Seize This Day?
Headline: How does an asset seizure work when dealing with cryptocurrency?
Body: I work for a government agency, and we often have to do Collections work for the government. When we do, if we go to a citizen’s business place, and we see a brand new boat, we surreptitiously take a picture of that boat and that image becomes part of the file, suggesting that the business has at least one asset that they can easily sell to get cash to settle their government debts. Through a legal process, if that citizen does not pay their legally due amount, the government can force a sale of that boat, and take all of the proceeds from the sale to satisfy the debt. Anything left over is given back to the taxpayer. This is long and drawn out, but it is a well-known process. So, this made me wonder; If the person’s most major asset is cryptocurrency, can the government seize it? What can we learn about this process?
Generally what happens when the government seizes, let’s say, a company?
One of two things happens here. First, if easier, the government could manage the company with the interest to gain more revenue to pay off the debt. The much more likely thing is that the government will hire a private company, who already knows the space, to manage the company. Eventually, the government will sell the entity to a private party and proceeds go to either public works or restitution. So, contrary to what I imagined before, seizing cryptocurrency might be a simple thing.
The traditional concept of confiscation whereby the seizure of assets (proceeds of crime) follows a conviction for a particular crime has recently been substituted by a new concept of confiscation that provides a vastly loosened link between the proceeds of crime and the criminal act itself. The relatively novel concept of extended confiscation gives law enforcement authorities “the ability to confiscate assets that go beyond the direct proceeds of a crime so that there is no need to establish a connection between suspected criminal assets and a specific criminal conduct.”
But recently, cryptocurrency has become an issue?
Yes. In 2013, there was an internet site called Silk Road where many illicit items were sold for payment in cryptocurrency. The government seized 175,000 Bitcoin, and held a sort of auction to get cash from this seizure. Previously, all of this cryptocurrency was held in cold storage (not attached to the Internet.) And now, it seems that some jurisdictions are trying to figure out the seizure of NFTs. Through investigating these crimes and prosecuting the perpetrators, federal law enforcement has acquired a sizable cache of cryptocurrency. In June, the DOJ seized about $2.3 million worth of bitcoin the FBI had obtained after tracking the movement of a ransom payment associated with the Colonial Pipeline cyberattack earlier this summer. This was after the agency seized about $1 billion in cryptocurrency that once belonged to Ross Ulbricht, creator of the online black market Silk Road, which federal officials shut down in 2013. Ulbricht was arrested that year and convicted in 2015 of distributing narcotics and money laundering. The U.S. government has to become more involved because if they don’t, we risk a new reality that crime really DOES in fact, pay.
According to numbers generated by the federal government, only 1% of illicit money flows are detected and this is based upon decade old data. Likely, the amount of transactions detected is much lower. It is likely much lower because, according to cryptocurrency experts, local law enforcement units don’t even recognize a cold wallet (hardware) when they see one. Education of local officials is certainly called for, but, additionally, the federal government needs to develop a platform from which they can sell and trade the seized cryptocurrency to pre-vetted buyers. This might be done in the future, but right now, Anchorage Digital is under contract with the Department of Justice to act as custodian for digital assets seized, and the one responsible to dispose of these assets. In point of fact, they are the first federally chartered bank for crypto.
The Verdict
Seizures are usually bad. Whether they happen in a hospital, or if they result from a crime (something like fraud) it is… bad. But, good people can do something about it. They can refuse to purchase these (increasingly) stupid meme coins. When you get right down to it, there are many more good actors than bad, and it seems axiomatic that if there aren’t a lot of good people transacting in a currency, there is very little transactional camouflage for bad actors to hide in. So, how can you tell if some coinage is thought out or not? Ask some basic questions. Do they have a whitepaper explaining their project? Do they identify their management team? If these and other questions are not answered “yes” then, if your transact in this currency, you might be making these camouflaging transactions, even inadvertently. So, measure twice, and cut a check once.
REFERENCES
The World of Seized Digital Assets w/ Joanna Summers – Ep. 96 (chainalysis.com)
Cryptocurrency Field Guide for Law Enforcement (chainalysis.com)
Bitcoin-based scams mean the federal government now needs a crypto bank – Vox
Who Snatched My Bitcoin Bag? Asset Seizure And Cryptocurrency – Crypto Briefing
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.