In an underground safe and at the bottom of a popcorn box hidden in a house in Gainesville, Georgia, law enforcement officials discovered devices containing more than $3.3 billion worth of bitcoins .
The cryptocurrency was illegally obtained by 32-year-old James Zhong, who stole 50,000 bitcoins a decade ago from Silk Road, a dark web black market. Zhong pleaded guilty on November 4 in federal court in New York to committing wire fraud, according to a statement by Damian Williams, U.S. Attorney for the Southern District of New York.
Unannounced so far, the discovery of Zhong’s bitcoin last year marks the second largest cryptocurrency seizure in the history of the US Department of Justice, second only to February’s. seizure of $3.6 billion in crypto from a Manhattan couple.
“For nearly a decade, the whereabouts of this huge missing piece of Bitcoin has exploded into a $3.3 billion+ mystery,” Williams said in a statement. But now that the US government has seized this historic amount of cryptocurrency, another mystery remains. What are they going to do with it?
A 1984 law designates the US Marshals Service, an office of the Department of Justice, as the primary repository for assets seized by federal law enforcement. “When we seize virtual currency, we keep it in our own wallet,” said Michael Case, the Southern District asset forfeiture coordinator for the New York Marshal Service.
Once the cryptocurrency is transferred to a government wallet, it is ultimately liquidated, Case said. “We have different routes to sell it in the market,” he added. The Marshals Service has held bitcoin auctions in the past, usually conducted in a series of lots. Between 2014 and 2020, the agency would have sold more than $7.2 billion worth of bitcoins, including $19 million bought by billionaire venture capitalist Tim Draper.
Decades-old law requires money to be used for law enforcement purposes
However, the Marshals Service has modernized its approaches to seizing bitcoin since its first cases involving the Silk Road cryptocurrency, which closed in 2013. “Now things are much smoother in terms of selling,” said said Case. In addition to auctions, bitcoin can be sold through government-approved exchanges, where it is often bought by people unaware of its origins, he said.
Once the cryptocurrency is liquidated, it will likely go into the Treasury Department’s forfeiture fund, said David Smith, attorney and forfeiture expert. A decades old status requires that those funds be earmarked for law enforcement purposes, Smith said, which can include building prisons, helping to train law enforcement and compensating victims. Additionally, if local law enforcement contributed in a particular case, they can claim up to 80% of the funds, he said.
“One of my least favorite uses for the money would be paying a huge sum to a state or local agency that may have started the investigation but won’t know what to do with all the funds,” he said. said Smith, who believes proceeds from Zhong’s bitcoin will likely remain in the Treasury Forfeiture Fund for some time. “It would be hard to spend $3 billion on a law enforcement project or agency,” he said.
Overall, Smith said the money shouldn’t go to law enforcement in the first place. “There are a lot of other important things the government spends money on,” he said. “It used to go to Congress and the president could decide what to do with it, it wasn’t just for law enforcement.” The law designating funds confiscated for law enforcement purposes has been past in 1984 – pushed by Joe Biden, a young senator at the time – to encourage local police to prosecute complex crimes.
Some think the victims should get most of the profits
While funds will likely fall into the treasury fund or be distributed to victims, the government should focus on the latter option, according to Alex Lakatos, an experienced asset forfeiture lawyer based in Washington, D.C.
In order to qualify for surrender, that is, when confiscated property is returned to victims of crime, victims generally must prove that the seized property was previously theirs. For example, in this case, people would have to prove that they previously owned bitcoins on Silk Road that were stolen by Zhong. “But with so much money, sometimes the government is ready to be a little more liberal,” Lakatos said. The parent of a child who overdosed on fentanyl-containing drugs purchased from Silk Road, for example, could potentially tie their claims closely enough to Zhong’s case to obtain compensation, he said.
However, while Lakatos thinks the Silk Road victims should end up with the majority of the money, he isn’t convinced that will be the outcome. “I guess a very large part of it goes to the Treasury,” he said. “But what they should do with it, which would be the right thing, would be to use it as remission.