IRS seized $ 1.2 billion price of cryptocurrency this yr
FBI agents clear materials from the home of United Auto Workers President Gary Jones into a truck on Wednesday, August 28, 2019.
Michael Wayland / CNBC
In June, the US government casually auctioned off some Litecoin, Bitcoin, and Bitcoin cash.
Lot 4TQSCI21402001 – one of 11 offers during the four-day auction – contained 150.22567153 Litecoin and 0.00022893 Bitcoin Cash, valued at over $ 21,000 at today’s prices. The crypto property was confiscated as part of tax infringement proceedings.
This type of sale is nothing new to Uncle Sam. For years, the government has been seizing, storing, and selling cryptocurrencies alongside the usual assets one would expect from high-profile criminal sting operations.
“It could be 10 boats, 12 cars, and then one of the lots is Bitcoin’s X number that is going to be auctioned,” said Jarod Koopman, director of the IRS ‘Cybercrime Division.
Koopman’s team of IRS agents doesn’t fit into the stereotypical form. They are sworn law enforcement officers who carry weapons and badges and carry out search, arrest and confiscation warrants. They’re also bringing back record amounts of crypto cash.
“In fiscal 2019, we had crypto seizures valued at around $ 700,000. In 2020 it was up to $ 137 million. And in 2021 we’re at $ 1.2 billion so far, ”Koopman told CNBC. The fiscal year ends on September 30th.
With increasing cybercrime – and the accompanying transport of digital tokens – it is expected that the government’s crypto coffers will continue to swell.
Interviews with current and former federal agents and prosecutors suggest the U.S. has no plans to pull out of its side business as a crypto broker. The seizure and sale of cryptocurrencies is growing so fast that the government has just enlisted the help of the private sector to manage the storage and sale of their hoard of crypto tokens.
Know what you don’t know
When Silk Road was shut down in 2013 – a now-defunct online black market for everything from heroin to firearms – federal agents really cut their teeth together searching for and seizing cryptocurrencies.
“It was completely unprecedented,” said Sharon Cohen Levin, who worked on the Silk Road’s first indictment and served as the New York City Southern District attorney’s chief of money laundering and confiscation for 20 years.
Silk Road, which operated on the dark web, traded exclusively in Bitcoin. It was good for the users because it gave them some level of anonymity. Despite its reputational success, it was good for Bitcoin at the time and helped raise its price by giving the token a use case beyond programming circles.
When the government started dismantling Silk Road, federal agents had to figure out what to do with all of the ill-gotten bitcoins.
“There was a wallet with around 30,000 bitcoins in it that we could identify and confiscate. At the time, it was probably the largest Bitcoin seizure ever and it sold for around $ 19 million, ”Levin said.
“Nobody had ever done anything like that. In fact, there weren’t really any companies to go to to sell the assets. The Marshals Service stepped up and ran their own auction of the assets where they took bids. ”She said.
This bitcoin batch went to billionaire venture capitalist Tim Draper. “It seemed like a large sum of money back then, but if the government had kept these bitcoins it would be worth a lot more today.”
The cache of coins sold in 2014 would be worth more than $ 1.1 billion as of Wednesday morning. But in hindsight it’s 20/20, and the government is unable to play in the crypto markets.
What this entire exercise achieved, however, was the establishment of a workflow that continues to this day, using old crime-fighting rails to deal with the tracking and seizure of cryptographically generated tokens that were inherently designed to evade law enforcement agencies.
“I just observed that the government is usually more than a few steps behind criminals when it comes to innovation and technology,” said Jud Welle, a former federal cybercrime attorney for 12.5 years.
“That’s not the kind of thing that would show up in your basic training. But I expect in three to five years … how you approach cryptocurrency seizure,” said Welle.
“’Follow the money’ is not new. Seizure disorders are not new. We’re just trying to find a way to apply these tools and techniques to a new pattern of facts, a new use case, ”he said.
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There are three main nodes 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 liquidation of looted crypto. And the third is to use the proceeds from these crypto sales.
In practice, according to Koopman, this first phase of the process is group work. He said his team often collaborates with other government agencies on joint investigations – think government weapons like the Federal Bureau of Investigation, Homeland Security, the Secret Service, the Drug Enforcement Agency, and the Bureau of Alcohol, Tobacco, Firearms and Explosives.
“Many cases, especially cyber, become … joint investigations because no agency can do everything,” said Koopman, who worked on the two Silk Road cases and the 2017 one. worked AlphaBay investigation that culminated in the closure of yet another popular and massive dark web marketplace.
Koopman stated that his division at the IRS is usually into crypto tracing and open source intelligence, which includes investigating tax evasion, false tax returns and money laundering. Other agencies that have more money and resources focus on the technical components.
“Then we all come together when the time comes to take any kind of enforcement action, be it an arrest, a seizure or a search warrant. And that could be national or global, ”he said.
Several agents are involved during the seizure itself to ensure proper supervision. This includes managers who set up the necessary hardware wallets to secure the confiscated cryptos. “We only keep private keys in the headquarters so that they cannot be manipulated,” said Koopman.
Once a case is closed, the US Marshals Service is the primary agency responsible for auctioning the government’s crypto holdings. To date, it has seized and auctioned more than 185,000 bitcoins. This supply of coins is currently valued at nearly $ 7 billion, although many have been sold in batches well below today’s price.
It is a great responsibility for a government agency to take on the task, which is why the Marshals Service is no longer responsible for the task alone.
The US General Services Administration, an agency that typically auctions surplus federal assets like tractors, added seized cryptocurrencies to its auction block earlier this year.
And just last week, after more than a year of searching, the Justice Department hired San Francisco-based Anchorage Digital as custodian for the cryptocurrency seized or confiscated in criminal cases. Anchorage, the first federally chartered crypto bank, will help the government store and liquidate this digital property. The order was previously awarded to BitGo.
“The fact that Marshals Service is bringing in professionals to help is a good sign that it will stay that way,” said Levin.
The process of auctioning crypto in blocks at fair market value is unlikely to change, according to Koopman. “Basically, you line up to auction it off. We never want to flood the market with a huge amount that could then affect the price component, ”he said.
But sales aside, Koopman said, trying to “time” the market to sell cryptocurrencies at peak prices isn’t a thing. “We’re not trying to play in the market,” he said.
In November, the government seized $ 1 billion worth of Bitcoin related to the Silk Road. Since the case is still pending, these Bitcoins sit idly in a crypto wallet. Had the government sold its Bitcoin stake when the price of the token peaked above $ 63,000 in April, the coffers would have been much larger than if they were liquidated at today’s price.
Where the money is going
Once a case is closed and the crypto has been exchanged for fiat currency, the Feds distribute the loot. The proceeds of the sale are usually paid into one of two funds: the Treasury Forfeiture Fund or the Assets Forfeiture Fund of the Department of Justice.
“The underlying investigative agency determines which fund the money goes into,” said Levin.
Koopman said the crypto tracked and seized by his team represents around 60 to 70% of the Treasury Forfeiture Fund, making it the largest single contributor.
Once paid into one of these two funds, the liquidated crypto can then be assigned to a variety of items. For example, Congress can withdraw the money and use that money to fund projects.
“Agencies can apply for access to some of that money to fund operations,” Koopman said. “We can make a request and say, ‘We’re looking for additional licenses or additional equipment,’ and then the Executive Office of Treasury will review it.”
In some years the Koopman team will receive different amounts depending on the initiatives proposed. In other years they get nothing because Congress decides to remove all the money from the account.
Keeping track of where all that money is going is not an easy process, according to Alex Lakatos, a partner at DC law firm Mayer Brown who advises clients on recovery.
The Justice Department hosts Forfeiture.gov, which offers some visuals on current seizure operations. For example, this document describes a case in May where 1.04430259 Bitcoin was withdrawn from a hardware wallet of a person in Kansas. Another 10 were taken from a Texas resident in April. However, it is unclear whether this is a comprehensive list of all active cases.
“I don’t think there is any place that has all of the crypto that the US marshals own, let alone the various states that may have forfeited crypto. It’s a hodgepodge, ”said Lakatos. “I don’t even know if anyone in the government wanted to care how they would do it.”
CNBC reached out to the U.S. marshals to ask if they had a central database outlining all active and past cases of crypto seizures. We also asked if there was a centralized forum to keep track of where crypto auction proceeds are going. We didn’t hear back right away.
What seems clear, however, is that more of these crypto seizure cases are being trumpeted to the public, as was the case with the FBI breaking into a Bitcoin wallet held by the Colonial Pipeline hackers earlier this spring.
“In my experience, people who are in these positions at high levels of government may only be there for a short time and want some wins under their belt,” said Welle.
“Something like this definitely gets the attention of journalists, cybersecurity experts, right, a lot of talk about it.”