Cryptocurrency Forfeiture: When the Government Seizes Digital Assets - Albenze, Inc.

Crypto: The New Frontier of Asset Forfeiture

Over the past decade, cryptocurrency has evolved from a niche tech curiosity to a major financial asset – and with that rise comes attention from law enforcement. Bitcoin, Ethereum, and other digital coins are now routinely seized by government agencies in both criminal and civil forfeiture actions. In fact, by 2025 law enforcement agencies (often with the help of blockchain analytics companies) have seized or frozen approximately $12.6 billion worth of cryptocurrency worldwide. This astonishing figure shows how big crypto forfeiture has become.

Why are governments so interested in crypto? On one hand, cryptocurrencies are used by bad actors – from ransomware gangs and dark web drug dealers to fraudsters – because of the semi-anonymity and ease of cross-border transfer. On the other hand, every crypto transaction is recorded on a blockchain, which can actually make it easier to trace illicit funds compared to cash. Agencies have realized that “follow the money” works in crypto, too, and they are getting more sophisticated at tracking and grabbing digital loot.

How Does the Government Seize Cryptocurrency?

Seizing crypto is different from seizing physical assets, but the legal framework is similar. If agents believe your digital assets are connected to illegal activity (say, part of a money laundering scheme or obtained via fraud), they can get a warrant or court order to seize those assets. Here’s how it typically happens:

Exchange Accounts: The easiest target is cryptocurrency held on exchanges (like Coinbase, Binance, etc.). Agents serve the exchange with a seizure warrant. The exchange is compelled to transfer the specified crypto from your account to a government-controlled wallet. You might simply try to log in one day and find your funds gone or account frozen. The exchange will usually send you a notice that your assets were seized by a given agency.
Hardware Wallets & Raids: If you self-custody (e.g., on a hardware wallet like Ledger or a mobile wallet), agents need to physically obtain the device or recovery phrase. In some cases, during a raid on your home or office, they will confiscate hardware wallets or written seed phrases. If you are taken into custody, they might pressure you to divulge passwords – though you have a right to remain silent. Notably, if the government cannot obtain your keys, they effectively can’t access the crypto (this has happened where suspects refused to unlock wallets – the assets remained in limbo). But beware: refusing a court order to provide access could lead to contempt charges.
Smart Contract Seizures: A newer development is seizing assets from smart contracts or DeFi platforms. For example, if your crypto is earning interest on a DeFi app, agents might not be able to “seize” from the contract directly, but they can order you (or the platform) to transfer it. There have also been instances of the government seizing domain names of websites (including crypto exchange fronts) to indirectly access user funds.

Legally, once in government custody, crypto is treated as property subject to forfeiture similar to cash. One big difference: crypto’s value can fluctuate wildly. This raises questions – if your $50k in Bitcoin was seized and by the time of the court hearing it’s worth $80k (or $20k), that volatility can matter. Typically, if returned, you get the amount of crypto back (not its original USD value), so you assume the market risk during the seizure period.

High-Profile Cryptocurrency Seizures

To understand what’s at stake, consider some high-profile cases and uses of crypto forfeiture:

Largest Crypto Seizure in History: In November 2020, the U.S. government seized over 69,000 Bitcoin (worth around $1 billion then, and several billion at today’s prices) from an Individual X who hacked the Silk Road marketplace many years prior. This haul one of the largest ever – was forfeited via a consent agreement. The identity of the hacker was kept secret, prompting a FOIA lawsuit which confirmed the event but not the name. The case illustrates that the government can and will go after huge stashes of crypto connected to old crimes, and it can end with enormous windfalls for law enforcement.
Bitfinex Hack Seizure: In early 2022, DOJ announced the seizure of about 94,000 Bitcoin (then $3.6 billion) tied to the 2016 Bitfinex exchange hack and arrested a husband-and-wife team in New York for laundering it. This was notable not just for the amount, but for the colorful suspects and the fact that almost the entire stolen cache was recovered thanks to tracing the blockchain. These bitcoins are undergoing forfeiture proceedings.
Scam and Fraud Takedowns: In April 2023, the DOJ (with FBI Phoenix) seized $112 million in cryptocurrency linked to “pig butchering” investment scams. Victims were conned into sending crypto to fraudulent investment platforms. Law enforcement, using blockchain analysis, followed the money through myriad wallets to exchanges and obtained seizure warrants. That $112M will potentially be sold and used to compensate victims (after forfeiture). This case shows how forfeiture can have a positive side – recovering funds to return to fraud victims – though it still requires treating the assets as “guilty” and seizing without initial owner consent.
Terrorism Financing: In 2020, the DOJ seized crypto accounts used by terrorist organizations (ISIS and al-Qaeda) to raise funds via social media. More recently in 2023, another operation targeted a Hamas financing scheme, seizing around $200,000 in crypto intended for terrorists. While the amounts are smaller, these cases are high priority and demonstrate that no matter the cause – crime, fraud, or terror – crypto is on the radar.

Legal Gray Areas and Owner Protections

Cryptocurrency is a relatively new type of asset, and the law is evolving. Some points to consider:

Is Crypto “Currency” or “Property”? For legal purposes, crypto is generally treated as property. This means in forfeiture, it’s handled under the laws for property/evidence. For instance, the IRS treats it as property for taxes. However, some laws about “monetary instruments” (like the $10k reporting rule) don’t clearly include crypto – yet agencies might treat large crypto movements as they would cash smuggling. Legislators are playing catch-up in defining crypto in legal terms.
Due Process Concerns: If your bank account is frozen, you usually get notice and a chance to contest. With crypto on an exchange, some users have complained that accounts were frozen or seized without immediate explanation, leaving them in the dark. As with cash, owners can argue a due process violation if crypto is taken and held for a long time without charges or a way to contest. However, the recent Supreme Court stance (Culley case) suggests courts aren’t eager to expand hearing rights (see Due Process topic).
Asset Management: When the government seizes crypto, what do they do with it? Agencies typically transfer it to U.S. Marshals Service wallets. The Marshals Service has conducted auctions of forfeited Bitcoin (selling for fiat). But interestingly, in 2022 the government floated the idea of a U.S. Strategic Bitcoin Reserve – holding onto seized bitcoin as a national asset instead of selling. This indicates the government might HODL crypto in the future for public benefit (or budget reasons).
Third-Party Innocent Owners: Just like other property, innocent third parties can get caught up in crypto seizures. If your funds on an exchange get frozen because someone you transacted with was bad, you’ll have to assert your innocence. Or if you bought crypto not knowing it was stolen in a hack, you could suddenly face a forfeiture claim. The law does provide for innocent owner defenses in crypto cases too – you’d need to prove your bona fides similar to other asset types.

What To Do If Your Crypto Is Seized or Frozen

If you discover that your cryptocurrency has been seized by the government (or an exchange informs you of a law enforcement action), take these steps:

Contact the Exchange (if applicable): Ensure it’s not a mistake or account issue. If it’s truly law enforcement, the exchange may give you a point of contact (agent or case number). They might not give much detail, but it’s worth asking.
Preserve Records: Gather all records of how you obtained the crypto (exchange receipts, transaction logs, etc.). This will be important to prove legitimate ownership or source of funds.
Legal Representation: Engage an attorney experienced in crypto and forfeiture. This is crucial – crypto adds technical complexity. For example, if only part of your holdings were seized as allegedly tainted, you might argue that not all coins are fungible or traceable to crime (issues of “taint” in crypto can get complex).
File Claim/Petition: Similar to cash, you must file a claim for the crypto to trigger a judicial process. If you believe you’re an innocent owner, assert that in your filing. Timing is again key (usually 30 days from notice).
Security Precautions: If only a portion of your assets were seized (say, one exchange account), consider moving any remaining crypto you control to a secure personal wallet. You don’t want a second surprise seizure. However, do not engage in “structuring” for example, trying to quickly split or hide assets after a seizure can raise suspicion of obstruction. Get legal advice on how to handle what you still have.
Monitor Market Value: Keep an eye on the market value of the seized crypto. If it’s dropping rapidly, your lawyer might argue for an interlocutory sale (to preserve value) or return on bond – conversely, if rising, that could affect settlement talks (the government might be more willing to return assets rather than risk you getting a big windfall if they lose).

Conclusion: Stay Ahead in the Crypto Game

Cryptocurrency forfeiture is here to stay. For law enforcement, crypto is just another asset class – one that can now be traced and taken. For owners, the key is to stay transparent and compliant to avoid looking like a target. But if despite that, your digital assets are seized, remember that you have the same rights to contest as with any property. The intersection of crypto and forfeiture law is new ground, and with experienced counsel, you can mount a strong defense, sometimes even leveraging the government’s limited understanding of the technology to your advantage.

Call to Action:

Has the government frozen your crypto wallet or seized your digital currency? Don’t assume there’s nothing to be done. Our firm understands both the technology and the law behind cryptocurrency forfeiture. Reach out to Sebastian Rucci for a consultation. We’ll help you navigate the legal process to unfreeze your assets or fight the forfeiture in court. Your bitcoins and tokens are valuable – protect them. Call 330-720-0398 to discuss how we can help recover your seized crypto.