The Wall Street Journal: Where did the $5 billion worth of Bitcoin in the hands of the U.S. government come from?

Author: Vicky Ge Huang

Compiled by: Luffy, ForesightNews

The U.S. government is one of the largest holders of Bitcoin in the world, but unlike other cryptocurrency whales, it does not care about the fluctuations in cryptocurrency prices.

This is because Uncle Sam has seized approximately 200,000 Bitcoins from cybercriminals and dark web markets. They are primarily stored offline in encrypted storage devices (known as hardware wallets) controlled by the U.S. Department of Justice, the IRS, or other agencies.

How the federal government handles Bitcoin has long been a topic of interest for cryptocurrency traders, as any selling activity could impact the price of Bitcoin and ripple through the $1 trillion cryptocurrency market.

Source: CoinDesk

The U.S. government is notoriously slow in converting its Bitcoin holdings into dollars. It is not "HODLing," nor is it waiting for Bitcoin to "go to the moon" to make a huge profit by selling its holdings. Instead, this massive amount of Bitcoin is more a byproduct of lengthy legal processes rather than strategic planning.

"We deliberately do not participate in the market; we basically determine our selling plans based on the timeline of the process," said Jarod Koopman, executive director of the IRS's Cyber and Forensic Services Division, which oversees all activities related to cybercrime.

According to an analysis of public documents by cryptocurrency company 21.co, just the recent three seizures have added over 200,000 Bitcoins to the government's coffers. Analysis shows that even after selling about 20,000 Bitcoins, the value of the Bitcoins held by the U.S. government still exceeds $5 billion, and the total reserve size could be much larger.

The legal process from seizing illegal Bitcoins to receiving the final order to liquidate them for cash can take years. In some cases, this benefits the government as the value of cryptocurrencies appreciates significantly.

For example, in 2016, when the cryptocurrency exchange Bitfinex was attacked by Ilya Lichtenstein, the market price of Bitcoin was around $600. By the time Lichtenstein and his wife Heather Morgan were arrested in 2022 (the Justice Department seized 95,000 Bitcoins in the case), the price of Bitcoin had risen to $44,000. Today, it hovers around $27,000.

Heather Morgan arrested

In last year's highly publicized collapse of the FTX exchange, the U.S. government did not seize any cryptocurrencies but took control of hundreds of millions of dollars in assets, most of which were cash and Robinhood stocks. Robinhood repurchased the seized stocks from the U.S. Marshals Service in August. The crypto assets of FTX are part of its bankruptcy estate, and the company is expected to use these funds to help fill an $8 billion gap in customer funds or restart the exchange.

When government agencies control crypto assets, Uncle Sam does not immediately own those assets. The government only takes ownership and transfers the tokens to the U.S. Marshals Service, the main agency responsible for liquidating seized assets, after a final forfeiture order is issued by the court.

During the pendency of the case, the government holds Bitcoin as evidence of a crime. Since the closure of the online drug market Silk Road in 2013, the Justice Department has stored seized Bitcoins in hardware wallets. In recent years, the agency has seized 69,000 Bitcoins that once belonged to Silk Road founder Ross Ulbricht and 50,676 Bitcoins from a Georgia man who admitted to stealing assets from Silk Road.

Nicolas Christin, a computer science professor at Carnegie Mellon University, stated, "The government's actions in handling these assets are often very slow because they have to conduct extensive due diligence, the cases are often complex, and there are many bureaucratic hurdles."

The Marshals Service's liquidation process has also evolved with the development of the crypto industry. In the early days of the industry, the agency sold cryptocurrencies directly to interested buyers through auctions, many of whom made substantial profits.

The Justice Department has been storing seized Bitcoins in hardware wallets

Venture capitalist Tim Draper made a fortune investing in cryptocurrencies, purchasing over 30,000 Bitcoins from the government through two auctions in 2014. In one auction, he bought Bitcoin at $632 when the market price was $618. After Bitcoin dropped to around $180, he bought more at $191 each in another auction. The high-frequency trading firm DRW's crypto division, Cumberland, bought 27,000 Bitcoins in an auction that same year.

In January 2021, the Marshals Service decided for the first time to liquidate part of its cryptocurrency inventory held at exchanges. Historically, it has sold crypto assets in batches rather than all at once to avoid adverse impacts on the market from large sell orders. Under current practices, the agency has taken additional measures to prevent adverse market impacts, including extending the liquidation period.

One such liquidation occurred in March when the government sold 9,861 Bitcoins through Coinbase. The Marshals Service confirmed this transaction.

A representative of the agency stated, "Our goal is to dispose of assets in a timely manner at fair market value."

In many cases, the proceeds from government sales are used to compensate victims. Bitfinex stated in July that it received over $300,000 in cash and 6.917 Bitcoins Cash (BCH), worth about $1,900 at the time, from the Department of Homeland Security. Government agencies investigating increasingly complex criminal activities can also seek assistance to pay for expenses such as cryptocurrency tracking software licenses.

"We find it difficult to adapt quickly," said Koopman of the IRS, "what has happened in the cryptocurrency space in less than 10 years is almost equivalent to what has happened in the financial industry over 100 years."