Author | Vicky Ge Huang, WSJ

Compilation | Wu Talks Blockchain

The U.S. government is one of the world’s largest Bitcoin holders, but unlike other crypto whales, it doesn’t care about the digital currency’s rise and fall.

That’s because Uncle Sam’s (the U.S. government) roughly 200,000 bitcoins were seized from cybercriminals and darknet markets. They’re mostly stored in encrypted, password-protected storage devices called hardware wallets controlled by the Department of Justice, the IRS or other agencies.

What the federal government does with its bitcoin has long been a topic of concern for crypto traders, as any sales could potentially move prices or create other ripple effects in the $1 trillion digital asset market.

The U.S. has been surprisingly slow to convert its Bitcoin into dollars. It’s neither HODLing (crypto lingo for holding with no intention of ever selling) nor waiting for Bitcoin to “soar” so it can sell its holdings at a high price. Instead, this pile of Bitcoin is more of a byproduct of a lengthy legal process than a strategic plan.

"We don't play the market. We basically set up our processes," said Jarod Koopman, director of the IRS's Cyber ​​and Forensic Services Division, which oversees all cybercrime-related activity.

Just three recent seizures have left the government’s coffers with more than 200,000 bitcoins, according to an analysis of public documents by crypto firm 21.co. Even after selling about 20,000 bitcoins, the U.S. holdings are still worth more than $5 billion, the analysis shows. The government’s total holdings are likely much larger.

The legal process from seizing illegal Bitcoin to receiving a final order to liquidate the tokens into cash can take years. In some cases, this is beneficial to the government as the value of cryptocurrencies grows wildly.

For example, in 2016, when crypto exchange Bitfinex was hacked by convicted tech entrepreneur Ilya Lichtenstein, Bitcoin was trading at around $600. By the time Lichtenstein and his wife Heather Morgan were arrested in 2022 and the Justice Department announced its largest-ever financial seizure of about 95,000 Bitcoins, the coin had risen to $44,000. Today, its price hovers around $30,000.

Heather Morgan was arrested last year for alleged Bitcoin crimes Source: Reuters

The U.S. government did not seize any cryptocurrency in last year’s FTX exchange collapse, but it did seize hundreds of millions of dollars in assets, mostly made up of cash and shares in brokerage firm Robinhood Markets. Robinhood repurchased the seized shares from the U.S. Marshals Service in August. FTX’s crypto assets are part of its bankruptcy estate; the company is expected to eventually use the funds to cover its $8 billion shortfall in customer funds or to restart the exchange.

When a government agency takes control of a crypto asset, Uncle Sam does not immediately own the asset. Only after a court issues a final forfeiture order does the government take ownership and transfer the tokens to the U.S. Marshals Service, the agency primarily responsible for liquidating seized assets.

The government holds bitcoin as evidence or proceeds of crime while cases are pending. The Justice Department has been storing seized bitcoin on hardware wallets since shutting down online drug marketplace Silk Road in 2013. In recent years, the agency has seized 69,000 bitcoins that once belonged to Silk Road founder Ross Ulbricht and 50,676 bitcoins that a Georgia man admitted to stealing from Silk Road.

“Governments are usually very slow to dispose of these assets because they have to do a lot of due diligence, the cases are usually complicated, and there’s a lot of red tape,” said Nicolas Christin, a professor of computer science at Carnegie Mellon University.

As the crypto industry has grown, the Marshals Service’s liquidation process has evolved. In the early days of cryptocurrencies, the agency held auctions to sell cryptocurrencies directly to interested buyers, many of whom made a healthy profit, at least on paper.

Wall Street Journal Illustration

Venture capitalist Tim Draper, who made a fortune investing in cryptocurrencies, bought more than 30,000 bitcoins from the government in two auctions in 2014. In one auction, he paid $632 per token when they were trading at $618. He paid about $191 per token in another auction when bitcoin fell to about $180. That same year, Cumberland, the crypto unit of high-frequency trading firm DRW, won 27,000 bitcoins in a single auction.

In January 2021, the Marshals Service decided for the first time to liquidate its seized digital currency inventory on cryptocurrency exchanges. Historically, it has sold crypto assets in multiple batches rather than all at once to avoid adverse market effects from large sell orders. In its current practice, the agency has taken additional steps to ensure that the market is not adversely affected, including liquidating cryptocurrencies over a longer time window.

In March, the government sold 9,861 bitcoins through Coinbase. The Marshals Service confirmed the sale. Coinbase declined to comment.

"Our goal is to dispose of assets in a timely manner at fair market value," a representative of the agency said.

In many cases, government sales proceeds go toward compensating victims. Bitfinex said in July that it received more than $300,000 in cash and 6,917 Bitcoin Cash (BCH), worth about $1,900 at the time, from the Department of Homeland Security. Government agencies may also seek financial support to pay for licensing fees for crypto-tracing software when investigating more complex crimes.

“It’s hard for us to adapt quickly,” said the IRS’s Koopman. “In less than 10 years, cryptocurrencies have undergone the same changes that the financial industry took 100 years to do.”