Biden Administration working on making it easy to confiscate crypto without criminal charges

The Biden Administration called for a dramatic expansion in the federal government’s ability to seize and keep cryptocurrency in a 61-page recent report by the US Attorney General. If passed, the proposed changes would strengthen both criminal forfeiture, which requires a conviction to permanently confiscate property, and civil forfeiture, which does not require a conviction or even the filing of criminal charges.

Notably, the release of the report coincided with the announcement of a new Digital Asset Coordinator Network. More than 150 federal prosecutors will be trained on “drafting civil and criminal forfeiture actions” as part of this nationwide network.

Because crypto is pseudonymous, it is sometimes assumed to be immune to government confiscation. The reality, however, is quite different. Last year, the United States Marshals Service—the custodians of Justice Department seizures—managed nearly 200 cryptocurrency seizures totaling $466 million.

Since fiscal 2014, the FBI, Secret Service, and Homeland Security Investigations have seized nearly $680 million in cryptocurrency (valued at the time of seizure), with hundreds of ongoing digital asset investigations. But even those sums pale in comparison to the IRS Criminal Investigation, which seized $3.8 billion in virtual currency between fiscal years 2018 and 2021.

Nonetheless, the Justice Department claimed that cryptocurrency has “revealed limits on the forfeiture tools used” by federal law enforcement and suggested “several updates to existing law.” First, the Attorney General wishes to broaden the most abusive form of civil forfeiture, which occurs without the oversight of an independent or impartial court.

Administrative Forfeiture

The seizing agency, not a judge, decides whether a property should be forfeited under “administrative” or “nonjudicial” forfeiture. Aside from real estate and property worth more than $500,000, the federal government can take almost anything through administrative forfeiture.

The Attorney General wishes to “lift the $500,000 cap for cryptocurrency and other digital assets.” This would remove one of the few restrictions on administrative forfeiture. Even if Congress does not act, the Secretary of the Treasury could simply end the cap by issuing new regulations under a law passed last year.

This proposal is extremely troubling. Administrative forfeiture affords property owners shockingly little protection. The government only needs to send a notice of administrative forfeiture after seizing property. If an owner does not file a claim for their own property quickly, it is automatically forfeited.

Because the seized property may be the owner’s most valuable asset, owners are frequently unable to fight back. Even if a claim is filed, the owner may not get their day in court. According to the Institute for Justice, federal agencies have rejected more than one-third of all seized cash claims as “deficient,” with the majority of claims being denied for “technical reasons.”

Unsurprisingly, because administrative forfeiture cases are much easier for the government to win, administrative forfeitures accounted for nearly 80% of all forfeitures conducted by the Department of Justice and 96% of forfeiture activity conducted by the Treasury Department.

Although the Justice Department praises administrative forfeiture for being “efficient” and reducing “undue burdens” in the court system, it has actually burdened the lives of thousands of victims who have done nothing wrong.

Simply ask Ken Quran. He opened a small convenience store in Greenville, North Carolina after moving to America from the Middle East. However, in June 2014, IRS agents stormed into Ken’s store and informed him that they had a warrant for $570,000 and had already seized every penny in his bank account—$153,907.99. Ken’s entire life savings had been amassed over nearly 20 years of long hours running his business.

Ken’s bank account was administratively closed less than three months later. Without those savings, Ken was forced to declare bankruptcy. He struggled to provide for his family, pay off his mortgage, and cover a line of credit he needed to keep his store open. Ken was never arrested or charged with a crime.

“I never thought this could happen in America,” Ken bemoaned. “I don’t understand how the government in this country can seize an honest businessman’s entire bank account without proving that he did anything wrong.”

Fortunately, Ken later filed a “petition for remission or mitigation” with the help of the Institute for Justice (basically a pardon for forfeited property). Following a media firestorm, the IRS agreed in February 2016 to return all of the money they had wrongfully taken from Ken. Although he lost fiat currency rather than cryptocurrency, Ken’s story demonstrates that there is no need to make administrative forfeiture more accessible.

Aside from expanding administrative forfeiture for cryptocurrency, the Justice Department “welcomes amendments to provide criminal and civil forfeiture authority for commodities-related violations.” Allowing criminal forfeiture following a conviction for fraud or manipulation in crypto markets would be a useful tool in combating scammers.

Most cryptocurrencies are currently classified as commodities rather than securities. As a result, prosecutors can “charge fraud and manipulation in the cryptocurrency markets” under federal commodities laws. Those statutes, however, “do not permit forfeiture of ill-gotten gains from criminal activity involving commodities,” as opposed to securities.

However, extending civil forfeiture casts a far too wide net and makes it far more likely that innocent holders will lose their crypto to government confiscation. After all, unlike criminal forfeiture, civil forfeiture does not require a conviction. Furthermore, federal agencies have a direct financial incentive to pursue forfeiture cases: When property is forfeited (either civilly or criminally), the federal agency seizing it can keep up to 100% of the proceeds.

Unfortunately, the proposed asset forfeiture expansions are part of a larger attack on cryptocurrency, including attacks on the financial privacy that cryptocurrency can otherwise provide. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is currently debating a rule that would extend intrusive reporting requirements to custodial wallets (those managed by a third party)—the same reporting requirements that prompted the IRS to seize Ken’s cash.

If adopted, the wallet’s host would be required to send detailed reports to FinCEN for every transaction involving an unhosted wallet that exceeds $10,000, including personal information such as the names and physical addresses of both parties involved. Because the blockchain is inherently public, a single report on a single transaction would effectively become a digital skeleton key, allowing the federal government to eavesdrop on all other transactions in the wallet.

This is heading in the wrong direction. Whatever the outcome of the midterm elections, Congress must reject the proposed crypto crackdown and rein in civil forfeiture.

Read more:

• Internal Revenue Service (IRS) Claims 91% Conviction Rate for Tax Crimes In 2019
• IRS Pursues Crypto Tax Evaders at M.Y. Safra Bank
• California governor to sign new crypto bill into law