What the US government does with the secret bitcoin reserve

For many years, the US government has maintained a side hustle to auction bitcoin and other cryptocurrencies. Historically, Uncle Sam has done a pretty lousy job of timing the market.

500 bitcoin it Sold to Riot Blockchain in 2018 for about 5 million dollars? It’s currently worth $23 million. Or 30,000 bitcoins went to billionaire venture capitalist Tim Draper for $19 million in 2014? That number would be more than $1.3 billion today.

The government obtained all that bitcoin by seizing it, along with the usual assets one would expect from high profile criminal activities. All are sold at a similar discount.

“It could be 10 boats, 12 cars, and one of the lots is X number of bitcoins up for auction,” said Jarod Koopman, director of the Internal Revenue Service’s cybercrime division.

One of the next moves on the auction block is $56 million worth of cryptocurrency seized by authorities as part of a Ponzi scheme case involving the BitConnect offshore cryptocurrency lending program. Unlike other auctions where the proceeds are redistributed to various government agencies, the cash from the sale of this cryptocurrency will be used to reimburse the victims of the fraud. .

The government’s activity of seizing and selling cryptocurrencies is growing so fast that it’s just enlist the help of the private sector to manage the storage and sale of its hoarded tokens.

FBI agents finish loading a truck out of the home of United Auto Workers President Gary Jones on Wednesday, August 28, 2019.

Michael Wayland / CNBC

Capture and reserve bitcoin

For the most part, the US has used old crime-fighting tools to deal with tracking and seizing cryptographically built tokens, which are designed to evade law enforcement.

“Governments are often several steps behind criminals when it comes to innovation and technology,” said Jud Welle, a former federal cybercrime prosecutor.

“This is not the type that will appear during your basic training,” says Welle. But he predicts that in three to five years, “there will be edited and updated manuals, here’s how you approach crypto tracing, this is how you approach seizing money.” electronic.”

There are three main loopholes in the flow of bitcoin and other cryptocurrencies through the criminal justice system in the United States.

The first stage is search and seizure. The second is the crypto liquidation being raided. And the third is to deploy the proceeds from the sale of that cryptocurrency.

In reality, the first stage is a team effort, according to Koopman. He said his team often works on joint investigations alongside other government agencies. It could be the Federal Bureau of Investigation, Homeland Security, the Secret Service, the Drug Enforcement Administration, or Bureau of Alcohol, Tobacco, Firearms and Explosives.

“A lot of cases, especially in the cyber space, become… joint investigations, because no one agency can do it all,” said Koopman, who has worked with The Road cases. Government Silk and 2017, said. AlphaBay’s investigation, which culminated in the shutdown of another popular and large dark web marketplace.

Koopman said his department at the IRS typically handles cryptocurrency tracking and open source intelligence, including investigating tax evasion, false tax returns, and money laundering. His team consists of sworn law enforcement officers who carry weapons and insignia and those who execute search, arrest, and seizure orders.

Other agencies have more money and resources to focus on the technical components.

“Then we all come together to conduct any form of coercion, whether it’s arrest, detention or search warrant. And that can be on a national or global scale,” he said. speak.

During the seizure, multiple agents are involved to ensure proper surveillance. That includes regulators, who set up hardware wallets necessary to protect seized cryptocurrency.

“We only maintain the private keys in our headquarters so they cannot be tampered with,” says Koopman.

In recent years, the government has brought in record amounts of cryptocurrencies.

“In fiscal year 2019, we had about $700,000 in crypto seizures. In 2020, that’s up to $137 million. And so far in 2021, we’re at 1, $2 billion,” Koopman told CNBC in August. The fiscal year ended September 30.

When Cybercrime Begins – and the volume of digital tokens that go with it – government cryptocurrency vaults are expected to swell even more.

Cryptocurrency Auction Block

Once the filing is closed, the US Marshals Service is the primary agency responsible for auctioning the government’s crypto holdings. Up to now, it has seized and auctioned over 185,000 bitcoins. That coin cache is now worth around $8.6 billion, although many of the coins were sold in batches for far less than today’s prices.

That is a huge responsibility for a government organization to take on, which is part of the reason why the Police Service is no longer shouldering the task alone.

The U.S. General Services Administration, an agency that typically auctions off surplus federal property, such as tractors, added forfeited cryptocurrency to the auction block earlier this year.

In July, after a search that lasted more than a year, the Ministry of Justice hired San Francisco-based Anchorage Digital become a custodian for cryptocurrencies seized or destroyed in criminal cases. Anchorage, First Federal Chartered Bank for Cryptocurrency, which will help the government store and liquidate this digital asset. The contract was previously awarded to BitGo.

“It is important that the Marshals Service is getting experts to help them,” said Sharon Cohen Levin, who worked on the first Silk Road prosecution and spent 20 years as head of money and wealth laundering. a good sign. forfeiture unit at the United States Attorney’s Office for the Southern District of New York.

According to Koopman, the process of auctioning cryptocurrencies, by block, to fair market value, is likely to remain unchanged.

“You basically have to line up to auction it off. We never want to flood the market with a large number, which can then affect the pricing composition,” he said.

But aside from distancing, Koopman said, trying to “timed” the market to sell at the top of crypto prices isn’t his goal. “We are not trying to play the market,” he said.

In November 2020, government seized 1 billion dollars bitcoin value associated with Silk Road. Because the case is still pending, those bitcoins are sitting idle in the crypto wallet. If the government had sold its bitcoin holdings when the token’s price peaked above $67,000 last month, the coffers would have been a lot bigger than if they had liquidated at today’s prices.

Where does the money go?

Once a case is closed and the cryptocurrency has been exchanged for fiat currency, the federations will then split the spoils. The proceeds of the sale are typically deposited into one of two accounts: the Treasury Expropriation Fund or the Justice Department’s Forfeiture Fund.

“The investigative agency basically determines which funds will go to,” Levin said.

Koopman said the cryptocurrency tracked and seized by his team accounts for about 60% to 70% of the Treasury Extortion Fund, making it the largest individual contributor.

Once placed in either of these funds, the liquidated cryptocurrency can then be put into a variety of line items. Congress, for example, may repeal the amount and provide cash for other projects.

“Agencies can make a claim to get access to some of that money to fund operations,” said Mr. Koopman. “We can make a request and say, ‘We’re looking for additional permits or additional equipment,’ and then that is reviewed by the Office of the Treasury Executive.”

Some years, Koopman’s team receives different amounts of money based on proposed initiatives. Other years they get nothing because Congress will decide to take all the money out of the account.

According to Alex Lakatos, a partner at law firm Mayer Brown in Washington, DC, advising clients on foreclosure is not a straightforward process.

Hosted by the Ministry of Justice, which provides some optics on current capture operations. This documentFor example, outline a case from May where 1.04430259 bitcoins were obtained from an individual’s hardware wallet in Kansas. The other 10 people are taken from a Texas resident in April. But it is not clear whether the list is a comprehensive summary of all active cases.

“I don’t believe there is any place where all the crypto that the US Marshals are holding, let alone the various states that may have lost crypto,” Lakatos said. “I don’t even know if someone in the government wants to get their arm around them, how they’re going to do it.”

A Justice Department spokesman told CNBC that he is “quite certain” there is no central database of crypto seizures.

But what is clear is that there are more cases of crypto seizure being made public, just like the case of the FBI breach Bitcoin wallets held by Colonial Pipeline hackers this early year.

“In my experience, people in these positions in the high levels of government, they can be there for a short time and they want to get some wins,” Welle said. “This is the kind of thing that definitely gets the attention of journalists, cybersecurity experts.”

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Sarah Ridley

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