'Staggering' Crypto Seizures Have Cops Struggling to Keep Up
The value grew to $1.25 million last year. “There were a lot of questions about it in 2018,” Costanzo says. “Now, in 2022, people have if not a full understanding, at least a rudimentary understanding.”
Global Seizures
Around the world, stashes of confiscated crypto have been auctioned alongside Ferraris, watches, diamonds, and, in one case in Germany, a harp. Wilsons Auctions, the largest independent auction house in the U.K. and Ireland, got involved in 2018 when the company realized that law enforcement didn’t have a solution for selling seized crypto at the time.
In February 2019 the company auctioned 315 Bitcoin for Belgian authorities. The sale, which took place online as well as in person, attracted bidders from more than 90 countries.
One middle-aged woman purchased half a Bitcoin along with some other items, says Aidan Larkin, who ran asset recovery for Wilsons at the time. When she insisted on taking the Bitcoin home with her in a bag, the auction team had to coach her on how to set up a digital wallet instead.
The U.K.’s National Police Chiefs’ Council, the representative body for all forces, undertook a procurement process that enabled police to use a third-party custodian to store and sell its crypto. So Surrey Police and other forces now use Komainu, which is backed by Nomura Holdings, Ledger, and CoinShares.
Larkin, who formerly worked as a criminal investigator for the U.K.’s tax authorities, left Wilsons to start a company called Asset Reality that aims to advise law enforcement on dealing with seized assets, including cryptocurrencies.
The U.S. Marshals Service, which disposes of assets like houses, cars, planes, boats, and artwork, has had a hard time finding a contractor to manage and sell forfeited crypto. From 2014 to 2020, the marshals auctioned crypto themselves.
Billionaire venture capitalist Tim Draper was one bidder who cleared background checks and bought crypto at auction. In 2014 he picked up 30,000 Bitcoin for $632 each, before the price plunged to $180. He still holds those Bitcoin, now valued at more than $40,000 each. He says he bought fewer Bitcoin in the next auction, investing about 40 of them in startups, but would consider buying more if the government auctions them.
He may not get the chance. As seizures ballooned, the marshals sought proposals from companies to store and sell crypto. In soliciting contractors, they posted 26 pages of questions and answers in May 2020. At that point, their portfolio was valued at $145 million in more than 160 wallets, the agency said.
Last April, BitGo Inc. won a $4.5 million contract. But that award fell through because it was supposed to go to a company designated as a small business, and BitGo, now part of Galaxy Digital Holdings, was too big. In July, a $6.6 million contract went to Anchorage Digital, which had received conditional approval for a national trust bank charter from the Office of the Comptroller of the Currency. The contract is on hold pending the outcome of a protest to the bid.
The U.S. Marshals Service now uses a secure online platform for selling and transferring cryptocurrency with the goal of disposing of assets “in a timely manner at fair market value,” says Kelly, the agency spokeswoman.
The Justice Department’s asset forfeiture policy manual last year spelled out how prosecutors and agents should proceed on crypto. Because multiple copies of a key may exist, “it is imperative that once authorization to seize the virtual currency is obtained, it be transferred to an agency-controlled wallet,” the manual states. Seized crypto also must be held in cold storage, or a secure offline device, until it’s transferred to a government-controlled custodial wallet.
The Situation in Germany & Bitfinex
In Germany, prosecutors in each of the country’s 16 states decide how to manage seized property. Frankfurt prosecutor Jana Ringwald’s cybercrime unit uses Bankhaus Scheich, a small investment bank, to ensure that confiscated cryptocurrency in her home state, Hesse, is legally managed and sold in a way that creates minimum volatility.
Prosecutors in Cologne, by contrast, auction cryptocurrency seized in North Rhine-Westphalia like other contraband. Buyers can pick up a physical wallet with the codes in person, or apply to have the coins transferred online.
Over time, German authorities have become more efficient in handling crypto, but delays aren’t always a bad thing. In 2018, Berlin police watched the value of their cryptocurrency soar as they waited to clear bureaucratic hurdles before holding an auction.
To be sure, much of the crypto seized today stems from crimes such as the Bitfinex hack or frauds that occurred years ago. Investigators handling these cases are specially trained in crypto sleuthing, and they say it can be easier to trace money on the blockchain ledger that underlies cryptocurrencies than in the traditional banking system.
“The blockchain of Bitcoin provides a lot more transparency than the legacy financial system,” says Gambaryan, the former IRS criminal investigator who’s now vice president for global intelligence and investigations at Binance. “This is coming from somebody who’s worked both. If not for Bitcoin, a lot of cases I was working wouldn’t be closed.”
For instance, in November 2020, U.S. authorities confiscated Bitcoin that had been hacked from the Silk Road digital marketplace about seven years earlier. The Bitcoin were valued at $1 billion when they were recovered from someone identified in court papers only as Individual X.
The IRS cracked the case after working with Chainalysis Inc., a cryptocurrency research firm. “That’s a perfect example of the permanence and immutability of the blockchain, that crimes committed long ago remain relevant as soon as we can get some attribution,” says Gurvais Grigg, Chainalysis’s global public sector chief technology officer.
Support for Law Enforcement, Volatility
The proceeds from seized crypto sold by the U.S. government go to support law enforcement if the crypto was used to facilitate crime, according to Michael Sherwin, a former federal prosecutor. But if there were victims of the crime, they get the money as restitution, he says. For instance, the Justice Department has said it will return the Bitcoin hacked from Bitfinex to the victims—a process to be worked out in court.
The volatility of cryptocurrency can create thorny questions for courts to solve. “If you have 300 tokens stolen in 2018, what’s the court going to give you? Are you going to get the value of the tokens in 2018, or are they just going to give you back your tokens, which had an exponential increase?” asks Sherwin, who’s now at the law firm Kobre & Kim. “I think it should be the latter. You should get your property back, even if it increased in value.”
As regulators and law enforcement agencies become savvier about seizing and disposing of crypto, so do the criminals trying to evade detection. “It’s not easy for us, and it’s still an extremely volatile market,” says Durkin, the Surrey detective chief inspector. “It’s an area of criminality that we’ve had to play catch-up on really quickly. But the police play cat and mouse, that’s what we do.”
—With Gaspard Sebag in Paris, Karin Matussek in Berlin, and Chris Strohm and Allyson Versprille in Washington
(Photo: Shutterstock)
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