When Alexandre Cazes hanged himself in a Thai jail cell in July, the 25-year-old left behind the trappings of a big-league drug dealer: villas, Lamborghinis, a Porsche, bank accounts in Liechtenstein and Switzerland. But Cazes, who authorities allege operated AlphaBay, the world’s largest black-market website for drugs and weapons, also left something else: Internet “wallets” holding millions of dollars’ worth of Bitcoin and other virtual currencies.
Cazes’s digital loot is now property of the U.S. Justice Department, which seized it during a global sting operation. The agency plans to sell it, and given that Bitcoin’s value has soared more than fivefold since then, it could reap a huge windfall. But if you want to find out who’s holding those coins, or when they’re being sold, you’ll need extensive cybersleuthing skills — and a lot of free time.
These digital seizures and sales, unheard-of five years ago, are fast becoming routine. Bitcoin’s enduring popularity among online wrongdoers, and its growing presence in criminal busts, has turned Uncle Sam into a major player in cryptocurrency markets. While exact figures are impossible to pin down, documentary evidence and interviews with current and former defense attorneys and prosecutors suggest that at least $1 billion worth of digital coins, and possibly much more, has spent time in the custody of U.S. law enforcement.
But once in government hands, this digital hoard disappears behind a cloak of secrecy. The anonymity that makes Bitcoin a darling of libertarians — along with opaque property-seizure laws hated by those same libertarians — makes it virtually impossible for the public to follow the digital money. And as federal agencies have been drawn into an ever-growing role in the cryptocurrency boom, their efforts to guard their digital gold have led to surprises, stumbles, and sometimes sin.
The U.S. Marshals Service is the oldest law-enforcement agency in the country, counting gunslingers like Wyatt Earp and Wild Bill Hickok among its alumni. More recently, TV and movies have familiarized many Americans with its role transporting prisoners and tracking dangerous fugitives. Far fewer people know the marshals sell Bitcoin.
A decades-old law gives the Marshals Service, which is part of the Department of Justice, primary responsibility for disposing of items seized by other federal law-enforcement agencies. That’s why you can visit the marshals’ website and ogle boats, cars, planes, wristwatches, and other ill-gotten gains snatched by the FBI and other agencies, all available at public auction. The seizure process, known as forfeiture, became more commonplace and controversial in the 1980s after Congress made it easier for federal officials to sell assets tied to drug crimes.
At the time, no one knew these assets would someday include money mined on computers. That changed earlier this decade during an epic investigation into Silk Road — a global eBay for illegal drugs. A young Texan known as Dread Pirate Roberts (real name: Ross Ulbricht) built Silk Road on three then-new technologies: cheap cloud data storage; the Tor browser, which let people roam dark parts of the Internet undetected; and Bitcoin, which let them pay each other in a secure, semi-anonymous manner, without involving banks.
By 2013, as the feds closed in on Silk Road, criminals had become savvy about Bitcoin, but law enforcement lagged behind.
“There was no expertise. It was too new,” says a prosecutor involved in the case. Like most sophisticated Bitcoin users at the time (and most criminals today) the Dread Pirate didn’t rely on a broker such as Coinbase to hold his digital funds. Instead, Ulbricht controlled an online wallet using a private key — a long, complex set of characters that’s basically impossible to guess. In private-key cases, the only way law enforcement can quickly obtain the Bitcoin is if the suspect reveals the key.
Enterprising agents figured out ways to snag suspects’ currency when it wasn’t protected. To get Ulbricht’s Bitcoin, they snatched his open, unlocked laptop from under his nose while arresting him in a San Francisco library. (As for Cazes, he was logged in to an AlphaBay administrator’s account when agents rammed a car through the gate of his Thailand estate.) By the time they busted the Dread Pirate, the marshals had got up to speed: They controlled at least two digital wallets of their own, to hold the Silk Road currency and receive Bitcoins seized by other agencies.
“This was cutting-edge stuff,” says Sharon Cohen Levin, a longtime chief of the asset-forfeiture unit in the U.S. Attorney’s office for the Southern District of New York, and now a partner at WilmerHale.
“We’d never done something like this.” Once they did, however, the marshals fell back on standard procedure, preparing to handle the Bitcoin the same way they would a coke smuggler’s speedboat: by auctioning it off. That posed challenges because of the sheer size of the seizure — about 175,000 Bitcoins, or 2% of all the Bitcoin in circulation at the time. According to a prosecutor familiar with the case, the marshals opted for a staggered series of auctions to avoid crashing Bitcoin’s price.
In four auctions between June 2014 and November 2015, the marshals sold the Silk Road Bitcoins for an average price of $379. Bitcoin went on to enjoy a huge run-up; as a point of comparison, in an unrelated auction this January, the marshals sold off 3,813 Bitcoins and netted $45 million — or about $11,800 per coin. Sold at those prices, the Silk Road stash could have reaped $2.1 billion, enough to cover the Marshals Service’s annual budget; in 2014 and 2015, it netted just $66 million. Billionaire venture capitalist Tim Draper, meanwhile, made what might be the investment of the decade when he snapped up 30,000 of the Silk Road coins for about $600 each. Draper, who described the auction process to Fortune as
“smooth,” says he hasn’t sold a single one, adding,
“Why would I trade the future for the past?”
The marshals couldn’t have anticipated this, of course. And federal agents shouldn’t be expected to time the market when they sell assets, says Clifford Histed, a former prosecutor who now practices at K&L Gates. In cases Histed worked in which securities were seized, he says,
“we realized the government doesn’t want to be in the business of guessing the stock market.”
Still, the Silk Road fire sale exposed the feds to ridicule from cryptocurrency devotees — and in an era of strained budgets, the pressure to sell high is great. In mid-December, as prices neared $20,000, U.S. attorneys rushed to federal court in Utah for permission to sell 513 Bitcoins they’d seized from a seller of counterfeit pharmaceuticals. The judge agreed, but the marshals didn’t make the sale until late January, by which point the price of Bitcoin had fallen nearly 50% off its high.
Local authorities are dealing with comparable headaches.
“We had a good, old-fashioned kidnapping and robbery where they put the guy into what he thought was an Uber and then held him at gunpoint for $1.8 million worth of [digital currency] Ethereum,” forcing him to give them his private key, says Brenda Fischer, who leads the cyber unit of the Manhattan District Attorney’s office. The DA’s office recovered the funds but is now coping with a conundrum: The robber converted the Ethereum to Bitcoin, whose price rose significantly after the theft — raising novel legal questions over who should get the surplus windfall.
Forfeiture.gov, a website run by the Justice Department, might seem at first like a godsend for watchdogs. On a recent Monday, a document on the home page detailed at least $2 million worth of digital coin forfeitures involving multiple agencies. You could learn that the Drug Enforcement Administration took 140 Bitcoins from a drug dealer in New Hampshire and 25 more from one in Boston, and that Customs and Border Protection seized 99 Bitcoins and 99 units of Bitcoin Cash (a separate currency) in Salt Lake City.
But the transparency is fleeting. There are often long lag times between the date of a seizure and its appearance in a report. And reports aren’t archived online: Each day, when a new one appears, the old one goes away. Paper copies exist — but nowhere, online or on paper, is there a tally of the cryptocurrency in federal custody at any given time.
“This country is weirdly lacking in central registries,” says Alex Lakatos, an attorney with Mayer Brown who has advised clients on forfeiture. Whether it’s the feds or local authorities doing the seizing, he adds,
“we don’t know how much property has been seized.” Asked if there is any public registry of forfeited property, a spokesperson for the marshals replies with a flat no. And there is no law obliging the government to create one. Histed and others in law enforcement generally defend this opacity; more transparency, they argue, could tip off criminals about agents’ methods or ongoing investigations.
In theory, any Bitcoin in federal hands can be traced, because cryptocurrency transactions are inscribed forever on a public blockchain ledger. But while Justice Department documents sometimes publicly identify
“secure government wallets,” many criminal cases do not, making it unclear where the Bitcoin went. Even in cases in which the wallet is identifiable, its contents appear to a layperson as endless strings of alphabet-soup characters — anonymized representations of individual coins, transactions, and users. To be sure, a cottage industry of forensics firms, including Elliptic and Chainalysis, has sprung up to help clients — many of them law-enforcement agencies — connect wallets to their owners. But public disclosure is not part of their mission.
As long as police have been seizing cash, some have been skimming it. I don’t think Bitcoin will prove any different.
This state of affairs makes it extremely difficult to figure out how much cryptocurrency the government owns — and it’s not clear, given the range of agencies grabbing Bitcoin (which also includes the Secret Service; the Bureau of Alcohol, Tobacco, and Firearms; and the Post Office) that the government itself knows. For advocates of transparency, it’s particularly galling given that blockchain technology, if deployed well, could easily make this clear. And to critics of forfeiture, the Bitcoin black hole is a digital manifestation of a system that has been abused for decades. Foes say that sweeping forfeiture powers at the state and local level create perverse incentives that can lead, in effect, to cops robbing civilians.
“I’ve spent 23 years in law enforcement and, unfortunately, I believe as long as police have been seizing cash, some have been skimming it,” says Histed.
“I don’t think Bitcoin will prove any different.”
Seen in that light, discrepancies and gaps in the public record take on troubling overtones. In tracing a sample of Bitcoins from court records and forfeiture notices, Fortune turned up several instances of coins whose seizure was documented but whose sale was not. Court filings from 2014, for instance, show the IRS seized 222 Bitcoins from a marijuana dealer in Texas, but there is no documentation of its sale. Likewise, there is no auction record for 50.44 Bitcoins seized by the Secret Service in 2014 from a couple who ran an illegal drug and money-changing site under the name “JumboMonkeyBiscuit.” (Other cases reflect odd valuations — for instance, the forfeiture notice for the 99 Bitcoins seized in Salt Lake — worth around $800,000 in early February — lists the value of the currency as $0). Some of these coins could still be tied up in active cases or in the hands of the agencies that seized them. But since the Marshals Service doesn’t comment on its internal processes, there’s no way to know whether there’s a valid reason why they’re in limbo.
There is no evidence to date of government agents misusing the forfeiture process to steal Bitcoin, and former prosecutors, including Histed, stress that corruption is the exception, not the rule. Nonetheless, the long gaps between seizure and sale only amplify the suspicions of defense lawyers and civil libertarians. And sources across the spectrum agree that the combination of opaque oversight and easy-to-move digital currencies creates a powerful temptation to go astray. Indeed, the first major federal Bitcoin bust proved as much.
Jarod Koopman is the director of Cyber Crime in the Criminal Investigation division of the IRS. The tax agency’s crime-fighting wing has about 2,000 agents — accountants with a badge and a gun — and counts a growing number of cryptocurrency experts in its ranks.
“They’re the cream of the crop,” Koopman says.
But one of the team’s best-known busts is also its most disturbing, because it involved an inside job. During the Silk Road investigation, two agents — Carl Force of the DEA and Shaun Bridges of the Secret Service — went on a crime spree that would make Al Capone blush. Before Dread Pirate Roberts was arrested, they stole Bitcoin from the kingpin and his website and tried to extort payment from him. The crooked pair even posed as hitmen, staging a fake execution of an informer as part of another scheme to defraud Ulbricht. The IRS sleuths eventually snared Force and Bridges; both pleaded guilty in 2015 to charges related to the case. The agents carried out their scam before Ulbricht’s assets were seized, so they didn’t technically game the forfeiture process. Still, the case points up the potential for murky doings when digital currency meets forfeiture law.
The Marshals Service, which is in the best position to provide a detailed accounting of seized property, is operating under something of a cloud itself. In September, after a lengthy investigation by staffers at the Senate Judiciary Committee, chairman Sen. Chuck Grassley (R-Iowa) blasted the service for using forfeiture funds to pay for perks and luxury items such as
“high-end granite countertops and expensive custom artwork,” much of it installed, appropriately enough, at a new Asset Forfeiture Academy in Houston. It wasn’t exactly a superheist, but it does nothing to assuage forfeiture critics or Bitcoin adherents, many of whom embrace the currency precisely because they lack faith in the integrity of governments.
Koopman estimates that his IRS squad has helped seize tens or hundreds of millions of dollars’ worth of virtual currency. That’s just one agency: Given that nearly a dozen others have forfeiture power, Koopman’s guess offers a sense of how far the government’s reach could extend into the digital coin market. And that reach will only grow as cryptocurrency becomes more commonplace.
Finding illicit currency won’t get any less challenging. For years, bad actors have been
“moving to other currencies that didn’t leave the same digital bread crumbs,” says Jud Welle, a former cybercrime prosecutor who is now a consultant with Aon. Many have abandoned Bitcoin for coins like Monero and ZCash, which offer the same sort of secure payment options but are all but impossible to trace. And more online black markets now bake so-called tumblers, which scramble transaction records, right into their checkout services, says James Smith, the CEO of forensic firm Elliptic. It adds up to a potentially endless digital cat-and-mouse game. And if law-enforcement agents ever do go rogue, the currency they steal will be that much easier to hide.
The digital money, meanwhile, keeps rolling in. Another recent forfeiture.gov list showed a DEA seizure of six Bitcoins in New Jersey, along with 27 Bitcoins (worth approximately $330,000) taken from one Anton Peck by the U.S. Attorney’s Office in Colorado. And an early February sting against a global credit card fraud ring reportedly netted the U.S. 100,000 more Bitcoins. In theory, Uncle Sam will be putting all of it up for auction — someday.
Who Gets the Bitcoins?
How Forfeiture Works
When agencies like the FBI and DEA seize Bitcoin, they rely on the Marshals Service to sell the seized coins. If the case involves a victim of a crime, the Justice Department distributes the funds as restitution. The remaining money is also shared with international partners and, if local law enforcement helped in the case, they can apply for up to 80% of the proceeds. The Justice Department then keeps and distributes the rest of the money to federal law enforcement at its discretion.
Critics say the forfeiture process can be abused.
“It incentivizes them to seize property,” says David B. Smith, chair of the Forfeiture Committee for the National Association of Criminal Defense Lawyers. One silver lining: At the federal level, Smith adds, there is no direct connection between who seizes the property and who gets the proceeds,
“so it is less corrupting.”