Law enforcement seizing BTC is nothing new. But there has been a recent change in how law enforcement agencies monetize seized BTC — and it’s wreaking havoc on the market.
According to Arkham, Germany’s Federal Criminal Police Office moved another $84 million worth of BTC this morning, following the transfer of $75 million worth of BTC to exchanges yesterday.
Currently, $30 million has been transferred to trading company Flow Traders.
The sale of seized BTC to exchanges, coupled with the impending release of Mt. Gox’s Bitcoin holdings, has reignited the discussion about how governments should handle large-scale crypto liquidations.
Government wallets don’t always send large amounts of BTC to exchanges.
Arthur Cheong, founder, CEO and CIO of DeFiance Capital, wondered aloud on Twitter why the government was no longer using public auctions.
“Why would the government now prefer to sell BTC through OTC transactions or directly on exchanges, rather than through auctions as it has done in the past?” he wrote. “These BTC may also fetch a premium given their provenance and clean background.”
Matthew Kaye, head of operations and strategy at Intuition Systems, told Decrypt that the government appears to be prioritizing expediency over maximizing returns.
“The U.S. deficit suggests the government may not have the priority or expertise to execute the sale of its BTC assets in a way that maximizes value,” he said.
“Selling this stock is likely to be seen as a simple task, with people preferring to take the easiest and most convenient route rather than getting the best possible price.”
That may not be the only reason. In many cases, governments find themselves sitting on large amounts of unrealized gains, said Ganesh Swami, CEO and co-founder of Covalent.
“When BTC was below 20k, most of the BTC was reclaimed/confiscated,” Swami said. “They really don’t care about the 5-10% difference.”
That view suggests the government may be satisfied with the significant gains already achieved, making the auction’s potential premium less attractive, he added.
Silk Road BTC Auction
The evolution of the government’s BTC liquidation strategy can be traced back to early high-profile cases.
The United States Marshals Service (USMS) pioneered Bitcoin auctions, notably selling assets seized from the Silk Road darknet marketplace in 2014 and 2015. But the USMS has also reportedly lost billions of dollars by selling its seized BTC too soon.
However, as crypto markets have matured and liquidity has improved, many governments have turned to market-based approaches.
For example, the Finnish customs agency worked with a cryptocurrency broker in 2023 to sell approximately 1,890 BTC seized in a criminal investigation.
Similarly, in 2021, the Swedish Enforcement Agency partnered with a cryptocurrency exchange to sell seized BTC through its trading platform.
Fideum co-founder Darren Franceschini highlighted another factor influencing the government’s decision: Buyers may be reluctant to use illegally obtained funds.
“The reason why governments choose to sell BTC on the open market rather than through auctions may stem from the origin of the BTC they hold, which is often associated with illegal activities,” he said. “As a result, institutions are generally more willing to purchase clean BTC rather than BTC associated with illegal or other activities.”
The insight highlights a potential paradox: While BTC with a clear provenance after government seizure could fetch a premium at auction, its association with a criminal case could make it less attractive to institutions that might otherwise want to buy it.
The impending liquidation of Mt. Gox’s Bitcoin holdings adds another layer of complexity to current market dynamics.
But in this case, the decision on whether to realize BTC gains still lies with individual creditors — who have been waiting for more than a decade to get their funds back.
According to Arkham, the Mt. Gox trustee appears to have moved $2.7 billion worth of BTC out of cold storage during Asian trading hours Friday morning.
