The IRS has seized $1.2 billion worth of cryptocurrency this fiscal year – here’s what happens to it

By MacKenzie Sigalos

The U.S. government regularly holds auctions for its stockpile of bitcoin, ethereum, litecoin and other cryptocurrencies it seizes and then holds in crypto wallets.
It really kicked off with the 2013 takedown of Silk Road, a dark web marketplace trading in illegal goods, where bitcoin was often used for payment.
Interviews with current and former federal agents and prosecutors suggest the U.S. has no plans to step back from its side hustle as a crypto broker.In June, the U.S. government casually auctioned off some spare litecoin, bitcoin and bitcoin cash.

Lot 4TQSCI21402001 — one of 11 on offer over the four-day auction — included 150.22567153 litecoin and 0.00022893 bitcoin cash, worth more than $21,000 at today’s prices. The crypto property had been confiscated as part of a tax noncompliance case.

This kind of sale is nothing new for Uncle Sam. For years, the government has been seizing, stockpiling and selling off cryptocurrencies, alongside the usual assets one would expect from high-profile criminal sting operations.

“It could be 10 boats, 12 cars, and then one of the lots is X number of bitcoin being auctioned,” explained Jarod Koopman, director of the IRS’ cybercrime unit.

Koopman’s team of IRS agents don’t fit the stereotypical mold. They are sworn law enforcement officers who carry weapons and badges and who execute search, arrest and seizure warrants. They also bring back record amounts of cryptocash.

“In fiscal year 2019, we had about $700,000 worth of crypto seizures. In 2020, it was up to $137 million. And so far in 2021, we’re at $1.2 billion,” Koopman told CNBC. The fiscal year ends Sept. 30.

As cybercrime picks up — and the haul of digital tokens along with it — government crypto coffers are expected to swell even further.

Interviews with current and former federal agents and prosecutors suggest the U.S. has no plans to step back from its side hustle as a crypto broker. The crypto seizure and sale operation is growing so fast that the government just enlisted the help of the private sector to manage the storage and sales of its hoard of crypto tokens.

Knowing what you don’t know

The 2013 takedown of Silk Road — a now-defunct online black market for everything from heroin to firearms — is where federal agents really cut their teeth in crypto search and seizure.

“It was totally unprecedented,” said Sharon Cohen Levin, who worked on the first Silk Road prosecution and spent 20 years as chief of the money laundering and asset forfeiture unit in the U.S. Attorney’s Office for the Southern District of New York.

Silk Road, which operated on the dark web, dealt entirely in bitcoin. It was good for users, because it promised them some degree of anonymity. Despite the reputational hit, it was good for bitcoin at the time, helping to pump up its price by giving the token a use case beyond programming circles.

When the government began to dismantle Silk Road, federal agents had to figure out what to do with all the ill-gotten bitcoin.

“There was a wallet with approximately 30,000 bitcoin in it, which we were able to identify and seize. At the time, it was probably the largest bitcoin seizure ever, and it sold for around $19 million,” said Levin.

“No one had ever done anything like it. In fact, there weren’t really companies that you could go to in order to sell the assets. The Marshals Service stepped up and conducted their own auction of the assets where they took bids,” she said.

That bitcoin batch went to billionaire venture capitalist Tim Draper. “It seemed like a large sum of money at the time, but if the government had retained those bitcoins, it would be worth way more today.”

The cache of coins sold in 2014 would be worth more than $1.1 billion as of Wednesday morning. But hindsight is 20/20, and the government isn’t in the business of playing the crypto markets.

What this entire exercise did accomplish, however, was to establish a workflow that remains in place today, one that uses legacy crime-fighting rails to deal with tracking and seizing cryptographically built tokens, which were inherently designed to evade law enforcement.

“I’ve just observed that the government is usually more than a few steps behind the criminals when it comes to innovation and technology,” said Jud Welle, a former federal cybercrime prosecutor of 12.5 years.

“This is not the kind of thing that would show up in your basic training. But I predict within three to five years … there will be manuals edited and updated with, ‘This is how you approach crypto tracing,’ ‘This is how you approach crypto seizure,’” Welle said.

″‘Follow the money’ is not new. Seizure is not new. What we’re just doing is trying to find a way to apply these tools and techniques to a new fact pattern, a new use case,” he said.

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