The U.S. government is one of the world's largest holders of Bitcoin, but unlike other cryptocurrency whales, it itself doesn't care whether the digital currency rises or falls in value. This is because hundreds of thousands of Bitcoins held by the U.S. government were mostly seized from cybercriminals and darknet markets. These bitcoins are mainly stored offline in password-protected storage devices - so-called hardware wallets, controlled by the U.S. Department of Justice, the U.S. Federal Tax Service or other agencies.
The last three seizures alone have netted the government more than 200,000 bitcoins, according to an analysis of public documents by cryptocurrency firm 21.co. Analysis shows that even after the recent sale of approximately 20,000 Bitcoins, the U.S. government’s Bitcoin holdings are still worth more than $5 billion. The government's total holdings may even end up being much larger than this number. Currently, each Bitcoin is worth approximately $27,000.
How the U.S. government handles these seized Bitcoins has long been a topic of concern among cryptocurrency traders, as any sales could cause price fluctuations or other knock-on effects on the digital asset market, which has a market value of about $1 trillion.
The U.S. government itself is notoriously slow at converting these seized Bitcoins into U.S. dollars. Of course, the U.S. government obviously has no intention of "HODLing" (a cryptocurrency term that means holding firmly for a long time and never selling it until death). They also don't want to wait for Bitcoin to "fly to the moon" so that they can sell their Bitcoins and make a fortune. On the contrary, the pile of Bitcoins sitting in government accounts is more a byproduct of a lengthy legal process than an investment plan.
Jarod Koopman, executive director of the IRS Cyber and Forensic Services Division, said in a recent interview, "We don't play the market. We don't compete in the market. In the course of our work, we are basically scheduled (by the process)."
The legal process can take years, from the seizure of illegal bitcoins to the receipt of final instructions to liquidate those coins. But it is precisely because of this that in many cases this seems to work in the government's favor, as the value of these cryptocurrencies has surged by double and even triple digits in many years.
For example, in 2016, when the cryptocurrency exchange Bitfinex was hacked by Ilya Lichtenstein and his wife Heather Morgan, Bitcoin was trading at only about $600. In 2022, when the Department of Justice announced the largest ever seizure of approximately 95,000 Bitcoins in the cryptocurrency industry, Bitcoin had climbed to $44,000.
During last year’s high-profile shutdown of crypto exchange FTX, the U.S. government did not seize any cryptocurrencies, but it did take over hundreds of millions of dollars in assets, consisting mostly of cash and stock from brokerage firm Robinhood Markets.
The U.S. government, a giant whale in the currency circle, does not want to interfere with the market
From a legal perspective, when a government agency takes control of an illegal crypto asset, the U.S. government does not immediately possess the asset. Only after a court issues a final forfeiture order does the government take ownership and hand over the tokens to the U.S. Marshals Service, the primary agency responsible for liquidating seized assets. While the case is pending, the government will keep the Bitcoin as evidence or as proceeds of crime.
"Governments are often very slow to process these assets because they have to do a lot of due diligence, the cases are often complex and there's a lot of red tape," said Nicolas Christin, a computer science professor at Carnegie Mellon University.
It is worth mentioning that as the cryptocurrency community continues to develop, the liquidation process of the U.S. Marshals Service is also continuing to evolve with the development of the cryptocurrency industry.
In the early days of cryptocurrency development, the agency was still stuck in the traditional model of holding auctions and selling cryptocurrencies directly to interested buyers, many of whom made handsome profits, at least on paper. In January 2021, the U.S. Marshals Service decided for the first time to liquidate some seized digital currency positions on cryptocurrency exchanges.
Historically, the Marshals Service has sold cryptocurrency assets in batches rather than all at once to avoid large sell orders that would adversely affect the market. In its current approach, the agency has also taken additional steps to ensure markets are not adversely affected, including liquidating cryptocurrencies over a longer time window.
In March this year, the U.S. government sold 9,861 Bitcoins through the cryptocurrency exchange Coinbase. "Our goal is to dispose of assets promptly and for fair market value," a Marshals Service representative said.
Koopman from the IRS lamented, “It’s actually difficult for us to adapt to changes quickly. What happened to cryptocurrency in less than 10 years took the financial industry 100 years to do.”
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