to delegate responsibility for the storage of confiscated cryptocurrency to the Federal Property Management Agency: “At the same time, taking into account the specific characteristics of cryptocurrencies, it is necessary to work out the procedure for their storage. Obviously, placing confiscated cryptocurrencies on cryptocurrency exchanges is unacceptable. For these purposes, it is advisable to create special cold storage without an active web connection. In turn, the most acceptable method of selling confiscated cryptocurrency is an auction in this case, and it is already used in a number of jurisdictions.”
Thus, if there are laws, then there will be auctions. Until that time, the fate of seized crypto is foggy.