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, WSJ

Compiled by: Wu Says Blockchain

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 of this digital currency.

This is because Uncle Sam (the U.S. government) has acquired about 200,000 Bitcoins from cybercriminals and darknet markets. These are primarily stored in encrypted, password-protected storage devices known as hardware wallets, controlled by the Department of Justice, the IRS, or other agencies.

How the federal government handles its Bitcoin has long been a topic of interest for crypto traders, as any sale could potentially impact prices or create other ripple effects in the $1 trillion digital asset market.

The U.S. has been surprisingly slow to convert its Bitcoin into dollars. It is neither HODLing (a crypto slang for holding and never intending to sell) nor waiting for Bitcoin to "skyrocket" to sell its holdings at a high price. Instead, this large stash of Bitcoin is more a byproduct of a lengthy legal process than a strategic plan.

"We don't play the market. We're basically set up according to our processes," said Jarod Koopman, director of the IRS's Cyber and Forensic Services division, which oversees all activities related to cybercrime.

Just three recent seizures have added over 200,000 Bitcoins to the government's treasury, according to an analysis of public documents from crypto firm 21.co. The analysis shows that even after selling about 20,000 Bitcoins, the U.S. still holds over $5 billion worth. The total holdings of the government could be much larger.

The legal process from seizing illegal Bitcoins to receiving liquidation tokens as cash can take years. In some cases, this is beneficial for the government, as the value of cryptocurrencies has skyrocketed.

For example, in 2016, when tech entrepreneur Ilya Lichtenstein hacked the crypto exchange Bitfinex, Bitcoin was trading at about $600. By the time Lichtenstein and his wife Heather Morgan were arrested in 2022, and the Department of Justice announced its largest-ever financial seizure of about 95,000 Bitcoins, the token price had risen to $44,000. Today, it hovers around $30,000.

Heather Morgan was arrested last year for alleged Bitcoin crimes. Source: Reuters

The U.S. government did not seize any cryptocurrencies during last year's collapse of the FTX exchange, but it did take control of hundreds of millions of dollars in assets, primarily consisting of cash and shares of brokerage firm Robinhood Markets. Robinhood repurchased the seized shares from the U.S. Marshals Service in August. The crypto assets of FTX are part of its bankruptcy estate; the company is expected to use these funds to cover its $8 billion customer fund shortfall or restart the exchange.

When government agencies control crypto assets, Uncle Sam does not immediately own the assets. The government only gains ownership after a court issues a final forfeiture order, at which point the tokens are transferred to the U.S. Marshals Service, the primary agency responsible for liquidating seized assets.

While cases are still pending, the government holds Bitcoin as evidence or proceeds of crime. Since the closure of the online drug market Silk Road in 2013, the Department of Justice has been storing seized Bitcoins in hardware wallets. In recent years, the agency has seized 69,000 Bitcoins that once belonged to Silk Road founder Ross Ulbricht, as well as 50,676 Bitcoins stolen from Silk Road by a man from Georgia.

"The government typically disposes of these assets very slowly because they have to conduct a lot of due diligence, the cases are often complex, and there are many bureaucratic hurdles," said Nicolas Christin, a computer science professor at Carnegie Mellon University.

As the crypto industry has evolved, the Marshals Service's liquidation process has also changed. In the early days of cryptocurrency, the agency held auctions to sell crypto directly to interested buyers, many of whom made substantial profits on paper.

Wall Street Journal illustration

Venture capitalist Tim Draper, who made a fortune investing in cryptocurrencies, purchased over 30,000 Bitcoins from the government in two auctions in 2014. In one auction, when they were trading at $618, he paid $632 for each token. When Bitcoin fell to about $180, he paid about $191 for each token in another auction. That same year, high-frequency trading firm DRW's crypto division, Cumberland, won 27,000 Bitcoins in an auction.

In January 2021, the Marshals Service decided for the first time to liquidate its seized digital currency inventory on a cryptocurrency exchange. Historically, it has sold crypto assets in multiple batches rather than all at once to avoid the adverse effects of large sell orders on the market. In the current practice, the agency has taken additional measures to ensure that the market is not adversely affected, including liquidating cryptocurrencies over a longer time window.

In March, the government sold 9,861 Bitcoins through Coinbase. The Marshals Service confirmed this sale. Coinbase declined to comment.

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

In many cases, the government's sale proceeds will be 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 may also seek funding to cover expenses such as licensing fees for crypto tracking software when investigating more complex crimes.

Koopman from the IRS said, "We find it difficult to adapt quickly." "The changes that cryptocurrency has experienced in less than 10 years are what the financial industry has taken 100 years to achieve."