Who Snatched My Bitcoin Bag? Asset Seizure And Cryptocurrency

Legal confiscation and its efficacy against cryptocurrencies discussed.

The primary goals of various organized crime syndicates is usually nothing more than financial gain. As a consequence, the primary job of various law enforcement agencies is to neutralize the proceeds of crime and send a clear message to society that crime doesn’t pay.

The effective prevention of and fight against various forms of crime is oftentimes therefore conditional on the authorities’ power to trace, freeze, manage and confiscate the proceeds of crime.

Confiscation is amongst the most effective mechanisms of combating organized crime, white-collar crime, money laundering and terrorist financing. The clear-cut purpose of confiscation is to deprive criminals of the benefit they have gained from their criminal operations, and to bleed them dry and terminate the possibility of any criminal undertakings in the future.

The punitive, reparative, and preventive benefits of confiscation have been widely recognized and, during the past decade, many countries have embraced a new and vastly broadened legal theory of the asset sezure mechanism.

The traditional concept of confiscation whereby the seizure of assets (proceeds of crime) follows a conviction for a particular crime has recently been substituted by a new concept of confiscation that provides a vastly loosened link between the proceeds of crime and the criminal act itself. The relatively novel concept of extended confiscation gives law enforcement authorities “the ability to confiscate assets that go beyond the direct proceeds of a crime so that there is no need to establish a connection between suspected criminal assets and a specific criminal conduct.”

The logic, or rather the ethics, behind extended confiscation and its collisions with fundamental human rights, as well as its supposed abuse by law enforcement agencies, have been discussed extensively in the past and won’t be the subject of this article. The main concern of this article is the use of cryptocurrencies by criminals as a means of protection against legal confiscation.

Can cryptocurrencies really be confiscated?

Yes, cryptocurrencies can be confiscated, in the sense that they have been confiscated numerous times in the past. But that’s a naive approach to the question and it completely misses the point.

Confiscation of cryptocurrencies means that law enforcement locates the digital assets, links them to an identified person, and takes control of them.

It has been clearly demonstrated in practice that, in the case of Bitcoin and other comparable pseudo-anonymous cryptocurrencies, locating and monitoring transactions in the bitcoin blockchain as well as linking the transactions to an identified person is fairly easy; the bitcoin blockchain is transparent and multiple private companies and government agencies have already built software tools that can track and monitor UTXOs and, in conjunction with various espionage methods, link the public keys to identified persons.

This, however, is not the case with truly anonymous cryptocurrencies. Monero or Zcash transactions, for example, are completely hidden and it’s virtually impossible to monitor and link them to identified persons (at least, theoretically: user failure is estimated to leave up to 62% of Monero transactions vulnerable to tracking, according to Princeton researcher Malte Möser, even if the coin itself is secure).

Even if we assume that hypothetically and, through whatever means this setback can be circumvented in the near future, taking control of the private keys or confiscating the cryptocurrencies remains a huge problem.

Cryptocurrencies, contrary to popular belief, are not kept in crypto wallets. Instead, they are represented as UTXOs on a decentralized and immutable ledger known as the blockchain. It’s the private keys (the means to access these UTXOs) that are kept in crypto wallets, and they are nothing but a secret string of numbers mathematically linked to the corresponding public address on the blockchain.

Furthermore, decentralized blockchains, as the word suggests, mean that there’s no central oversight or a body authorized to control the supply of (and the access to) cryptocurrencies. This, therefore, implies that the only way for law enforcement to confiscate the actual cryptocurrency is to get a hold of the private keys — and if we take into account that private keys are just numbers that can be stored offline (e.g. written on a piece of paper, or simply memorized), it immediately becomes evident that the concept of cryptocurrency confiscation becomes largely impracticable for all but the most common crook.

No solution in sight for crypto asset seizure

The recent high profile cases of cryptocurrency confiscations and money laundering indictments indicate that governments are gradually moving cryptocurrency-related crimes up on their agendas.

However, the bad guys seem to have a significant head start considering that (a) it’s now easier than ever to purchase cryptocurrencies anonymously (through crypto ATMs, tête-a-tête meetups or OTC cash transactions); (b) funds can be obscured with the use of mixers, tumblers, truly anonymous cryptocurrencies (Monero or Zcash); and (c) private keys can be stored offline (in cold storage, or simply be memorized).

Many, if not all, of the cryptocurrency confiscations we’ve witnessed in the past have been made possible simply because the criminals used largely transparent cryptocurrencies such as Bitcoin, and held their private keys on their PCs or unprotected USBs.

If they were “smart enough” to use anonymous cryptocurrencies and properly protect their private keys – confiscation would be virtually impossible. Even though in most jurisdictions the AML and CFT regulations have been adapted to account for the criminal use of cryptocurrencies, it seems that the problem of how to confiscate criminal proceeds in the form of cryptocurrencies will need significant development before a solution is forthcoming.

 

The author is not currently invested in digital assets.