You’re always hearing about how crypto is used in criminal enterprises, which brings a host of questions about how crypto relates with law enforcement. The burning question on my mind is, can crypto wallets be legally seized?
Crypto wallets can be legally seized. The government has the right to legally seize any assets that have been involved in illegal activity, including crypto wallets. However, depending on the cryptocurrency held, it can be more difficult for the proper authorities to seize crypto than fiat currency.
With the basic answer to whether crypto wallets be seized out of the way, let’s dive into some related topics. I’m going to explore whether crypto wallets can be frozen, the different types of crypto, how hard they are to seize, and examples of the government seizing crypto wallets.
Can Crypto Wallets Be Frozen?
Crypto wallets cannot be frozen. Unlike traditional bank accounts, the decentralized nature of crypto wallets makes it impossible to freeze crypto wallets. However, if crypto is held on a centralized exchange, authorities can freeze users’ accounts on the exchange.
Can Authorities Track Crypto Wallets?
Authorities can track crypto wallets pretty easily. If a crypto wallet has performed a transaction, the authorities can track it. They can also verify the identity of any user who has purchased crypto on an exchange via identity verification requirements.
A blockchain is a list of every transaction that has taken place using a specific cryptocurrency, including a wallet ID. Therefore, as long as the authorities can match your crypto wallet ID to your personal ID through an exchange, they can see every crypto transaction you’ve ever participated in.
What Type of Crypto Is Hardest To Seize?
Privacy coins like Zcash and Monero are the hardest cryptocurrencies for authorities to seize. Authorities struggle with privacy coins because privacy coins contain extra layers of privacy that obscure transaction IDs on the blockchain.
Privacy coins are so effective at maintaining users’ privacy that some countries have put regulations in place, stopping their usage. A few of the countries that have enforced regulations on privacy coins include Japan, South Korea, and Australia.
The world of privacy coins is fascinating, so I’m sure you’ll want to learn more on the topic. You can check out this article on Tech Target as a starting point.
What Happens to Seized Crypto?
What happens to seized crypto depends on where the seizure occurs. For instance, in the U.S. seized crypto is usually auctioned off in a public auction held by the The U.S. Marshals Service. It has auctioned over 185,000 Bitcoins since 2014. The BTC was worth about USD 8.5 billion in early 2022.
Instances When the Government Seized Crypto Wallets
The amount of crypto seized by the United States government has been growing exponentially every year. According to this article on crypto seizures by CNBC, in 2019, the Internal Revenue Service (IRS) seized $700,000 worth of crypto. In 2020, they seized $137 million in crypto, and in 2021 they had reached $1.2 billion in crypto seizures.
Now that we know crypto seizures by the government are not uncommon let’s dive into some specific instances when government agencies have done so.
The Silk Road Bitcoin Seizure
The Silk Road Bitcoin seizure is the first major crypto seizure by the United States government. Law enforcement seized over $1 billion in Bitcoin from Silk Road founder Ross William Ulbricht in 2013.
After six months of programming, in February 2011, Ross Ulbricht launched the Silk Road marketplace on the dark web. Ulbricht released the Silk Road intending to create the ideal libertarian free market.
The Silk Road marketplace was a free market where users could browse anonymously through the Tor browser. Ulbricht’s disdain for government regulations led to the Silk Road marketplace being flooded with illegal drugs, firearms, and stolen goods. However, the Silk Road was not restricted solely to illegal sales.
Unfortunately for Ulbricht, his free market was brought down in 2013. The United States law enforcement utilized the Bitcoin blockchain to track down Ulbricht, sentencing him to two life sentences plus 40 years in federal prison, with no chance of parole.
Communities online argue Ulbricht’s sentence is too harsh for his actions. Considering that Ulbricht was not charged with any violent crimes, and the Silk Road was his first offense, an online movement has formed to reform Ulbricht’s sentence.
I’ve only scratched the surface regarding Ulbricht and the Silk Road. If you want to further your research, I recommend this episode of The Tim Ferris Show with Katie Haun. Katie Haun was on the team that took down Ross Ulbricht, and in this podcast episode, she discusses how the blockchain assisted their investigation.
Additionally, for the other side of the story, you can check out Ross Ulbricht’s Change.org petition, nearing 500,000 signatures.
The Largest Bitcoin Seizure
The United States Department of Justice seized approximately $4 billion in Bitcoin from a couple attempting to launder the stolen Bitcoin. The Bitcoin in question originated from a 2016 hack of the Bitfinex crypto exchange.
The amount of Bitcoin stolen from Bitfinex in 2016 was approximately 120,000 Bitcoins. In early 2022, 120,000 Bitcoins were worth about USD 5.5 billion, making this the largest government bitcoin seizure.
The couple behind the money laundering is 34-year-old Ilya Lichtenstein and 31-year-old Heather Morgan. Both Lichtenstein and Morgan face a maximum penalty of 25 years in federal prison.
The fascinating aspect of the Bitfinex hack is that the hacker’s identity is yet to be unearthed. Considering that the Bitfinex hack could be the highest amount of money stolen in a single robbery, it’s shocking that law enforcement has yet to find the culprit.
Ottawa Trucker Protest
The final real-world example of crypto seizures comes from the Ottawa trucker protests. On February 28th, 2022, the Ontario Superior Court of Justice seized Bitcoin donated to aid the Ontario trucker protests.
The story begins on January 22nd, 2022. Hundreds of Canadian truckers banded together to protest against COVID vaccine mandates for crossing the border between Canada and the United States.
The group of protestors labeled the Freedom Convoy met in Ottawa, the capital of Canada, on January 29th, 2022. After two weeks of consistent protests in the streets of Ottawa, on February 11th, Ontario’s Premier, Doug Ford, enacted a state of emergency.
The state of emergency was effected because the Freedom Convoy was blocking emergency vehicles, harassing the local community, and engaging in isolated violent incidents. A few days later, on February 14th, Canada’s Premier called to order the Emergencies Act, which gave the Ontario government the right to seize assets involved with the Freedom Convoy.
Less than two weeks after the Emergencies Act was enacted, over $1 million worth of Bitcoin was seized from the Freedom Convoy and moved into escrow.
The government has the legal right to seize crypto wallets. What’s more there are plenty of examples of crypto wallet seizures in the past. We dove into a few of these examples in this article, but we’ve barely scratched the surface.
The United States Government keeps seizing more crypto every year, so we can expect to see more seizures in the future.
However, there is one opportunity to decrease the number of crypto seizures. This article touched on privacy coins and the potential to fully anonymize crypto transactions.
- TechTarget: Monero and the complicated world of privacy coins
- Business Insider: Bitcoin does not make payments anonymous — just really hard to trace
- CNBC: The IRS has seized $1.2 billion worth of cryptocurrency this fiscal year
- CNBC: U.S. Marshals Service hires custodian to hold crypto seized in criminal activity
- Investopedia: How The US Government Handles Its Massive Stash Of Bitcoins
- Wikipedia: Silk Road (marketplace)
- The Blog of Author Tim Ferriss: silk road
- BBC: Record-high seizure of $4bn in stolen Bitcoin
- CoinDesk: The Bitfinex Bitcoin Hack: What We Know (And Don’t Know)
- Financial Post: Crypto connected to trucker protest seized by police, fundraiser says in …
- Wikipedia: Canada convoy protest
- Change.org: Petition • Clemency for Ross Ulbricht, Serving Double Life for a Website