What is Cryptocurrency Confiscation?

Cryptocurrency seizure refers to the seizure of cryptocurrency assets by authorities, often as part of a legal investigation. This can occur in cases of fraud, money laundering, or other illegal activities.

If law enforcement suspects illegal activity, they can seize digital assets from cryptocurrency wallets. The funds are typically transferred to government-controlled wallets until the case is over. The seized assets are sold or auctioned off if the defendant is found guilty in court. But if they are found not guilty, the cryptocurrency is returned to their wallets.

Seizure occurs during an arrest, the execution of a search warrant, or based on a seizure order that specifies the assets to be seized. Cryptocurrency seizure orders are typically issued to exchanges or custodians, not individuals.

The order will specify the exchange’s wallet address and the reason for the seizure. The exchange will be required to provide the private key of that particular wallet to the prosecutor. To avoid liability and the possibility of serious consequences, exchanges usually comply and provide the private key.

However, requiring exchanges to hand over private keys under legal pressure poses a fundamental challenge to the decentralization principle on which cryptocurrencies are built.

Notably, a forfeiture order is not the only way for law enforcement to seize cryptocurrencies like Bitcoin held by an individual or other entity. Governments can also seize cryptocurrencies through a process called forfeiture. Forfeiture refers to the permanent loss of property by court order or judgment. The process of confiscating cryptocurrencies usually precedes a seizure, and not all seized assets are forfeited.

How does the cryptocurrency confiscation process work?

The process of seizing cryptocurrency is significantly different than seizing physical assets like apartments, vehicles, or jewelry. Tangible assets can be seized through physical force, but with cryptocurrency wallets, authorities need a private key to unlock and transfer the assets.

Typically, authorities work with the exchange hosting the wallet to access and recover the assets. This is possible for software wallets, also known as hot wallets, because exchanges typically store a copy of the private keys. However, for hardware or cold wallets—offline wallets owned by individuals—authorities may need to use technical intrusion measures to recover the assets.

After the seizure, the authorities will secure the cryptocurrency and can proceed to liquidate the assets. Liquidation usually requires a court order, and the process can take years. Once the assets are liquidated, the proceeds are distributed to victims of the crime or shared among government agencies.

The U.S. Department of Justice (DOJ) established the Virtual Asset Exploitation Unit (VAXU) within the Federal Bureau of Investigation (FBI) in 2022, focusing on blockchain analysis and virtual asset forfeiture. VAXU works closely with the DOJ’s National Cryptocurrency Enforcement Team (NCET) on asset forfeiture matters.

In some cases, government agencies use a process called administrative forfeiture. Under this process, assets are seized without the owner of the cryptocurrency wallet being prosecuted for any crime. This means you can lose your cryptocurrency without going through a court trial.

In this context, the FBI deployed NexFundAI, a cryptocurrency token created in May 2024 as part of Operation Token Mirrors. This covert operation targeted individuals and entities involved in cryptocurrency fraud, particularly pump-and-dump schemes. Designed to look like a legitimate cryptocurrency, NexFundAI served as a “bait” to lure in market manipulators, allowing the FBI to collect evidence against them.

When are crypto assets seized?

Authorities confiscate cryptocurrencies when they are used for illegal activities such as tax evasion, money laundering, fraud or drug trafficking.

If an individual uses cryptocurrency for illegal activities such as drug trafficking or cyberattacks, the cryptocurrency may be considered “proceeds of crime” by authorities and subject to seizure by government agencies. The purpose of such seizure is to stop the illegal activity or recover stolen funds.

Criminals often use cryptocurrencies to take advantage of the “anonymous” nature of blockchain transactions to hide the flow of money. However, government agencies can identify the proceeds of crime through the “data trails” left on the blockchain and seize the assets. They can also require cryptocurrency exchanges to freeze wallets used in the crime.

Prosecutors typically consider factors such as the feasibility of seizing crypto assets, the challenges of managing or seizing the assets, and the value of the assets when deciding whether to proceed with seizure.

Data on the amount of money stolen by hackers over the years. Source: Chainalysis What happens after the cryptocurrency is seized?

Once your cryptocurrency assets have been seized under civil law in the United States, you will need to hire a foreclosure attorney to file a certified petition with the foreclosure agency to take the case to court. The agency has 90 days to file a lawsuit to seize the assets or return the cryptocurrency.

When the authority files a seizure lawsuit, the court will issue a notice to all parties involved to present their side of the story. Your attorney can file an answer, a counterclaim, or a motion to dismiss the authority’s lawsuit. If you prove your case, the court can dismiss the authority’s lawsuit, order the return of the seized crypto assets, and award you attorney’s fees.

If the authorities have filed a criminal case, the process is more complicated and you may face additional charges. In these cases, the defendant will often agree to a plea agreement, which eliminates the need for a forfeiture order. Under these agreements, the defendant may voluntarily surrender the private key as part of the agreement.

In the UK, the Proceeds of Crime Act 2002 regulates how seized cryptocurrency is dealt with. As with other seized assets, 50% of the value goes to the Home Office, while the remaining 50% is split between the police, the Crown Prosecution Service, and the courts. Additionally, there is the possibility that some of the seized assets will be returned to victims of cryptocurrency crime.

In Europe, when authorities discover illegal cryptocurrency transactions, they seek court orders to freeze or seize assets. They work with cryptocurrency platforms to enforce these orders. In cross-border cases, agencies like Europol can assist. Confiscated cryptocurrency is stored in government-controlled wallets and, depending on national laws, can be auctioned or liquidated after a conviction.

In India, law enforcement agencies such as the Enforcement Directorate (ED) and local cybercrime squads work together or independently to seize cryptocurrencies. When illegal activity is detected, authorities can seek a court order to have the exchange freeze or seize the assets. Until the court makes a final decision, the seized cryptocurrencies are stored in wallets under government custody. This process is often lengthy as India is still developing a clear legal framework for dealing with cryptocurrency-related crimes.

Example of cryptocurrency seizure

Government agencies around the world have carried out numerous seizures of cryptocurrency assets, including funds linked to Bitfinex, Silk Road, and Mt. Gox.

Here are some typical examples:

Bitfinex Funds Seized

In 2022, US federal authorities recovered about $3.6 billion worth of Bitcoin related to the 2016 Bitfinex exchange hack. About 120,000 BTC were stolen by hackers, and the money was traced back to two individuals years later.

Authorities seized the assets as part of the investigation. Although Bitcoin transactions are anonymous, the case represents advances in blockchain analysis, demonstrating that even years of illicit funds can be traced and seized.

The Silk Road Crackdown

In 2013, the US government seized approximately 144,000 Bitcoins from the online criminal marketplace Silk Road. Ross Ulbricht, the founder of the platform, was arrested on charges of facilitating illegal drug transactions.

The highly publicized seizure of cryptocurrency was part of a larger campaign to crack down on illegal cryptocurrency activity. The U.S. Marshals Service later auctioned off the seized Bitcoin, now worth billions of dollars. The Silk Road case is still considered a milestone in the regulation and prosecution of cryptocurrency-related crimes.

Seizing Mt. Gox Assets

Mt. Gox, once the largest Bitcoin exchange, declared bankruptcy in 2014 after losing 850,000 Bitcoins, worth about $450 million at the time. After filing for bankruptcy, the exchange's remaining assets, including more than 200,000 BTC, were seized by Japanese authorities. The funds were held in an escrow account while authorities pursued legal proceedings to repay creditors.

In March 2014, Mt. Gox CEO Mark Karpelès announced the discovery of 200,000 Bitcoins in an old digital wallet, reducing the loss to 650,000 BTC, raising hopes for creditors. The Tokyo District Court later appointed a temporary administrator to handle the complex legal case. A major challenge was valuing the lost Bitcoins, whose value had soared since the hack. Karpelès faced embezzlement charges, but was only convicted of falsifying records. As of 2024, the process of repaying creditors continues, with the repayment deadline extended to October 2025.

How does law enforcement use the seized money?

In the United States, federal agencies must submit a plan to the Department of Justice (DOJ) for how the money from forfeited assets will be spent. The plan must clearly state how the money will be spent. Civil forfeiture became popular in the 1980s during the anti-drug campaign and has faced persistent criticism since then.

In some cases, seized assets are returned to their owners as part of a plea agreement. However, only 1% of seized assets are ever returned. The majority of forfeited funds are typically used to support law enforcement activities, such as equipment, training, and investigations. For example, in 2011, the St. Louis County Police Department spent $400,000 on helicopter equipment from this fund.

Some states, such as Missouri, require that the proceeds of forfeiture be distributed to the school system. However, law enforcement agencies often retain the majority of these funds through the Federal Equitable Sharing Program. This has led to controversy over the use of forced forfeiture of assets from individuals or companies.

Many argue that reform is needed to ensure that the asset forfeiture process is conducted fairly and transparently, while providing adequate protections for those at risk of asset forfeiture.