In February of this year, the Department of Justice (DOJ) announced the seizure of more than 94,000 bitcoin from an account belonging to a New York couple who was arrested the same day the seizure was announced. The complaint and affidavit authorizing their arrest allege the government’s belief that the bitcoin was part of a cache of cryptocurrency stolen during a 2016 cyber-attack on Bitfinex and that the couple had conspired to “launder” the proceeds.
During the attack, an unknown hacker breached Bitfinex systems security and stole nearly 120,000 bitcoin from its customers. Due to bitcoin’s publicly available blockchain, law enforcement was able to identify the digital wallet to which the bitcoin stolen during the attack were transferred. Beginning in 2017, whoever controlled that wallet began trying to “launder” the stolen bitcoin through a complex series of transactions designed to obfuscate the bitcoins’ trail. By using blockchain analysis, the government identified several accounts through which the bitcoin traveled and traced their ownership to the New York couple. After obtaining a warrant to search a cloud storage account belonging to one of them, the government found an encrypted file containing, among other things, the private key associated with the initial wallet where more than 94,000 of the stolen bitcoin still remained. Valued at over $3.6 billion, the government’s seizure of the remaining bitcoin became the largest financial seizure in DOJ history.
This massive seizure follows the recent news of DOJ’s creation of a cryptocurrency enforcement team (NCET) and, in the days following the seizure, further announcements were made regarding the appointment of NCET’s first director and the FBI’s creation of their own Virtual Asset Exploitation Unit (VAXU). Given these massive investments, we can anticipate the government’s prioritization of the misuse of cryptocurrency and should expect to see seizures like this one happening with increasing frequency. For this reason, it is important to understand how the government can seize cryptocurrency like bitcoin.
Is bitcoin legal?
Absolutely. There are thousands of cryptocurrencies, including bitcoin, that are perfectly legal to possess despite not being issued by a centralized government. In fact, in its October 2020 publication of the Cryptocurrency Enforcement Framework, DOJ noted the potential for blockchain technology like that employed by bitcoin “to provide increased effectiveness, efficiency, and security” over fiat concurrency. In a study published by Pew Research Center in November 2021, 16% of Americans reportedly have owned or transacted in cryptocurrency at some point, and a report released in February 2022 by research group Chainalysis illustrates just how fast cryptocurrency usage is growing (total transaction volume grew 567% between 2020 and 2021!).
When can the government seize bitcoin?
The government can seek to obtain a warrant to seize any property it has probable cause to believe is evidence of a crime or was used in the commission of a crime. In locations throughout the U.S. Code, the government is given the authority to seek forfeiture and seizure not only of property directly involved in a crime, but also property constituting the proceeds of a crime or property directly acquired from the crime’s commission (i.e. property purchased with criminal proceeds). This definition of property includes tangible money in the form of cash and coins, as well as money contained in bank accounts or whose value is represented virtually. In a money laundering case like this one, the government will have to prove to a court that the property sought to be forfeited (here, the bitcoin and/or anything obtained by exchanging the bitcoin) is substantially connected to the criminal act(s) that were committed.
How does the government seize bitcoin?
Logistically speaking, the 2021 edition of DOJ’s Asset Forfeiture Policy Manual instructs a seizing agency to have its own digital wallet or address to which it should transfer the seized currency immediately. Thereafter, the cryptocurrency is stored by the U.S. Marshals Service until the a forfeiture proceeding is formally litigated.
Legally speaking, how cryptocurrency is seized depends largely on where the private key necessary to unlock the currency’s value is stored. When it’s stored physically (e.g. scribbled down on a piece of paper or saved to a computer or external hard drive), the government may attempt seizure of the item as it would any other tangible object, by obtaining a warrant to search for the item where it has probable cause to believe it is located. But when the key is stored digitally (e.g. in a wallet hosted by a third-party institution like Bitfinex, or in a web-based storage account as was the case with the $3.6 billion worth of bitcoin seized here), the government serves a subpoena or seizure warrant directly on the institution hosting it.
Federal forfeiture statutes have provisions authorizing the government to obtain a warrant to seize property prior to filing any formal action where notifying the property’s owner would jeopardize the government’s ability to forfeit it in the future. Given the ability of cryptocurrency to be accessed and transferred remotely, the government is likely to attempt seizure of this type of asset before someone even knows there’s an ongoing investigation into them or their property.
Do I have any defenses if the government seizes my bitcoin?
Yes. While seizure of the bitcoin gives the government the ability to possess it temporarily, it doesn’t give them title to the property or the authority to dispose of it. That can occur only after a declaration of administrative forfeiture, a judgment of civil forfeiture, or a final order of forfeiture in a criminal case. Forfeiture cases are both time-sensitive and exceedingly complex, even for experienced criminal attorneys. Consequently, you should seek the assistance of an experienced federal defense attorney immediately following the seizure of your property to ensure that your rights are properly preserved. Our firm has over two decades of experience helping individuals navigate this process. Contact us to learn more about how we can help.