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    What happens when authorities seize Bitcoin and other crypto assets?

    What happens when authorities seize Bitcoin and other crypto assets?

    What happens when authorities seize Bitcoin and other crypto assets?
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    By CNBCTV18.com  IST (Published)

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    When authorities legally evict criminals of digital assets that are not theirs, it is known as 'crypto seizure'. But how can digital assets even be seized? And what happens when authorities take these crypto assets? Scroll down to find out.

    There has been a string of crypto scams over the last few years. The culprits behind these hacks and attacks have managed to syphon millions of dollars from investors and decentralised finance (DeFi) platforms alike. Fortunately, some of these fraudsters have been caught, and their ill-gotten funds have been recovered.
    For instance, last February, the US Department of Justice (DoJ) announced a Bitcoin seizure worth $3.6 billion, the single largest financial seizure in the DoJ's history. Until December 2021, the US Marshal Service had also recovered 22 different cryptocurrencies valued at over $900 million. In fact, cryptocurrencies made up over 90 percent of the assets seized by the US Internal Revenue Service.
    But what exactly are crypto seizures? How can digital assets even be seized? And what happens when authorities take these assets? Let's find out.
    What are crypto seizures, and how are they seized?
    Crypto seizures occur when authorities legally evict criminals of digital assets that are not rightfully theirs. However, authorities can't seize cryptos like they seize cars or real estate. You can't exert physical force or legally coerce the criminals in question. Instead, you need to find the crypto wallet containing the assets and the corresponding private key.
    You cannot remove the funds from a wallet without a private key. Authorities usually work with the exchange that hosts the wallet to gain entry and recover the funds. This works well in the case of hot wallets, as the issuing crypto exchange usually has a copy of the private key. However, in the case of cold wallets, which are offline and privately owned, authorities have no option but to hack into them and recover the funds.
    But what happens when authorities seize crypto?
    After seizing the ill-gotten cryptocurrencies, authorities have to secure and then liquidate them. However, a court order is usually required to do this, and as you can imagine, that can take years to arrive in some cases. When the assets are eventually liquidated, the sale proceeds are given to the victims of a crime (hack) or distributed between government agencies.
    Authorities have also turned to auction houses to sell recovered crypto assets. For instance, in February 2019, an independent auction house in the UK sold crypto assets as law enforcement did not have any other option. The auction attracted bidders from over 90 countries, and one middle-aged woman who had purchased half a Bitcoin insisted on carrying it home in a bag with all the other items she had purchased, as per a Bloomberg report.
    The US Marshals Service — with experience in disposing of assets like houses and artworks — faces challenges in ridding itself of cryptocurrencies. From 2014 to 2020, they too had no option but to auction off recovered crypto assets.
    In an interview with CNBC, Jarod Koopman, director of the IRS’s cybercrime unit said that the auction proceeds are usually deposited into the Treasury Forfeiture Fund or the DoJ’s Assets Forfeiture Fund. He also stated that federal agencies can use this money to fund upcoming operations. Of course, they would have to put in a formal request that would need to be approved by the Executive Office of Treasury.
    However, the marshals seldom turn to auctions these days. Instead, they seek proposals from companies that can store and sell cryptos for them. They also use a secure online platform for disposing of digital assets and have an asset forfeiture manual that dictates how the authorities should deal with cryptos. One of the instructions is to transfer the crypto pronto from the criminal's wallet to an agency-controlled wallet.
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