Can Bitcoin be seized by the government? The Bitcoin was initially designed to allow people to make faster and safer financial transactions anonymously without the need of any intermediaries like a traditional bank.
Though it has been successful in doing that initially, over time a lot of rules and regulations were imposed on Bitcoin, as well as other crypto coins that came to existence after it.
These rules and regulations that every crypto exchange needs to abide by allow tracing Bitcoin transactions by the law enforcement as and when required.
Bitcoin can even be seized by the government in spite of the technical difficulties involved in it.
Yes, the immutable records of the distributed public ledger or blockchain make it pretty difficult to detect any illegitimate transactions or use of Bitcoin, but that is for the general public.
It is not impossible for the government or the law enforcement agencies to track and seize Bitcoin if they feel that it is illegal proceeds of crime.
There are lots of different ways in which they can do so.
Ideally, the most common and effective way to seize Bitcoin by the law enforcement authorities is by getting hold of the private keys that are linked to the Bitcoin wallet.
They can even confiscate the digital Bitcoin wallet ‘physically.’
This is the process by which the governments try to dispossess a person of his or her Bitcoin holding legally.
If you are confused and wondering how on earth it is possible for them to get hold of the virtual currency this is the article that will throw some light to clear all your doubts.
Can Bitcoin be Seized by the Government?
In legal terms, seizure of an asset or proceeds of crime by the law enforcement authorities means that the state takes control of the property.
This means that the law prohibits the property from:
- Disposition or
In most cases seizure of assets may involve finding out and restraining the assets.
These assets may include and certainly not limited to:
- Real estate
- Bank deposits
- Jewelry and more.
In short, asset seizure involves anything that can be located and tracked easily.
However, in case of seizing Bitcoin, it is completely different because Bitcoin, as such, is a decentralized virtual currency.
This means that it lacks physical form and is not managed, regulated or administered by any intermediaries such as banks or any other financial institutions.
Therefore, when it comes to seizing Bitcoin and other crypto coins, legal as well as investigative challenges may potentially arise for the Courts and the law enforcement authorities to handle.
The design and decentralized nature of operation of Bitcoin makes it a unique digital asset that is particularly hack resistant and seizure resistant.
Access to the Bitcoin wallet and funds can only be made with the private keys that are typically in possession of the owners of the wallets or accounts.
There is no amount of legal coercion or physical force that can be applied to transfer the coins from one the wallet of one person to that of another without the use of the corresponding keys to the wallets.
This makes Bitcoin pretty safe as an investment asset class.
However, at times when the law enforcement authorities of the government are able to determine the real-world identity of a person and the Bitcoin address, that individual can be coerced by the law enforcement authorities to divulge the private keys to the wallet.
When they have that, they can move the coins from the wallet.
Now, what is a Bitcoin seizure and when it does happen, you may ask.
Well, Bitcoin can be seized by the law enforcement authorities if they feel that you have violated the law.
As you may know that Bitcoin is one of the most favored crypto coins that is used for money laundering, funding terrorism and other sorts of criminal activities.
If the law enforcement authorities and the government believe that a particular transaction is involved in such transactions, they can seize the coins.
As said earlier, the law enforcement agency can coerce the individual to divulge the private keys or else face legal consequences.
However, there are other ways to get hold of the keys as well.
Sometimes the law enforcement authorities may target the specific crypto exchange that hosts the wallet of the individual in question in order to get hold of the private key.
At other times, the agencies may try to seize the private keys and coins by even hacking the hot wallet of the person in question.
They may also dispossess the owner of the cold wallet.
The seizure proceedings carried out by the law enforcement agent needs to be based on the finding of probable cause by the agent.
They will have to substantiate their finding with proper evidence that will prove that the particular asset or transaction corresponds to the proceeds of any criminal activity or it was used to assist one.
The procedure followed for seizure of Bitcoin on suspicion of illegal activities is pretty long and complex.
In the United States in particular, the US Attorney’s Office sets up these procedures.
These procedures typically govern the asset seizure for digital currency.
In order to get a seizure warrant, the prosecuting agency needs to file an affidavit and an application.
The affidavit includes all the necessary details along with the probable cause and the factual allegations for the seizure.
Before any legal action is started or the actual seizure of the asset is made, the US Attorney’s Office will usually collaborate with the US Marshals Service.
This is typically done to find out the amount of Bitcoin that is needed to be seized and its valuation based on the current market price.
It is essential for the prosecuting agency to be concerned and careful with the logistics of the entire process for the seizure.
It is also required to be well prepared for the possibilities for management, forfeiture, or disposition problems that may be related to it.
Most importantly, it is required to ascertain in the first place that whether or not the quantity of coins to be seized is valuable enough for such a legal action at that particular point of time.
If everything goes well and in favor of a seizure then several agencies may collaborate in executing the plans and the prosecutorial strategy.
Once the coins are seized by a law enforcement agency of the US government, it is the responsibility of only the US Marshals Service to auction them off.
About Bitcoin Seizure
The main highlights of the Bitcoin seizure process is that it is carried out by the government or the law enforcement authorities of the government to be more precise.
As said earlier, a Bitcoin wallet and the funds in it can be subject to government seizure only when there is a probable cause of funding or facilitating a criminal activity is established by the law enforcement authorities after investigation.
This can only be done when the private keys to the Bitcoin address in question are acquired by the law enforcement agencies.
In this process, a person in question is legally dispossessed of his Bitcoin holding.
Ideally, warrants are also issued that are normally sealed unlike the warrants for seizing an address.
This is done to hide it from the general public as well as to shield the identity of the custodian who hosted the Bitcoin wallet of the defendant.
This warrant also discloses the complete history of the transactions that were made to and from the Bitcoin wallet address in question.
This reveals the probable cause of seizure of the coins.
Primarily, as it is said earlier, Bitcoin can be apprehended by a warrant if it is used to help in the commission of any criminal activity.
According to law, facilitating an act of crime refers to any action or conduct that may cause the crime with an intention to make it quite difficult to detect.
It also refers to any instrument used by the person that helped the crime to occur.
For example, if a company engages in money transferring business activities with Bitcoin without acquiring a proper and valid license for it may result in criminal activities such as money laundering.
It may also result in conspiracy to launder money.
Moreover, any asset that has been obtained legally but has been used to help in a specific criminal act may be subject to seizure as well.
Moreover, any Bitcoin income or compensation generated from any criminal activity or service may also be subject to seizure.
For example, Bitcoin received as a payment for the sale of drugs, for an assassination or an attempt of it, and for hacking computers, all indicates “proceeds of a crime” according to the law.
Therefore, such proceeds can also be confiscated by the governments.
There are some preparations to be made by the law enforcement agencies of the government prior to the seizure.
Ideally, the main problem that is faced by the law enforcement authorities is during the detection of the unlawful use of Bitcoin transactions.
This is in spite of the fact that all transactions involving Bitcoin and crypto are recorded in a blockchain which is a distributed public ledger that can be seen by all.
This is because every transaction is validated and endorsed by a process called mining.
Also, the fact that it maintains anonymity makes it practically impossible by others to trace a transaction and its source.
However, the law enforcement authorities implement a variety of mechanisms in order to probe the virtual currencies and determine whether or not these are proceeds of crime.
A few of these special mechanisms include:
Commencing financial investigations:
This process involves collection of all available information regarding a particular Bitcoin transaction between exchanges and agencies especially on an international level.
It also involves collation and analysis of the data and information to find any relation to any criminal activities in the movement of assets.
Tracing of assets:
This process involves using ‘red flag’ indicator systems to help in tracing the assets involved in a criminal activity.
This mechanism notifies the law enforcement authorities when these specific things are noticed:
- A large number of accounts owned by a single individual or even by one particular virtual currency exchange company and are used typically as flow-through accounts
- A few off-shore accounts held by one single individual or a virtual currency exchange company and
- Recurring movement of money between the bank accounts owned by different people located in different countries.
While the first two indicate the potential purpose of tax evasion or to hide illegal profits, the last possibility indicates likely layering activity which is characteristically used when anyone wants to launder money.
There may also be some jurisdictional issues faced by the law enforcement authorities while seizing Bitcoin.
These issues are typically created due to the fact that crypto transactions happen online and it literally removes the national borders.
These issues are quite complex and can be avoided only after locating the address first and then go ahead with the seizing preparations.
It is the physical location of the device that contains the Bitcoin wallet that is more necessary.
In most of the cases this is considered to be just the right jurisdiction for freezing and confiscating.
The process followed by the law enforcement authorities to seize Bitcoin as a result of an illegal allegation can be different for different situations.
Here are the ways in which the law enforcement authorities seize Bitcoin.
This is a process when the law enforcement authorities seize the coins through a warrant.
In pursuant to such seizure warrants all those coins that are held in self-custody can also be confiscated by the government or the law enforcement authorities.
However, this must quantify the identity of the owner of the wallet address as well as the amount of Bitcoin held in that particular address.
However, if a search warrant for Bitcoin is used which is typically set to seize the coins from an exchange or any other institutional custodian will be typically addressed to that particular exchange or institutional custodian and not the individual.
Ideally, a seizure warrant that is filed properly will very clearly identify all the addresses that are associated with the coins to be seized.
It will also essentially present the facts that satisfy the probable cause for such seizure and allegation as per the Fourth Amendment.
Moreover, the crypto exchange or the institutional wallet custodian may also provide the private key for the Bitcoin wallet mentioned in the seizure warrant to the law enforcement authorities voluntarily in order to absolve themselves from liability and legal consequences.
Typically, Bitcoin can be traced and confiscated by tracing and gaining control of the wallet in the first place.
This is due to the fact that it is the Bitcoin wallet that contains all the necessary and intrinsic info about the private keys.
There is no way Bitcoin can be seized by the law enforcement authorities by simply transferring the funds to the wallets created by them to hold the coins or taking away the hard drive.
Obtaining the private keys is therefore essential and once these are obtained in any possible ways by the law enforcement authorities, the Bitcoin can be seized easily.
Apart from seizing Bitcoin from the wallet of an individual or an entity as identified in the warrant, the law enforcement authorities can also seize coins held by some other individual or an entity. This process is typically referred to as criminal forfeiture.
Such forfeitures result in the permanent loss of the coins and are usually done on the basis of a court order or judgment.
However, such seizure may happen even before forfeiture and it is not necessary that all seizures of coins will typically result in forfeiture.
Typically, in a criminal forfeiture, the defendant is usually accused of some criminal activity which involves a particular property or asset.
As you may know that Bitcoin is treated as property and not completely fungible by the law. Therefore, it can be subject to forfeiture apart from seizure.
In most of the cases, the defendants in such an action are already in detention and as a piece of a plea covenant they disclose the private keys.
This specific method of criminal forfeiture is a common process followed by the Department of Justice in order to obtain Bitcoin through its officers and agencies.
This is quite easy because in such cases, as said earlier, the defendants normally accept a plea deal very easily.
This means that in most of the cases issuing a warrant may not be necessary because the defendants are willing to relinquish their private keys in exchange for the plea deal.
In a nutshell, no matter whichever way is followed by the law enforcement authorities, there are a few specific steps that they need to follow to seize the Bitcoin of a suspect.
The agency preemptively has to create a digital wallet to hold the seized coins in it temporarily before the custody of the same coins are handed over to the US Marshals Service which is the sole authority to auction them off.
Warrants and affidavits:
There are affidavits and warrants made for such seizures of Bitcoin and these are usually available to the public.
The next step involves identifying the Bitcoin wallet that is supposed to hold the alleged coins and is suspected to be involved in illegal transactions of funds.
The time is very limited in such situations once the wallet is discovered.
Therefore, the law enforcement authorities should quickly find out whether or not it is likely to access the wallet by using the necessary private keys or pass codes.
Otherwise, access to all devices should be restricted that may hold Bitcoin.
The law enforcement authorities should then focus on collection of the coins and storing them in their own Bitcoin wallet from the wallet of the defendant.
If this particular wallet is not encrypted then it is easy for the law enforcement to move the coins from it.
And, if it is encrypted the suspect can be asked to volunteer and give the codes, which is the easiest way.
If the suspect does not cooperate, then an order must be obtained to compel the suspect to unlock the wallet.
Getting such an order is easy because admitting that the suspect is aware of the encryption code is enough for it.
However, sometimes immediate access to the wallet of the suspect may not be possible.
In such situations, the wallet should be placed in a faraday bag or changed to airplane mode. This will prevent tampering.
Once it is decrypted, the law enforcement authorities transfer the Bitcoin seized to their wallet.
There are different ways to do so and which one to use will depend on the way it is stored by the suspect.
The next step is to ensure that their Bitcoin wallet is safe and secure where the coins should be preserved till it is sent to the US Marshals Office for an auction.
The law enforcement authorities have to monitor and track thousands of transactions made from one or multiple Bitcoin accounts to one or multiple accounts related to the defendant.
This is a complex and tedious process but the law enforcement authorities are aided by special tools.
One such effective aide to execute a search warrant is to use a cloud account that may be owned by one of the defendants.
This will help the law enforcement authorities to discover files that contain the private keys to a particular wallet in which the majority of the stolen funds may be stored.
By using the private keys obtained from there, the law enforcement authorities can seize large amounts of coins.
Well, that may not always be possible because every fraudulent user may not hold a cloud account.
In that case, the traditional blockchain network helps the law enforcement authorities quite a lot.
This relatively new analytical tool helps effectively in long-term tracing of virtual assets.
The data available on the blockchain can be used by the law enforcement authorities for analysis and hunting down the suspicious account maintained and the funds held by the defendants.
A proper analysis of the blockchain data may reveal several facts that may indicate the probabilities of money laundering schemes no matter how complex it is.
Some of these facts include:
- Chain hopping, which is a process where the coins are converted from one blockchain to another
- Peeling transactions, which indicates that the funds have undergone a succession of increasingly smaller transfers to different wallet addresses and
- Multiple mixing attempts, which indicates that the transactions made by various users are combined together to disguise the details of any one single transaction.
All these are very sophisticated analytical techniques used by the law enforcement authorities to detect and thwart fraudulent activities using Bitcoin.
Sometimes, depending on the search warrant application, the law enforcement authorities may also follow the “clustering analysis” technique.
These are typically pattern recognition algorithms.
It helps the agencies to scan the blockchain network to find out any particular pattern in a transaction.
This eventually helps the investigators in unearthing efforts to complicate the flow of funds.
This process, out of all, is praised by several law enforcement authorities and even by the judges and attorneys claiming that this is one of the most reliable bases for searching illegal activities using Bitcoin and crypto.
It is not surprising that the Federal law enforcement authorities have signed multimillion-dollar contracts with several developers of such tools.
This also indicates how focused the law enforcement authorities are on the crypto space.
However, in this particular aspect, the crypto community also plays a significant role in helping the government as well as the law enforcement authorities to root out illegal activities using crypto and the blockchain technology.
Then there is the Anti-Money Laundering or AML rule and the KYC or Know Your Customer protocols that every crypto exchange now needs to have in place and abide by.
These regulatory measures also play an important role in helping the law enforcement authorities in thwarting cyber crime.
The private implementation of these procedures prove to be the key to such types of investigation and rooting out its mistreatment that will eventually help in making the crypto space much safer and more reliable.
Several crypto exchanges working in the United States are typically regulated as MSBs or Money Services Businesses.
This is done because the MSBs need to follow the strict requirements of the Bank Secrecy Act and therefore the crypto will also have to do the same, by default.
For example, the MSBs are needed to maintain Anti-Money Laundering policies and Know Your Customer procedures to protect them from being misused by the miscreants.
In addition to that, they are also required to register themselves with the Financial Crimes Enforcement Network or FinCEN, and report them from time to time for any suspicious activities noticed on their platforms.
Compliance with all these specific requirements by the MSBs, and therefore the crypto exchanges, proves to be a very important tool for the law enforcement authorities to detect illegal activities on a Bitcoin blockchain network.
Their job is made easier by the crypto exchanges for the law enforcement authorities when they need to investigate stolen exchange funds.
The exchanges keep proper records now of different useful information that helps in the verification process such as:
- The number of the accounts used for a particular transaction
- The sources of funds that are being transferred
- The additional identification information that may help in identifying an alleged perpetrator and
- The nature of business entities that are involved in the transactions.
Such AML detection methods maintained by the crypto exchanges works very well and makes it easy for the law enforcement authorities to identify an account and freeze it, if need be, when any suspicious activity or transaction is perceived.
Therefore, the law enforcement authorities will continue using the data obtained from the blockchain for analysis and make it a priority.
This will help them to keep up with the pace of fresh and inventive schemes.
This is because the crypto space is typically sophisticated technologically and is also constantly evolving and rapidly expanding.
Therefore, the tools of ruse are also growing at an equally fast pace which leaves no other alternatives for the law enforcement authorities to look for more proven ways to detect illegal activities on a blockchain.
For this, they will also need to update their detection methods continually, and, using the ever evolving blockchain and harnessing its growing power is perhaps the best possible way to stay abreast.
Looking at it from an entirely different perspective, this rapidly increasing and developing blockchain technology will make the virtual currency exchanges better as well as the banks and other financial institutions.
They will also have to abide by the same BSA/AML regulatory requirements which will bring all on the same page.
This will not only help the clients and customers to avoid risks, but will also help them to avoid potential civil and regulatory liabilities for themselves.
And, the governments will be in a much better position and comfort while detecting illegal financial activities and preventing and deterring cyber crime involving Bitcoin and other crypto coins as well as the blockchain technology.
All these will be possible due to the public and immutable nature of the transactions recorded on the blockchain in spite of the fact that the digital assets are still viewed with skepticism by the regulators and the policymakers.
Therefore, while helping the law enforcement authorities to follow the money flow in a transaction and track the wrongdoers down, blockchain also highlights the role played by it in the crypto industry by being a step ahead of the bad actors.
Bitcoin transactions may be anonymous and difficult to trace and hack but it is not entirely impossible, given the regulations imposed on it.
There are lots of ways in which the government can seize Bitcoin for varied reasons, as pointed out in this article.
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