For many years, the U.S. government has seized, stockpiled, and sold cryptocurrencies connected to cybercrime. This fiscal year, the IRS has seized $1.2 billion worth of cryptocurrencies, such as bitcoin, ethereum, and Litecoin. The government regularly auctions off its stockpile.

The History of Crypto Seizures

The government began this practice in 2013 with the takedown of Silk Road, a dark web marketplace where illegal goods, such as drugs and firearms, were traded. Silk Road operated on the dark web and used bitcoin for transactions. The digital wallet seized had 30,000 bitcoin in it, which sold for around $19 million. Today, that quantity of bitcoin would sell for $1.1 billion.

The Flow of Seized Crypto

The takedown of Silk Road established a process for crypto seizures:

  1. Search and seizure
  2. Liquidation of raided crypto
  3. Deployment of the proceeds from crypto sales

Search and seizure is a collaborative effort. The IRS agents often work alongside other government agencies such as the Federal Bureau of Investigation (FBI), Homeland Security, the Secret Service, the Drug Enforcement Agency (DEA), and the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF). The IRS agents investigate tax evasion, false tax returns, and money laundering.

Liquidation of raided crypto is handled by the U.S. Marshals Service which has auctioned more than 185,000 bitcoins. They do not attempt to “play the market” or try to get the best price, but rather they auction it off in blocks at fair market value.

After the crypto has been exchanged for fiat currency, the proceeds are typically deposited into the Treasury Forfeiture Fund or the Department of Justice Assets Forfeiture Fund. The cash is used to fund projects. Congress may choose to rescind the money, or agencies can request access to some of the funds for operational expenses.

Crypto Seizures Increase

The value of crypto seizures has increased significantly over the last several years. In the fiscal year 2019, the government seized $700,000 worth, and in 2020, they seized $137 million worth. In the fiscal year 2021, which ended September 30, they seized more than $1.2 billion.

Cybercrime, in general, is on the rise. As cybercrime increases, so does the government’s haul of crypto cash. The amount of crypto collected from cybercrimes is projected to increase significantly. In fact, the U.S. Marshals Service hired Anchorage Digital, a private sector firm, to act as a custodian for cryptocurrency seized or forfeited in criminal cases. The agency manages the storage and sales of crypto tokens.

The broader crypto market is worth $1.6 trillion. U.S. Securities and Exchange Commission Chair Gary Gensler has said he would like to see more crypto oversight and safeguards to protect investors.

In the Classroom

This article can be used to discuss cryptocurrency (Chapter 15: Money and the Financial System).

Discussion Questions

  1. What is cryptocurrency? What is fiat money?
  2. What is the process the government takes when seizing crypto?
  3. Why do you think cybercrime is on the rise?

This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell, Linda Ferrell, and Geoff Hirt.

Sources

MacKenzie Sigalos, "The IRS Has Seized $1.2 Billion Worth of Cryptocurrency This Fiscal Year – Here’s What Happens to It," CNBC, August 4, 2021, https://www.cnbc.com/2021/08/04/irs-has-seized-1point2-billion-worth-of-cryptocurrency-this-year-.html

Robert Schmidt and Benjamin Bain, “New SEC Boss Wants More Crypto Oversight to Protect Investors,” Bloomberg, August 3, 2021, https://cacm.acm.org/opinion/articles/254713-new-sec-boss-wants-more-crypto-oversight-to-protect-investors/fulltext

Tanaya Macheel, "U.S. Marshals Service Hires Custodian to Hold Crypto Seized in Criminal Activity," CNBC, July 28, 2021, https://www.cnbc.com/2021/07/28/us-marshals-service-hires-custodian-to-hold-crypto-seized-in-criminal-activity.html