What happens to seized cryptocurrency?

What does the seizure of cryptocurrency mean?

As a seasoned observer of financial markets and legal systems, I find myself intrigued by the complex interplay between cryptocurrencies and law enforcement agencies. The examples of Bitfinex, Silk Road, and Mt. Gox serve as stark reminders of the double-edged sword that is digital currency – a tool for innovation and financial freedom, but also a means for illicit activities.

The taking hold of digital currencies signifies their confiscation by authorities, often happening during the course of law enforcement investigations. This can happen in instances involving fraudulent activities, money laundering, or illegal operations.

If law enforcement suspects illegal transactions, they can seize digital assets stored in wallets and keep them in government-managed wallets until the legal proceedings end. If the accused is found guilty, these confiscated assets may be sold or auctioned off. However, if they are declared innocent, their cryptocurrency will be returned to its original wallet.

A seizure takes place during an arrest, under a search warrant, or with a seizure warrant that specifically identifies the property to be confiscated. Seizure warrants for cryptocurrencies are usually issued to exchanges or other institutional custodians, not individuals. 

As a researcher, I find that warrants issued in these cases typically outline the digital wallet address belonging to the exchange, along with the rationale for the asset seizure. The directive is then given to the exchange to disclose the private keys associated with this particular wallet to the prosecuting authorities. To mitigate potential legal ramifications and severe penalties, exchanges tend to cooperate and hand over these private keys willingly.

Nevertheless, the demand for cryptocurrency exchanges to surrender their private keys under compulsion of law represents a significant obstacle to the core principle of decentralization that underpins the development of digital currencies.

It’s important to note that aside from a warrant, law enforcement agencies can also claim cryptocurrencies such as Bitcoin (BTC) owned by someone else through a process known as forfeiture. Forfeiture is a term that means the permanent loss of an asset, typically due to a court order or judgment. When it comes to crypto seizures, they often occur prior to forfeiture and not all confiscated assets ultimately get forfeited.

Did you realize? Back in November 2023, the Department of Justice (DOJ) confiscated approximately $9 million worth of Tether (USDT). These funds were linked to cryptocurrency accounts suspected of being involved in pig butchering scams.

What is the process of seizing cryptocurrency?

The process of seizing crypto differs from the procedure authorities follow for confiscating physical assets like apartments, vehicles or jewelry. Tangible objects can be taken away using physical force, but when it comes to a crypto wallet, the corresponding private key is needed to unlock and transfer the funds.

In many cases, authorities partner with the platform that manages the digital wallet to gain access and restore lost funds. This method is effective for software wallets (or ‘hot’ wallets), as these exchanges typically store a copy of the key. Conversely, hardware wallets or ‘cold’ wallets, which are kept offline and owned privately, may require authorities to infiltrate the device if they need to retrieve the funds.

Following a seizure, officials safeguard the digital currency and might sell it off. Typically, a court order is necessary before selling, a process that could span over several years. The money derived from the sale is then distributed; either to victims of the crime or divided among various government departments.

In 2022, the United States Department of Justice established the Virtual Asset Exploitation Unit (VAXU) within the Federal Bureau of Investigation. The main goal of VAXU is to concentrate on blockchain analysis and the confiscation of virtual assets. This unit frequently collaborates with the DOJ’s National Cryptocurrency Enforcement Team in matters related to asset seizure.

At times, certain government entities employ a method known as administrative seizure. Through this process, the authorities can take possession of assets even if no criminal charges have been filed against the asset owners. Consequently, you could potentially lose your cryptocurrency without ever going through a court trial.

In a relevant scenario, the FBI introduced NexFundAI, a digital currency token, in May 2024, during Operation Token Mirrors – a secretive law enforcement operation. This operation aimed to apprehend individuals and entities engaged in illicit cryptocurrency practices, primarily pump-and-dump schemes. The purpose of the NexFundAI token was to resemble a legitimate digital currency, acting as bait to lure market manipulators. By doing so, the FBI could collect incriminating evidence against these individuals.

Here’s an interesting fact: According to a Chainalysis report, the proportion of funds from illicit wallets laundered through DeFi protocols increased significantly in 2021, jumping from 2% in the previous year to 17%.

When are crypto assets seized?

Law enforcement agencies confiscate cryptocurrencies whenever they are employed in illegal acts like tax avoidance, money washing, deceit, or narcotics trading.

If individuals employ cryptocurrency for illicit purposes like drug trafficking or hacking, it could be labeled by law enforcement as ‘tainted funds.’ This categorization makes the crypto vulnerable to confiscation by government entities. The aim of this seizure is to prevent criminal activity and recover pilfered assets.

Criminals sometimes exploit the “anonymity” offered by cryptocurrency transactions within blockchains to hide their financial activities. However, government agencies have methods of tracing such criminal proceeds through digital footprints or ‘data trails’ left on these blockchains. They can then seize these funds and even request that crypto exchanges temporarily lock the wallets associated with illicit activities.

As a crypto investor, I ponder over the practicalities involved in confiscating digital assets, weighing the possibilities of forfeiture or administrative complexities, and evaluating the worth of the cryptocurrencies before deciding if it’s wise to move forward with any seizures.

What happens after the seizure of crypto?

In the United States, if your assets are taken under civil law, it’s essential to hire an attorney specializing in asset forfeiture. They will help you submit a verified claim to the seizing agency for legal action in court within a specified timeframe (90 days). If the agency chooses not to file a complaint for the seizure of your cryptocurrency within this period, they must return it to you instead.

When the agency submits a request for seizure, the court sends notices to all concerned parties, asking them to present their arguments. Your lawyer can respond by filing an answer, counterclaim, and a motion to dismiss the agency’s claim. If you effectively prove your case, the court might drop the case against you, require the agency to compensate your attorney costs, and return any seized cryptocurrency assets back to you.

If a criminal case is brought against you by an agency, the process might become more intricate and you could face additional accusations. In such situations, defendants frequently negotiate plea deals to simplify the process. As part of these agreements, defendants sometimes willingly hand over their private keys to avoid the necessity of a search warrant.

In the United Kingdom, the Proceeds of Crime Act 2002 specifies how cryptocurrencies seized in criminal investigations should be managed. Similar to other confiscated properties, half (50%) is allocated to the Home Office, while the rest (50%) is split among law enforcement agencies, prosecutors, and courts. Additionally, there’s a possibility that some of these confiscated cryptocurrencies may be returned to victims who have been wronged by crypto-related crimes.

In Europe, when unlawful cryptocurrency transactions are identified, legal authorities request a court order to either freeze or seize related assets. To execute this order, they collaborate with crypto exchange platforms. In instances involving multiple countries, organizations like Europol might provide aid. The confiscated digital currency is kept in government-controlled wallets. Depending on the country’s specific laws, auctions or liquidations may follow after a guilty verdict has been reached.

From my perspective as a crypto investor, it’s essential to understand that Indian law enforcement agencies like the Enforcement Directorate (ED) and local cybercrime units operate independently or jointly when it comes to the seizure of cryptocurrencies. If any illegal activity is detected, the authorities may petition the court for an order directing the exchange to freeze or seize the assets involved.

Examples of seizure of cryptocurrency

Many instances exist where governments have taken control of digital currencies, such as the Bitfinex funds, the cryptocurrencies tied to the Silk Road marketplace, and the assets belonging to Mt. Gox.

Here are some well-known examples:

Seizure of Bitfinex funds

In the year 2022, I, as an analyst, uncovered that approximately $3.6 billion worth of Bitcoin, traced back to the 2016 Bitfinex exchange heist, had been recovered by US federal authorities. Originally, around 120,000 BTC were stolen, and years later, these digital assets were found to be associated with two individuals.

Officers took control of the resources during their ongoing probe. Despite the anonymity associated with Bitcoin transactions, this incident showcased advancements in blockchain investigation techniques, proving that it’s possible to trace and seize funds hidden for years.

Did you know? In July 2023, the US Homeland Security recovered $314 million from the 2016 Bitfinex hack and returned it to the victims.

Clampdown on Silk Road

2013 saw the U.S. government seizing approximately 144,000 Bitcoins from the illicit online marketplace Silk Road. The man behind its creation, Ross Ulbricht, was subsequently arrested for his role in facilitating illegal drug trades. This high-profile confiscation of digital funds formed part of a broader effort to curb unlawful cryptocurrency transactions.

After seizing Bitcoin worth billions of dollars from a previous case, the U.S. Marshals Service decided to sell it off at an auction. The Silk Road incident remains a significant milestone in the ongoing efforts to control and prosecute criminal activities related to digital currencies.

Confiscation of Mt. Gox’s assets

As a researcher delving into the world of cryptocurrency, I’d like to shed light on the unfortunate demise of Mt. Gox, once the leading Bitcoin exchange. In 2014, the platform succumbed to bankruptcy following the loss of approximately 850,000 Bitcoins, equating to a staggering $450 million at that moment in time. Post-bankruptcy, Japanese authorities seized control over the exchange’s remaining assets, including over 200,000 Bitcoin. These confiscated funds were placed into escrow as legal proceedings commenced to settle debts owed to creditors.

In March 2014, Mark Karpelès, CEO of Mt. Gox, revealed that they had found approximately 200,000 Bitcoins in an old digital wallet, which helped lessen the overall loss to about 650,000 Bitcoin. This news ignited optimism among creditors. Subsequently, the Tokyo District Court appointed a temporary administrator to handle the intricate legal proceedings. One of the key challenges was determining the value of the lost Bitcoins due to their significantly increased price since the hack. Karpelès was indicted for embezzlement but found guilty only of manipulating records. Repayments to creditors continued in 2024, and the deadline for these repayments was pushed back to October 2025.

How do law enforcement agencies use the seized funds?

In the United States, federal authorities are required to present a spending plan of confiscated assets to the Department of Justice. This blueprint details how the money will be utilized. The practice of civil forfeiture gained traction in the 1980s during the war on drugs and has consistently faced criticism since then.

Occasionally, confiscated property can be given back to its original owners in exchange for a plea bargain. However, just a meager 1% of confiscated assets typically make their way back to the owners. These funds are usually utilized for law enforcement purposes such as purchasing gear, providing training, and conducting investigations. For instance, in 2011, the St. Louis County Police Department spent $400,000 on helicopter equipment.

In certain U.S. states, such as Missouri, confiscated funds are typically directed towards schools. However, law enforcement agencies often retain the majority of these seized funds by utilizing the federal Equitable Sharing Program. Yet, the practice of seizing assets forcefully from individuals or businesses has long been a subject of criticism across different sectors.

As a researcher, I firmly advocate for transformative changes aimed at ensuring equitable and transparent execution of asset forfeiture procedures. These adjustments should prioritize safeguarding the interests of individuals whose assets might be subject to seizure, promoting fairness and transparency throughout the process.