Government officials around the world often admit their disdain for cryptocurrency because it is widely used to facilitate crime and finance terrorism. Although cash (government sponsored) is still by far the preferred financial instrument of criminalsIt is true that nefarious actors turn to digital assets as well. When corrupt systems deviate, law enforcement officers and other government officials can find themselves in possession of large sums of cryptocurrencies.
Reports of such cases seem to become more common as the adoption of cryptocurrencies increases. In August alone, the US Department of Justice announced the “largest ever seizure of cryptocurrency accounts by terrorist organizations,” and a Tokyo court ordered Japan’s first digital asset seizure in a precedent. How do officials seize cryptocurrencies and what are the consequences of their actions for the controversial relationship between government institutions and the world of decentralized finance?
Source of income for states
Regardless of the legal definition of cryptocurrency by various states, they continue to be exposed to economic activity that includes digital money without borders. In the most common scenario, the cryptocurrency is seized along with other assets of the exposed criminals.
Often times, government institutions do not have the expertise or specific standards for cryptocurrency so they have to deal with it on an ad hoc basis. For example, When the Latvian Tax Authority first seized Bitcoin (BTC) from a convict, officials were reported to have left it in the perpetrator’s wallet even after securing access to the funds.
Considering that successful cryptocurrency seizures can result in a steady stream of revenue, some jurisdictions are changing asset loss rules to accommodate digital assets. A somewhat controversial law is being drafted in Russia to provide law enforcement agencies with a mechanism for seizing cryptocurrencies. The new rules could come into force as early as 2021.
Other governments are finding creative ways to capitalize on digital money. A bill currently under scrutiny in the state of Illinois expands the list of assets that are considered abandoned property and can ultimately be reclaimed from the treasury.
Cars, boats and cryptocurrencies
In the United States, cryptocurrency involved in illegal activity is generally auctioned by law enforcement agencies in the same way as other seized assets. US cryptocurrency attorney Dean Steinbeck told Cointelegraph, “It is common for law enforcement agencies like the US Marshals Service (USMS) to sell cars, boats and cryptocurrencies to the highest bidder. I think February through 2020 the USMS auctioned more than 4,000 BTC. “ Steinbeck added that he was not aware of any specific rules for liquidating the seized cryptocurrency that were different from other types of assets.
Jorge Pesok, a digital asset practice advisor at the law firm Crowell Moring, told Cointelegraph that the United States Marshals Service You have authority over any property that has been confiscated under laws applied or administered by the Department of Justice and its investigative agencies. Pesok said there are experts at USMS who can handle almost any type of seized property:
“It is unlikely that cryptocurrency-specific settlement rules will be developed, or will need to be developed, as the Complex Asset Team within the USMS Asset Forfeiture Division is tasked with disposing of assets that require specialist knowledge and experience, including running businesses, Stocks and bonds. Now they’ve added cryptocurrencies to the list. “
Elsa Madrolle, international managing director of the blockchain security company CoolBitX, said so Liquidation of digital assets can be quite difficult due to a variety of factors, ranging from “law enforcement delays to custody requirements to asset fluctuations”.. Still, Madrolle found that an estimated more than $ 1 billion in digital assets went through the U.S. agency. Marshals.
In 2013, when the online black market for the Silk Road was eliminated, the US government even became one of the top 10 holders of Bitcoin. Madrolle added that crypto auctions are quite common outside of the US, with some governments relying on well-known consulting firms as intermediaries.::
“Many other countries have also used auctions to sell seized digital assets: Australia (which chose Ernst Young), South Korea, UK, Bulgaria (with Deloitte) etc. In other countries, digital asset seizure is fairly new In Taiwan, price volatility strangely disrupted an attempt at auction in 2018 and the courts instead decided to liquidate the confiscated bitcoin. “
Effects on the market and beyond
Opinions vary on the importance of moving seized cryptocurrency funds to the digital asset market. Dean Steinbeck said the amount of digital assets moved by law enforcement agencies “is typically small compared to the global market.” At the same time, he does not believe that the activities of government agencies could have a significant impact on Bitcoin or other liquid cryptocurrencies.
Rather, Madrolle noted that U.S. government agencies appear to be concerned about the potential impact of freeing up additional liquidity in the cryptocurrency market. In 2016, the U.S. Marshals Service even signed a Memorandum of Understanding with the Treasury Executive Office on the loss of assets and held auctions to periodically sell the seized Bitcoin to limit the impact on the market.
Madrolle believes that the feeling that drives these policies is the most important of all: By smoothly reintroducing seized cryptocurrencies into the system, rather than removing them entirely from the market, law enforcement agencies around the world are recognizing them as “real assets”.
Steinbeck largely agreed with this interpretation and said so Government-sponsored auctions “send a signal to the market that they consider cryptocurrency a legal asset”.which is a small but fine step:
“Just consider for a moment that law enforcement will not auction the marijuana or cocaine they have seized. Illegal contraband will be destroyed. At least at the most rudimentary level, law enforcement officials say they consider cryptocurrencies as a legal asset and that they are not legal, have moral or ethical issues that they could sell and distribute as part of their routine operations. “
Indeed, there is some evidence that on the rare occasion that government agencies are ideologically against digital assets, These considerations can outweigh the obvious monetary benefits. One example is Finnish Customs’ refusal to auction 15 million euros ($ 18 million) of bitcoin as it is believed to go directly to the money laundering ecosystem.