Author: Chloe, PANews
The US government has become one of the largest holders of Bitcoin to date, despite having sold hundreds of millions of dollars' worth of Bitcoin earlier this year. According to The Wall Street Journal, the government currently holds over 200,000 Bitcoins, valued at over $5 billion.
These Bitcoins were seized from cybercriminals and dark web markets and are mainly stored in encrypted, password-protected offline hardware wallets controlled by the US Department of Justice, the Internal Revenue Service, or other agencies.
According to an analysis by cryptocurrency company 21.co based on public documents (source), the federal government has seized over 200,000 Bitcoins in just the last three cases since 2020. These cases have all resulted in the funds flowing into the government's wallets. They are:
Case 1: Silk Road seizure in November 2020 (69,369 BTC). The Silk Road, a dark web black market site from the 2010s, initially gained popularity for facilitating transactions using Bitcoin. Due to the privacy features of the dark web, the Silk Road was rife with sellers offering illegal items, including drugs, firearms, explosives, and money laundering services. It was not until the founder, Ross Ulbricht, was arrested in 2013 and sentenced to life imprisonment that in 2020, he agreed to relinquish ownership of 69,369 Bitcoins to the US government to waive his liability.
Case 2: Bitfinex hack case (94,643 BTC). In August 2016, Bitfinex, a well-established cryptocurrency exchange, experienced one of the largest-scale hacking incidents in history. At that time, hackers stole up to 119,756 Bitcoins (valued at $71 million at the time), which is now worth up to $3.6 billion. It was not until last year that the US Department of Justice announced the arrest of an American couple for allegedly laundering the proceeds of the Bitfinex hack, with over 94,000 Bitcoins (valued at over $3.6 billion at the time) being frozen. This was the largest cryptocurrency financial seizure in the history of the US Department of Justice.
Case 3: James Zhong seizure in March 2022 (51,326 BTC). Continuing the narrative of the dark web's Silk Road, James Zhong established nine fraudulent accounts in September 2012 to exploit market vulnerabilities, each receiving 200 to 2,000 Bitcoins. He then quickly triggered over 140 transactions, deceiving the withdrawal processing system to transfer 50,000 Bitcoins into his account, and subsequently transferred these Bitcoins to various wallets. The Internal Revenue Service (IRS) conducted a search at James Zhong's residence in Gainesville in November last year, seizing these 50,000 Bitcoins, marking the second-largest cryptocurrency seizure in the history of the US Department of Justice.
21.co's analysis of these public documents also revealed that these public disclosures only reveal the "minimum estimated value" of the Bitcoin holdings by the US government.
Liquidation Actions Draw Attention, How Will the US Government Minimize Market Impact?
The legal process from seizing illegal Bitcoins to liquidating them into cash takes several years, during which the value of the cryptocurrency can appreciate significantly, which can be advantageous for the government in certain situations. For example, in the Bitfinex hack case in 2016, the market price of Bitcoin was around $600. When the American couple was arrested in 2022 (with the Department of Justice seizing 95,000 Bitcoins), the price of Bitcoin had risen to $44,000. Now, it hovers around $27,000.
The US government's Bitcoin reserves are mainly stored in encrypted storage devices in offline wallets, overseen by the Department of Justice and the Internal Revenue Service. When government agencies seize encrypted assets, they do not immediately take ownership of the assets. Only after a final forfeiture order is issued by the court can the government take ownership and transfer the tokens to the primary agency responsible for liquidating the seized assets, namely the US Marshals Service.
The liquidation process of the US Marshals Service has evolved with the development of the cryptocurrency industry. In the early days, the Marshals Service held auctions to sell the cryptocurrency directly to interested buyers. Notably, prominent venture capitalist Tim Draper previously became wealthy by purchasing a large amount of Bitcoin through such auctions.
Throughout, the Marshals Service's auction activities have involved selling the seized assets in batches rather than all at once to prevent adverse market effects. Currently, the Marshals Service takes additional measures to ensure that the market is not negatively impacted, including extending the time to liquidate all seized cryptocurrencies.
The Cyber Crimes Unit of the Internal Revenue Service oversees all activities related to cybercrime. Jarod Koopman, the Executive Director, stated, "We deliberately do not participate in the market. We basically determine the sales plan based on the timeline of the process."
In many cases, the proceeds from the government's sale of assets are used to compensate victims, and government agencies investigating criminal activities may use these proceeds to assist in covering all enforcement-related expenses, such as tracking software licensing fees.
A recent example is the US government's involvement in the FTX exchange case, where the government did not seize any cryptocurrency but took control of assets worth hundreds of millions of dollars, most of which were in cash and Robinhood stocks. In August, Robinhood repurchased the seized stocks from the US Marshals Service, and the proceeds will ultimately be used to cover the $8 billion shortfall in customer funds at FTX.
In summary, the US Marshals Service, responsible for liquidating illicit cryptocurrency assets, takes additional measures to ensure that the market is not negatively impacted.
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