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Lawful Seizure of Cryptocurrency – Proceeds of Crime

It was recently reported in the Wall Street Journal that this past November in the Times Square area of New York City a man gets into what he thought was a car service vehicle, except, to his surprise, a gun is pointed at him by a stranger with the demand that he not only surrender his wallet, keys, and cellphone but his USB drive and 24 word passphrase as well.

The victim did not have either his USB drive or passphrase on his person. But, a few hours later, when the man finally gets home, he finds that his USB drive and the paper in which the passphrase was written is missing, and the next day he discovers that the $1.8 million in cryptocurrency—stored on his USB drive—had been transferred out of his account.[1]

Although it is unlikely—but not impossible—for an IP owner to be robbed at gunpoint (consider the risk to a rights holder carrying a USB drive or laptop containing trade secrets to a state-of-the-art computer software or even the recipe for KFC chicken…stranger things have happened), but this post will not focus on gunpoint robberies. This post will focus on problems related to the seizure of an IP thief’s “proceeds of crime” in the form of cryptocurrency for law enforcement and rights holders.

SLIPPERY SLOPE

Of course, it is not news to any of us that cryptocurrency—almost from its launch—has been used by organized crime globally to hide the proceeds of their criminal activity: whether it’s the proceeds of drug sales, Nigerian 419 scams, or counterfeiting, (the Silk Road prosecution in 2013 is a notable example) it is an eye-opener to learn how slippery it is to seize cryptocurrency—through a public or private legal process.

Consider the following three problems:

  1. Problems in Tracking Cryptocurrency

Although there is software that has the capability to track cryptocurrency, prosecutors have trouble identifying individuals associated with those accounts because of its anonymity, thus, it’s reason for being so attractive to criminal enterprises.

As one U.S. federal prosecutor was quoted as saying in the Wall Street Journal article, “Even though investigators can follow the funds by analyzing the blockchain, they may not be able to connect those funds to a culprit in the real world. We have received ‘Mickey Mouse’ who resides at ‘123 Main Street’ in subpoena returns.”

  1. Unstable Value of Cryptocurrency

Even if you’re successful in seizing the cryptocurrency, prosecutors run into a problem in its value being maintained in order to lock-in the applicable charge(s).

In the above-detailed robbery case, the Manhattan District Attorney’s office wanted to sell the seized cryptocurrency in order to nail down its value, but the defense attorney raised the issue of whether or not the prosecutors have a right to.

” ‘They wanted to turn it into cash so they couldn’t be blamed…then the question becomes, do they have a right to?’, said the defense attorney. The district attorney’s office ultimately decided not to sell it. The answer to his lawyer’s questions is still unclear.”

  1. Court Confusion of Cryptocurrency’ Standing and How to Apply the Law

In a 2014 Florida case involving the sale of cryptocurrency and money laundering the judge is quoted in the Wall Street Journal article as saying, “This Court isn’t an expert in economics…however, it is very clear, even to someone with limited knowledge in the area, that bitcoin has a long way to go before it is the equivalent of money.’ Prosecutors have appealed the ruling.”

WHY SHOULD IP PROTECTION PROFESSIONALS CARE?

Three reasons:

  1. IP criminal enterprises almost certainly use cryptocurrency at times to hide their money, and we (IP infringement investigators and attorneys) are in the business of following the money;
  2. Unlike cash or bank account assets that can be seized and its value nailed-down, cryptocurrency makes it difficult locating the money, identifying the bad actor(s), and managing its fluctuating value, even when you do seize it; and
  3. The law is playing catch-up

[1] The Crypto Crime Wave is Here, by Corinne Ramey, Wall Street Journal, April 26, 2018: https://www.wsj.com/articles/the-crypto-crime-wave-is-here-1524753366

 

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Ron Alvarez is a licensed private investigator and IP investigations specialist in New York City. He is a former NYPD lieutenant where he investigated robbery, narcotics, internal affairs, and fine art cases. Ron is a graduate of the FBI National Academy and earned a B.A. in Government and Public Administration from John Jay College of Criminal Justice in Manhattan. He has published a number of articles on various topics for PI Magazine. Ron is licensed in New York State.

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