Thefederal government's relationship with bitcoin has generated numerous headlines over the years, which issurprising, considering that the U.S. government is one of the largest holders of bitcoins.
The bitcoins are typically sold off in public auctions conducted by the U.S. Marshals Service, which is a law enforcement agency withinthe Department of Justice. At least $1 billion worth of digital coins and possibly much more has spent time in the custody of U.S. law enforcement. As a result, the U.S. Marshals Service, which is responsible for sales of the confiscated bitcoin, has become a major player in cryptocurrencies. (See also: US Marshals To Auction Seized Bitcoins.)
But little else is known about the government’s handling of bitcoins. Now, a new Fortune article takes a look at the mechanics of the government’s handling of its stash of cryptocurrencies.Here are two things to learn from the Fortune piece.
Crypto Price Volatility Is Messing Up The Government’s Plans
Several agencies within the U.S. government routinely seize valuable objects and precious metals and sell them off in auctions. But none of the assets seized have the price volatility of cryptocurrencies. This has given rise to novel situations and questions.
For example, a strategically timed sale of bitcoin, which has appreciated significantly in price, would have paid dividends for a government agency’s budget. But the U.S. government has been criticized for selling bitcoins at a cheap price. (See also: Which Governments Are Hoarding Bitcoin?)
The average sale price for bitcoins at the auctions held by the Marshals Service between June 2014 and November2015 was $379 per token. Venture capitalist Tim Draper (pictured below) struck gold during the auctions by purchasing 30,000 coins at an estimated price of $18.5 million. At current prices, his stake is worth $300 million. That’s not a bad return for an investment of roughly 2.5 years. (See also: More Billionaires Are Buying Cryptocurrencies.)
The U/S. government attempted to mimic Draper’s strategy last year. When the price of bitcoin neared $20,000 in December 2017, government agencies attempted to sell 513 coins. By the timethey’d acquired the necessary permissions in mid-January, the price of a single bitcoin was in a slump and down by nearly 50%.
One of the more interesting cases involving bitcoin occurred recently, when local authorities in Manhattan busted a kidnapping and burglary case involving ether, ethereum’s cryptocurrency, in January 2018. The robber had wiselyconverted ethereum into bitcoin, which has since appreciated in price. The authorities are in a conundrum over who should get profits from a sale of the loot.
The Forfeiture.gov site, which records Justice departmentadministrative, civil and criminal forfeiture actions, should typically be the place to find out more about the total number of bitcoins held by the government. But, according to the Fortune report, there is a lag between the publication date of an online report and the date of seizure. Reports are also not archived online and paper copies are not made. Bitcoin addresses linking wallets to owners are also not available.
Multiple agencies have seized bitcoin over the years, making the state of affairs even more confusing. The absence of traceability for the government’s bitcoin stash has serious repercussions for the overall bitcoin ecosystem because it means that it is difficult to ascertain and establish ownership of the cryptocurrency, which is based on principles of transparency.
As an example, Fortune found that 322 bitcoins were seized from a marijuana dealer in Texas in 2014, but there is no record of their sale. Effectively, this means that 322 bitcoins within the cryptocurrency’s network could belong to addresses that have not transacted for a long time. In the end, they might even drop out of circulation.
Earlier this year, Arvind Narayanan, a professor at Princeton, conducted research about coins that are burnt and forever unspendable. “We have all heard stories of cryptocurrency owners losing private keys, and it is impossible to estimate how many coins have been lost this way,” he said.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.
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The bitcoins are typically sold off in public auctions conducted by the U.S. Marshals Service, which is a law enforcement agency within the Department of Justice. At least $1 billion worth of digital coins and possibly much more has spent time in the custody of U.S. law enforcement.
The sale of cryptocurrency is generally only regulated if the sale (i) constitutes the sale of a security under state or federal law, or (ii) is considered money transmission under state law or conduct otherwise making the person a money services business (“MSB”) under federal law.
Known Bitcoin reserves held by governments account for 2.7% of the total 21 million supply of bitcoins, with the largest being the US Government with over 210,000 bitcoins worth more than $13bn at the time of writing.
How Is Bitcoin Seized? Bitcoin is seized by law enforcement as a result of a criminal allegation. Each seizing agency preemptively creates a wallet to temporarily hold the seized bitcoin before custody is eventually transferred to the U.S. Marshals Service for auction.
The U.S. government is one of the world's biggest holders of bitcoin, but unlike other crypto whales, it doesn't care if the digital currency goes up or down in value. That is because Uncle Sam's stash of some 200,000 bitcoin was seized from cybercriminals and darknet markets.
Bitcoin is not controlled by any single group or person. Instead, it is governed by multiple stakeholders — including developers, miners, and users. Developers write the code that makes Bitcoin run; miners validate transactions; and users put the software to work by trading, transacting, holding, and more.
Profits on the sale of assets held for less than one year are taxable at your usual tax rate. For the 2024 tax year, that's between 0% and 37%, depending on your income. If the same trade took place a year or more after the crypto purchase, you'd owe long-term capital gains taxes.
Last year, the U.S. held 69,640 bitcoins according to the research a doctoral thesis by Sachin Jaitly, a general partner at investment advisor Morgan Creek Capital. That's 94% of the bitcoin in global government coffers at the time.
Even after selling some 20,000 bitcoin, the U.S.'s holdings are still worth more than $5 billion, the analysis shows. The size of the government's total stash is likely much larger. From seizing illicit bitcoin to receiving the final order to liquidate the tokens for cash, the legal process can take years.
Note that if we were to rank countries based on their actual number of crypto owners, India would rank first at 93 million people, China would rank second at 59 million people, and the U.S. would rank third at 52 million people.
Because online wallets use a third party to store Bitcoin funds, that third party can freeze accounts and assist in the seizure of funds left online. Police can do so using the same method to freeze traditional bank accounts, but the warrant or subpoena must be directed at the online wallet operator.
The US, UK and EU sanctions regimes all include forms of asset freeze/blocking restrictions. These restrictions prohibit any form of dealing with a person who is an asset freeze target, including making assets directly or indirectly available to them.
Can a government ban Bitcoin? They can try, but the very essence of Bitcoin is decentralization. Meaning there is no central authority that gets to control who can and cannot use Bitcoin, and what Bitcoin can and cannot be used for.
The Securities and Exchange Commission regulates assets it determines to be securities. It doesn't yet regulate Bitcoin, but it is regulating investments or derivatives related to Bitcoin.
Governments across the world own an estimated 567,316 BTC, representing 2.70% of the total supply. The Chinese government reportedly holds 190,000 BTC that was recovered from the Plustoken scam in 2019. Members of the Ukrainian government privately hold roughly 46,351 BTC.
Instead, the SEC has left crypto regulation open to interpretation through enforcement of existing rules, charging crypto issuers and companies for securities laws, recordkeeping, fraud, manipulation, trading, and custodian violations under federal acts and judicial codes that have already been enshrined in civil law.
There is no central authority for Bitcoin, as it operates on a decentralized network, Bitcoin relies on a distributed network of nodes that validate and record transactions on the blockchain through a consensus mechanism called Proof of Work (PoW).
Choose a reputable exchange: Popular exchanges in the USA include Coinbase, Gemini, and Kraken. These exchanges allow you to buy and sell Bitcoin using US dollars and other fiat currencies, and they typically have strict compliance standards to comply with US regulations.
Key Takeaways. A central bank digital currency (CBDC) is the digital form of a country's fiat currency. A nation's monetary authority, or central bank, issues a CBDC, which promotes financial inclusion and simplifies the implementation of monetary and fiscal policies.
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