The Biden administration wants to make it easier to seize crypto without charges

Buried deep in a 61-page recent report from the US Attorney General, the Biden administration called for a dramatic expansion of the federal government’s ability to seize and retain cryptocurrency. If passed, the proposed amendments would strengthen both criminal forfeiture, which requires conviction for permanent confiscation of property, as well as civil forfeiture, which does not require conviction or even criminal charges.

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 in “drafting civil and criminal forfeiture actions.”

Due to crypto’s pseudonymous nature, it is sometimes believed to be immune from government confiscation. But the reality is quite different. Last year, the US Marshals – the custodians of the Department of Justice’s seizures – managed nearly 200 cryptocurrency seizures worth $466 million.

Since fiscal year 2014, the FBI, Secret Service, and Homeland Security Investigations have collectively seized nearly $680 million worth of crypto (value at the time of seizure), with hundreds of ongoing investigations involving digital assets. But even these amounts pale in comparison to the IRS Criminal Investigation, which has confiscated a staggering $3.8 billion in virtual currency between fiscal years 2018 and 2021.

Still, the Justice Department argued that crypto has “revealed limits to the forfeiture tools used” by federal law enforcement and recommended “several updates to existing law.” Firstly, the Attorney General wants to expand the most offensive form of civil confiscation, which takes place without any independent or impartial judicial oversight.

During “administrative” or “non-judicial” confiscation, the seizing agency – not a judge – decides whether a property should be forfeited. The federal government can use administrative forfeiture to take almost anything, except real estate and property valued at more than $500,000.

That $500,000 limit currently applies to cryptocurrency, but the attorney general wants to “raise the $500,000 limit 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 passed last year, the Treasury Department can simply end the cap by passing new regulations.

This proposal is deeply worrying. Administrative forfeiture offers shockingly little protection for property owners. After seizing property, the authorities only need to send notice of an administrative confiscation. If an owner fails to promptly file a claim for their own property, it is automatically forfeited.

Since the seized property may be the owner’s most valuable asset, the owners often do not have the means to fight back. But even when a claim is filed, the owner may still not get their day in court. According to a report by the Institute for Justice, federal agencies have rejected more than a third of all submitted claims for seized cash as “deficient”, with most claims rejected for “technical reasons”.

Not surprisingly, since administrative forfeiture cases are significantly easier for the government to win, administrative forfeitures accounted for nearly 80% of all forfeitures conducted by the Department of Justice and 96% of the Treasury Department’s forfeiture activity.

Although the Department of Justice praises administrative forfeiture for being “effective” and for reducing “unnecessary burdens” on the justice system, administrative forfeiture has in reality burdened the lives of thousands of victims who have done nothing wrong.

Just ask 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 broke 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. This money was all of Ken’s 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 these 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 the store afloat. Ken was never charged with a crime.

“I never thought this could happen in America,” Ken lamented. “I don’t understand how the government of this country can take the entire bank account of an honest businessman without proving that he has done anything wrong.”

Fortunately, with the help of the Institute for Justice, Ken later filed a “petition for remission or relief” (basically a pardon for lost property). After a media storm, in February 2016, the IRS agreed to return all the money they had wrongfully taken from Ken. Even if he lost fiat currency instead of crypto, as Ken’s story shows, there is absolutely no reason to make administrative forfeiture easier to use.

In addition to expanding administrative forfeiture for crypto, the Justice Department “will seek changes to provide criminal and civil forfeiture authority for commodity-related violations.” Allowing criminal forfeiture following a conviction for fraud or manipulation in crypto markets would be a valuable tool to crack down on fraudsters.

Currently, most cryptocurrencies are considered commodities rather than securities. So under federal laws governing commodities, prosecutors can “target fraud and manipulation in the cryptocurrency markets.” But unlike securities, “this statute does not permit the forfeiture of ill-gotten gains from criminal activity involving goods.”

But prolongs civilian confiscation casts an overly wide net and will 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 the property has been forfeited (either civilly or criminally), the seizing federal agency can retain up to 100% of the proceeds.

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

If passed, the wallet host would have to submit detailed reports to FinCEN for every transaction with a non-hosted wallet over $10,000, including personal information such as the names and physical addresses of both parties involved in the transaction. Since the blockchain itself is public, a single report of a single transaction would effectively become a digital skeleton key, allowing the federal government to sniff all of the wallet’s other transactions.

This is going in exactly the wrong direction. Regardless of how the midterms shake out, Congress must reject the proposed crypto crash and rein in civil forfeiture.