Researchers found buried deep in a 61-page recent report by the U.S. Attorney General, the Biden Administration called for a dramatic expansion in the federal government’s ability to seize and keep cryptocurrency. If enacted, the proposed changes would bolster both criminal forfeiture, which requires a conviction to permanently confiscate property, as well as civil forfeiture, which does not require a conviction or even criminal charges to be filed. Notably, the report’s release was coupled with the announcement of a new Digital Asset Coordinator Network. This nationwide network is staffed with more than 150 federal prosecutors who will be trained on “drafting civil and criminal forfeiture actions.”
The 4th Amendment to the US Constitution:
“The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things.”
Due to crypto’s pseudonymous nature, it is sometimes assumed to be immune from government confiscation. But the reality is quite different. During 2021, the U.S. Marshals the custodians for Justice Department seizures managed almost 200 cryptocurrency seizures worth $466 million. Since fiscal 2014, the FBI, Secret Service, and Homeland Security Investigations have collectively seized almost $680 million worth of crypto (valued at the time of seizure), with hundreds of still active investigations involving digital assets. But even those amounts pale in comparison to IRS Criminal Investigation, which has confiscated a staggering $3.8 billion in virtual currency between fiscal 2018 and 2021.
The Justice Department argued that crypto has “revealed limits on the forfeiture tools used” by federal law enforcement and recommended “several updates to existing law.” First, the Attorney General wants to broaden the most abusive form of civil forfeiture, which occurs without any independent or impartial judicial oversight.
Under “administrative” or “nonjudicial” forfeiture, the seizing agency not a judge decides whether a property should be forfeited. The federal government can use administrative forfeiture to take almost anything, aside from real estate and property valued at more than $500,000. That $500,000 limit currently applies to cryptocurrency, but the Attorney General wants to “lift the $500,000 cap for cryptocurrency and other digital assets.” This would eliminate one of the very few limits on administrative forfeiture. Even if Congress refuses to act, thanks to a law enacted last year, the Secretary of the Treasury could simply end the cap by adopting new regulation.
This proposal is deeply concerning. Administrative forfeiture provides shockingly scant protection for property owners. After seizing property, the government need only send notice of an administrative forfeiture. If an owner fails to quickly file a claim for their own property, it is automatically forfeited.
Since the seized property may be the owner’s most valuable asset, owners often do not have the means to fight back. Yet even when a claim is filed, the owner still might not get their day in court. According to a report by the Institute for Justice, federal agencies have rejected more than one-third of all filed claims for seized cash as “deficient,” with most claims denied due to “technical reasons.” Unsurprisingly, since administrative forfeiture cases are significantly easier for the government to win, administrative forfeitures accounted for almost 80% of all forfeitures conducted by the Department of Justice and 96% of the Treasury Department’s forfeiture activity.
The Justice Department praises administrative forfeiture for being “efficient” and for reducing “undue burdens” in the court system, in reality, administrative forfeiture has burdened the lives of thousands of victims who have done nothing wrong.
Here is an example an average forfeiture: Ken Quran, after coming to America from the Middle East, he opened a small convenience store in Greenville, North Carolina. But in June 2014, IRS agents barged into his store and told Ken they had a warrant to seize $570,000 and had already seized every penny in his bank account $153,907.99. That money was Ken’s entire life savings, earned over nearly 20 years of long hours running his business. Less than three months later, Ken’s bank account was administratively forfeited. Without those savings, Ken was driven to the financial breaking point. He struggled to support his family, pay off his mortgage, and cover a line of credit he had to take out to keep his store afloat. Ken was never charged with a crime.
“I never believed this could happen in America,” Ken lamented. “I do not understand how, in this country, the government can take an honest businessman’s entire bank account without proving that he did something wrong.”
Fortunately, with help from the Institute for Justice, Ken later filed a “petition for remission or mitigation” (basically a pardon for forfeited property). After a media firestorm, in February 2016, the IRS agreed to return all of the money they had wrongfully taken from Ken. Although he lost fiat currency rather than crypto, as Ken’s story shows, there is absolutely no need to make administrative forfeiture easier to use.
In addition to expanding administrative forfeiture for crypto, the Justice Department “would welcome amendments to provide criminal and civil forfeiture authority for commodities-related violations.” Allowing criminal forfeiture after a conviction for fraud or manipulation in crypto markets would be a valuable tool to crack down on scammers.
Currently, most cryptocurrencies are considered commodities rather than securities. So under federal laws governing commodities, prosecutors can “charge fraud and manipulation in the cryptocurrency markets.” But unlike securities, those statutes “do not permit forfeiture of ill-gotten gains from criminal activity involving commodities.”
But extending civil forfeiture casts far too wide a net and would make it much more likely for innocent holders to lose their crypto to government confiscation. After all, civil forfeiture lacks a conviction requirement, unlike criminal forfeiture. Moreover, there is a direct financial incentive for federal agencies to pursue forfeiture cases: Once property has been forfeited (either civilly or criminally), the seizing federal agency can retain up to 100% of the proceeds.
The proposed expansions in asset forfeiture are part of a broader assault on cryptocurrency, including attacks on the financial privacy cryptocurrency can otherwise afford. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is currently considering a rule that would extend intrusive reporting requirements to custodial wallets (i.e. those managed by a third-party) the same reporting requirements that led the IRS to seize Ken’s cash.
If adopted, the wallet’s host would have to send detailed reports to FinCEN for every transaction with an unhosted wallet over $10,000, including personal information like the names and physical addresses of both parties involved in the transaction. Since the blockchain is inherently public, a single report on a single transaction would effectively become a digital skeleton key, letting the federal government snoop on all of the wallet’s other transactions.
This is moving in precisely the wrong direction. No matter how the midterms shake out, Congress must reject the proposed crypto crackdown and rein in civil forfeiture.
The 4th Amendment to the US Constitution:
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things.
Red Sky Alliance is a Cyber Threat Analysis and Intelligence Service organization. For questions, comments or assistance, please contact the office directly at 1-844-492-7225, or feedback@wapacklabs. com
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Website: https://www.wapacklabs.com/
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Article here: TR-22-304-001.pdf
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