What Happens To Cryptocurrencies That Are Seized During Criminal Investigations?

Law enforcement, like any other type of property, has the authority to sell your cryptocurrencies and spend the money.

Earlier this year, Prince Charles briefed Parliament about two legislation during the annual Queen’s Speech in the United Kingdom. The Economic Crime and Corporate Transparency Bill, for example, would provide the government more authority to confiscate and recover cryptocurrencies assets.

Meanwhile, the US Internal Revenue Service (IRS) confiscated more than $3 billion in cryptocurrency in 2021.

As the monetary stock of digital currencies expands and regulators’ supervision of the maturing industry tightens, the amount of seized funds will certainly rise.

But, assuming that the funds are not returned to the victims of scams and fraud, where do they go? Are auctions held, as they are for confiscated property? Or are these coins supposed to be housed on a special wallet, which may end up serving as an ideal investment fund for law enforcement agencies? CoinCu attempted to obtain some answers.

Cryptocurrency is money for the newcomers in the room. In that respect, the fate of seized cryptocurrency should be similar to that of other confiscated money or property. Civil forfeiture, or the forcible seizure of assets from individuals or businesses accused of illicit activity, is a contentious law enforcement tactic. 

It became regular practice in the United States in the 1980s as part of the drug war, and it has been the target of outspoken critics ever since.

In the United States, any confiscated assets become the government’s permanent property if a prosecutor can prove that they are linked to criminal behavior or if no one asks their return. In some circumstances, the assets are returned to their rightful owner as part of a plea bargain with the prosecution. However, others estimate that just 1% of seized assets are ever restored.

How do police departments use the money they don’t have to return? They use it to buy whatever they want or need, such as workout equipment, police cars, jails, and military equipment.

The St. Louis County Police Department, for example, spent $170,000 in 2001 to purchase a BEAR (Ballistic Engineered Armored Response) tactical vehicle. It spent $400,000 on helicopter equipment in 2011. The Washington Post examined over 43,000 forfeiture files and discovered that the seized funds were spent on items ranging from an armored personnel carrier ($227,000) to a Sheriff’s Award Banquet ($4,600) and even employing a clown ($225) to “improve community relations.”

Some states, such as Missouri, require that seized money be allocated to schools, but as the Pulitzer Center points out, law enforcement agencies pocket almost all of the money by exploiting a loophole in the federal Equitable Sharing Program.

U.S. Attorney General Eric Holder issued an order limiting government agency forfeiture in 2015, but his successor in President Donald Trump’s administration, Jeff Sessions, revoked it, calling it “a key tool that helps law enforcement defund organized crime.”

While none of the specialists could comment on the technical issues of storing seized crypto assets, the remainder of the procedure is similar to that of non-crypto assets.

According to Don Fort, a former IRS Criminal Investigation Division chief who now heads the investigations section at law firm Kostelanetz & Fink, the only significant difference is the requirement to auction off the digital assets:

“At the federal level, seized cryptocurrency goes to either the Department of Justice or Department of Treasury Forfeiture Fund. Once the crypto funds are auctioned off by one of the forfeiture funds, the funds can be used by the respective federal law enforcement agencies.”

Fort added that, just like with non-crypto funds, the agency requesting forfeited funds must submit a particular strategy or initiative to reclaim and spend the funds, and the plan must be approved by the Department of Justice before the funds are allocated to the agency.

In the United Kingdom, a similar system governs the distribution of seized cryptocurrency. The Proceeds of Crime Act of 2002 specifies how cryptocurrency proceeds of crime should be handled after they are confiscated. Tony Dhanjal, Koinly’s head of tax, said:

“When it generally comes to confiscated assets — as opposed to cash — the Home Office gets 50%, and the other 50% is split between the Police, Crown Prosecution Services and the Courts. There is also leeway for some of the confiscated assets to be returned to the victims of crypto crime.”

However, Dhanjal feels that the legislation should be modified to expressly address crypto assets, since they pose a “unique challenge for police departments as anything that has ever come before it.” The announcement of the Economic Crime and Corporate Transparency Bill did not include any specifics other than the intention to “create powers to more quickly and easily seize and recover crypto assets,” but an update on the procedure of seized crypto allocation is certainly something to be desired.

The European Union, as is typically the case with regulatory systems, is more convoluted. While the EU has systems of mutual aid in criminal problems, criminal legislation is the responsibility of individual member states, and there is no central agency to coordinate enforcement or seizure.

However, seizing cryptocurrencies assets is not always possible. The AGRASC auctioned off 611 Bitcoin (BTC) in 2021 after seizing cold storage devices used by prosecuted individuals who had placed their encryption keys on a USB stick. As Verbiest put it:

“This was made possible by the fact that the aforementioned articles allow seizures on the movable property, so the USB stick (and its content) could be seized. The case would have been different if the crypto funds had been stored on a third-party server via a delegated storage service, as the aforementioned texts do not allow seizures of intangible property.”

With the practice of property forfeiture still very contentious — some even preferring to refer to it as “highway robbery” — cryptocurrencies offer their owners at least some measure of protection. Nonetheless, technology apart, both coiners and non-coiners will have to contend with a lengthy history of law enforcement overreach.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Patrick

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