One spring day in a village just west of London, residents saw a man being muscled into a vehicle in front of a nearby house. He reappeared with cuts and bruises 13 hours later, but the cops had already discovered the house was a cannabis-growing operation. A separate search of the man’s home in a nearby town turned up something more intriguing — some of the first cryptocurrency that would ever be seized by British police.
That era-defining 2017 case yielded a safety-deposit box containing jewelry, gold bars, ￡263,000 (US$342,000) in cash and an item that flummoxed the lead investigator, Matthew Durkin, a 19-year veteran of the Surrey police. It was a USB device found in the suspect’s study. The gadget was wrapped in a small notebook, which contained two strings of 12 random words. A young probationary officer recognized the device, a KeepKey, as a virtual currency holder and the words as seed phrases to access cryptowallets. Eventually, police discovered that it held 295 bitcoin.
“It meant nothing to me until someone said it was worth ￡900,000,” said Durkin, 51.
Illustration: Mountain People
In the past few years, police departments such as Durkin’s and law enforcement agencies around the world have had to learn quickly about how to deal with cryptocurrencies, often in amounts that eclipse traditional assets such as cash, gold, jewelry, vehicles and real estate. In London, for instance, police seized almost ￡300 million of cryptocurrencies linked to crime last year.
The US Marshals Service held 22 cryptocurrencies valued at about US$919 million in December last year, spokeswoman Shaunteh Kelly said.
In February, the US made its largest financial seizure ever: About US$3.6 billion in bitcoin stolen during a 2016 hack of the Bitfinex currency exchange.
Cryptocurrencies made up almost all — 93 percent — of the assets confiscated by the US Internal Revenue Service’s (IRS) Criminal Investigation Division in the fiscal year that ended on Sept. 30.
“It’s exploded since 2017,” said Ryan Korner, head of the division in Los Angeles. “We’re at a point where it touches almost every investigation that we work in one way or another. We’re trying to make sure that all of our agents have the knowledge to work these cases.”
The qualities that make cryptocurrencies attractive to criminals — some think they are easier to hide and transfer than many valuable assets — are challenging law enforcement.
To start, investigators have to learn to recognize a cryptowallet and then how to obtain the private key, or seed phrase, to unlock it. Months after the US$10 million hack of the GateHub platform in 2019, French investigative judge Pascal Latournald and his colleagues held and interrogated a suspect for the better part of 48 hours before he gave up the code that unlocked US$2 million in bitcoin. The exhausted suspect, hoping for leniency, revealed he had written it on a slip of paper inside a cookbook in his parents’ living room in southern France, according to an officer involved in the investigation who spoke on the condition he was not named.
US agents have discovered seed phrases hidden on a gum wrapper, inside a TV instruction manual and on tiny pieces of paper stuffed in a suitcase in a closet, said Tigran Gambaryan, who was a special agent for the IRS’ criminal investigation arm for a decade before joining crypto exchange Binance in September last year.
In 2018, British police chiefs lobbied the government for funding to equip about 250 officers — dubbed crypto tactical advisers — and train them in how to investigate, seize and realize the value of digital currencies.
The FBI in February formed a crypto unit to provide equipment, training and blockchain analysis to agents. The US Department of Justice appointed Eun Young Choi as the director of a team dedicated to crypto crimes.
Choi has said her focus would include virtual currency exchanges and services, known as mixers or tumblers, that obscure funds.
Speaking at a conference in Munich, Germany, US Deputy Attorney General Lisa Monaco said her prosecutors would work more with European partners on crypto enforcement.
Laurel Loomis Rimon, who worked on many money laundering cases during her 17 years as a federal prosecutor, said the value of the recent seizures is “staggering” and would have a big impact on prosecutors.
“There’s a facility with this type of analysis that has been growing,” said Rimon, now at the law firm Paul Hastings. “You’ve got prosecutors getting more and more comfortable with it.”
As law enforcement becomes more sophisticated in identifying and accessing a suspect’s cryptocurrency, they have also had to navigate the challenges of securing it and, eventually, liquidating it.
In the Surrey case, police quickly bought their own KeepKey and transferred the bitcoin to it. They put the device and seed phrase in a safe, and only two officers knew the combination.
Durkin had heard about two US agents who went to prison for stealing bitcoin while investigating the now-shuttered Silk Road underground virtual drug bazaar.
“I was very conscious of security — people’s heads can be turned with a million quid,” Durkin said. “But most of all, I was worried about losing it — I didn’t want to stand in front of my chief constable and say ￡900,000 in bitcoin had gone.”
Durkin’s team got a court order, the first of its kind in the UK, that enabled them to convert the crypto into sterling. They sold it directly to a trusted international exchange for ￡1.25 million, the market rate at the time.
Once seized, it can take years for authorities to secure a forfeiture order letting them sell crypto and return the proceeds to crime victims or governments. In the US, seized property is subject to claims by people who say they have a right to it.
In 2018, authorities in Monmouth County, New Jersey, raided two locations used by a suspected drug dealer, Giddel Gonzalez-Estrada. They seized cocaine, cash and a handgun, as well as bitcoin, litecoin and ether valued at US$57,000.
Gonzalez-Estrada held the cryptocurrency in an account at Coinbase Global Inc. Monmouth authorities got a judge’s approval to seize the cryptocurrency from Coinbase, which transferred it to a wallet set up by detectives.
They held it on a device in the evidence vault, said Michael Costanzo, a special deputy attorney general.
Gonzalez-Estrada pleaded guilty in 2019 and was sentenced to 10 years in prison. When a judge finally approved the forfeiture last year, detectives transferred the cryptocurrency back to Coinbase, netting US$198,237 for the county’s law enforcement trust account.
Seizing and selling cryptocurrency is becoming less daunting for prosecutors and detectives, Costanzo said.
Monmouth prosecutors are preparing for trial against a former tennis teacher accused of identity theft and other crimes. In 2017, they seized cryptocurrency valued at US$200,000. The value grew to US$1.25 million last year.
“There were a lot of questions about it in 2018,” Costanzo said. “Now, in 2022, people have if not a full understanding, at least a rudimentary understanding.”
Around the world, stashes of confiscated cryptocurrency have been auctioned — alongside Ferraris, watches, diamonds and, in one case in Germany, a harp.
Wilsons Auctions, the largest independent auction house in the UK and Ireland, got involved in 2018 when the company realized that law enforcement did not have a solution for selling seized cryptocurrency at the time. In February 2019, the company auctioned 315 bitcoin for Belgian authorities. The sale, which took place online as well as in person, attracted bidders from more than 90 countries.
One middle-aged woman purchased half a bitcoin along with some other items, said Aidan Larkin, who ran asset recovery for Wilsons at the time.
When she insisted on taking the bitcoin home with her in a bag, the auction team had to coach her on how to set up a digital wallet instead.
The British National Police Chiefs’ Council, the representative body for all forces, undertook a procurement process that enabled police to use a third-party custodian to store and sell cryptocurrency. So Surrey Police and other forces now use Komainu, which is backed by Nomura Holdings, Ledger, and CoinShares.
Larkin, who formerly worked as a criminal investigator for British tax authorities, left Wilsons to start a company called Asset Reality that aims to advise law enforcement on dealing with seized assets, including cryptocurrencies.
The US Marshals Service, which disposes of assets like houses, vehicles, planes, boats and artwork, has had a hard time finding a contractor to manage and sell forfeited cryptocurrency. From 2014 to 2020, the marshals auctioned cryptocurrency themselves. Billionaire venture capitalist Tim Draper was one bidder who cleared background checks and bought cryptocurrency at auction. In 2014, he picked up 30,000 bitcoin for US$632 each, before the price plunged to US$180. He still holds those bitcoin, now valued at more than US$40,000 each.
He said he bought fewer bitcoin in the next auction, investing about 40 of them in start-ups, but would consider buying more if the government auctions them.
He might not get the chance. As seizures ballooned, the marshals sought proposals from companies to store and sell cryptocurrency. In soliciting contractors, they posted 26 pages of questions and answers in May 2020. At that point, their portfolio was valued at US$145 million in more than 160 wallets, the agency said.
In April last year, BitGo Inc won a US$4.5 million contract, but that award fell through, because it was supposed to go to a company designated as a small business, and BitGo, now part of Galaxy Digital Holdings, was too big.
In July, a US$6.6 million contract went to Anchorage Digital, which had received conditional approval for a national trust bank charter from the US Office of the Comptroller of the Currency. The contract is on hold pending the outcome of a protest to the bid.
The US Marshals Service now uses a secure online platform for selling and transferring cryptocurrency with the goal of disposing of assets “in a timely manner at fair market value,” Kelly said.
The justice department’s asset forfeiture policy manual last year spelled out how prosecutors and agents should proceed on cryptocurrency.
Because multiple copies of a key might exist, “it is imperative that once authorization to seize the virtual currency is obtained, it be transferred to an agency-controlled wallet,” the manual states.
Seized cryptocurrencies must also be held in cold storage, or a secure offline device, until it is transferred to a government-controlled custodial wallet.
In Germany, prosecutors in each of the country’s 16 states decide how to manage seized property. Frankfurt prosecutor Jana Ringwald’s cybercrime unit uses Bankhaus Scheich, a small investment bank, to ensure that confiscated cryptocurrency in her home state, Hesse, is legally managed and sold in a way that creates minimum volatility.
Prosecutors in Cologne, by contrast, auction cryptocurrency seized in North Rhine-Westphalia like other contraband. Buyers can pick up a physical wallet with the codes in person, or apply to have the coins transferred online.
Over time, German authorities have become more efficient in handling cryptocurrency, but delays are not always a bad thing. In 2018, Berlin police watched the value of their cryptocurrency soar as they waited to clear bureaucratic hurdles before holding an auction.
To be sure, much of the cryptocurrency seized today stems from crimes such as the Bitfinex hack or frauds that occurred years ago. Investigators handling these cases are specially trained in crypto sleuthing and they say it can be easier to trace money on the blockchain ledger that underlies cryptocurrencies than in the traditional banking system.
“The blockchain of bitcoin provides a lot more transparency than the legacy financial system,” said Gambaryan, the former IRS criminal investigator who is now vice president for global intelligence and investigations at Binance. “This is coming from somebody who’s worked both. If not for bitcoin, a lot of cases I was working wouldn’t be closed.”
For instance, in November 2020, US authorities confiscated bitcoin that had been hacked from the Silk Road digital marketplace about seven years earlier. The bitcoin were valued at US$1 billion when they were recovered from someone identified in court papers only as Individual X. The IRS cracked the case after working with Chainalysis Inc, a cryptocurrency research firm.
“That’s a perfect example of the permanence and immutability of the blockchain, that crimes committed long ago remain relevant as soon as we can get some attribution,” said Gurvais Grigg, Chainalysis’s global public sector chief technology officer.
The proceeds from seized cryptocurrency sold by the US government go to support law enforcement if the cryptocurrency was used to facilitate crime, said Michael Sherwin, a former federal prosecutor.
However, if there were victims of the crime, they get the money as restitution, he said.
For instance, the justice department has said it would return the bitcoin hacked from Bitfinex to the victims — a process to be worked out in court.
The volatility of cryptocurrency can create thorny questions for courts to solve.
“If you have 300 tokens stolen in 2018, what’s the court going to give you? Are you going to get the value of the tokens in 2018, or are they just going to give you back your tokens, which had an exponential increase?” said Sherwin, who is now at the law firm Kobre & Kim. “I think it should be the latter. You should get your property back, even if it increased in value.”
As regulators and law enforcement agencies become savvier about seizing and disposing of cryptocurrency, so do the criminals trying to evade detection.
“It’s not easy for us, and it’s still an extremely volatile market,” Durkin said. “It’s an area of criminality that we’ve had to play catch-up on really quickly, but the police play cat and mouse, that’s what we do.”
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