2022 Team Favorites: Cops Seizing Crypto

They walk us through how police and FBI agents have had to rethink how to recover stolen goods when they're dealing with digital assets. This sort of turns into a Keystone Caper's type adventure with agents trying to track down digital keys after a raid or a seizure, all the gain access to stolen crypto. All of us here on the Bloomberg Crypto team hope you had a great end too, and we look forward to what the new year will bring.

Hope you enjoyed this one picture this You're the FBI trying to track down the digital keys that will give you access to illicit or stolen crypto. You're rifling through books, paper stuffed in suitcases. You're tearing open gum wrappers. It's like something out of a movie. But in the world of crypto, these odd nooks and crannies have become totally normal places for law enforcement to look for digital passwords alone.

Cops in the U S and the UK sees billions of dollars in crypto assets from various different criminal busts. With so much money on the line, enforcement agencies around the world have had to learn and learn quickly how to suppot these digital assets and seize them from accused criminals. Today I'm joined by Bloomberg reporters Ellen Milligan. They are spending all this taxpayer money to train these police officers

in crypto, and then they're losing them. And David Vorriacos while the crypto was in the possession of the US government, stole it from right under their noses. To discuss how the seizures of digital assets are transforming leasing policies and protocols around the world. Ellen, David, thank you so much for joining us today, Thanks for having us. We're going to talk about something kind of weird, which is how do police officers sees imaginary money. And I don't just

mean imaginary in the sense of contested valuation. I mean imaginary as in not cash, not physical, not things that you can sort of wrap your head around. You know, people are breaking down the door and they're like freeze and we're gonna take all your stuff. You have been writing about what happens when cops sees crypto. Tell us

more about what that's like. Well, police traditionally have sees physical items like jewelry, cash, cars, boats, planes, and with crypto, they have to know that it's there, and they have to be educated enough about the process to understand that it has value and there are are unusual ways to access and so that's what we wrote about. The police around the world are educating themselves on what crypto is and how to access it. Then once they get it, how they store it and how they sell it and

ellen what does that look like. Well, really, there's a few different elements to this. Like David said, there's the seizing of the crypto and discovering it, which is easier said than done, because often there's not a physical element to crypto. Sometimes there is like a kind of hardware device that crypto wallet is kept on or something like that, but often these are digital assets and to discover them and then to seize them, you need a seed phrase

that accesses the crypto wallet. So even if you're holding a keep key device, for example, police won't know how much bitcoin or another cryptocurrency is held on there until they can access it using this kind of password, and then they're storing it once they've seized it. How do they keep this asset safe often for years while you

go through a criminal trial and then a forfeiture order. Um. There's real security issues with hacks, for example, but also there's you know, in some cases there have been corrupt police officers who have taken it for themselves. Um. And then the last element is how you release that that cryptocurrency um, if you give it back to victims or what value you give it back to victims if the

state keeps it. These are the questions that law enforcement has been grappling with, and what David and I really discovered is there's no standardized procedure of where that people do this every as in any of the parts like each one is idiosyncratic exactly, and every different law agency around the world and different law agencies within the same

countries do it differently. And the police let the rest of the world when it comes to crypto, have had to learn this as they go along, and inevitably mistakes have been made along the way, and they're still grappling with this. So you mentioned kind of three elements, each of which sounds hilariously complicated. So let's let's take one of each one in turn. First of all, is the the identification, right, So, like something suspicious is happening, we

think that's a suspicious things in crypto. We've figured out that that exists. What are the steps involved in Okay, we think that this is suspicious. We have, you know, good cause we have all the people work, etcetera. That's required. How do they even get those passwords in the first place. Well, in identifying the suspicious crypto, they can see the movement of crypto on the blockchain. That is a public um ledger ledger that they can see, and they can What

they must first do is trace it to criminal activity. Uh. And once they've traced it to criminal activity, they can then get a court order two seize wallets that are associated with UM say stolen crypto. At that point they can't they cannot actually access those wallets without the seed recovery phrases, and they can come in different ways. They may be written on slips of paper. They may get

it from UM insiders who are familiar with it. But if they do not have those seed recovery phrases, they can't The police cannot access the crypto, so they can't say compel and exchange to have that crypto over to them. There's a case UM that's pending in federal court in

Washington in which UM a guy named Gary Harmon from Akron, Ohio. UM. He is alleged to have stolen crypto right from out under the noses of the Internal Revenue Service, which had seized crypto from Gary's brother Larry Harmon, who pleaded guilty UM two charges associated with running a crypto mixer and

helping to obscure the identity of crypto. And the federal government alleges that Gary Harmon, while the crypto was in the possession of the U. S Government, stole it from right under their noses and has a value of many millions of dollars. He's scheduled to go to trial early next year, but there have been negotiations that have been spelled out in court papers in which Uh, the federal government just wants the seed recovery phrase so they can

have the crypto. And Gary Harmon's lawyers say that's essentially tantamount to him admitting he committed the crime. Interesting, so all of the big parts of jurisp it and so people might be familiar with now being applied to the slightly more chaotic entity is involved in crypto. That sounds like fun Ellen, you mentioned that that's the second part

of this complex thing around storage. There seems to be part of the problem the David is describing if if another entity can just be like, Nope, that's mine and take it once that crypto has been seized by the government or by the police, Like, what's going on there? What are those faiel safes exactly? And Um, A lot of these cases have come out of like the eighteen time where there was kind of the last big spike in crypto and then crash before before spike. Um, and

a lot of those cases came out of hacks. And that just shows you even if the police are holding it um and storing this crypto in their own internal system or outsourced system, there's still a danger that that could be hacked and when you've got cases like the bit for next case that David spoke about, I mean, the whole world knows how much UM that this law enforcement agency has ceased, and it becomes very vulnerable, vulnerable because of that. I spoke to a small police force

in southern England for this story. They stumbled across crypto for the first time accidentally really in twenty seventeen. So this was a kidnapping case UM where a guy was kidnapped. Turned out his house was a cannabis farm. So they did some digging around and they found this keep key device which had a notepad attached to it with two seed phrases, and it had nine hundred grand in bitcoin I think on it. And so what police did is that that there was no precedent for this. They had

no idea what to do. Most of them didn't really know what krypto was. They bought their own key key device and they transferred UM the bitcoin from his wallet to their wallet, their crypto wallet, and then they kept this keep key device and the seed phrases in a safe and only to hang on like a physical a physical safe in the police station. And I need two

policemen had access to the to the safe. And that's because in the silk Row case that David referred to, UM, there two police officers ran off in that case in the US with some of the money that they were storing. UM, and so there was a you know, the police are very worried about corrupt police officers but also about losing losing the money. So that's how they did it. And then UM they eventually sold it to a trusted exchange.

Now they don't do that anymore, not surprisingly because it is very dangerous to keep such a millions of dollars in in a mini like small police station in southern England. It's ridiculous now, um, but these are the kinds of ways that they would do it as they were learning on the job. And I mean now what they do and what most UK law enforcement agencies do, which is

they have a UM. They outsource it to a company called Kamani, which is backed by a Ledger and and others, and it's they've got their own secure, high tech like system of James. So they say, you know, I guess time will time will tell. We'll be right back with more from Bloomberg reporters. David Vorriakos and Ellen Milligan on how law enforcement is keeping up with this new digital to mention of financial crime. I want to push on something that you're saying here about. You know, they tried

some stuff, the stuff didn't necessarily work. Now they may be getting better at it. How are they getting better? Like where are they finding people? You've mentioned outsourcing, but they obvious we need police officers who are themselves trained in knowing what to do. What has that process been like? So in the UK, UM the police lobbied the government, the Home Office UM for funding to train about two fifty officers around the country in how to investigate sees

and realize the value of these assets. They were dubbed crypto tactical advisors. Yes, and I think one or two from every force around the country was trained in this and that really helped them. And then they did a public procurement process UM to outsource this and I know that that's been done in the US less successfully UM, which David can tell you about. But actually the trouble that they're having now is UM they've lost a number of these crypto tactical advisors to coin based chain analysts.

These firms who can triple their pay. So that's something that really struggling with is they are spending all this taxpayer money to train these police officers in crypto and then they're losing them to these firms who can pay them far more. So let me just make sure I'm

understanding this. I a U S taxpayer, have nominally contributed to somebody working for coin base right now, essentially potentially I as a UK taxpayer, definitely um I would say also in the US, I mean the FBI and the Internal Revenue Service have some extremely talented investigators and they have a very large databases at their access which are able to they're able to use to triangulate to figure out who owns a wallet because they can follow the

movement of crypto across the blockchain in ways that people can't do it um who have only public access. And they also work with firms like Analysis, which um Ellen had mentioned, to help them put together who owns, you know, disputed wallets. And I would also say that the government is looking to privatize the storage and sale of seized crypto assets. The Justice Department, through the Marshals has had

sort of mixed success with that. Marshals used to auction crypto themselves and they stopped in They were trying to hire an outside firm and the two firms that they had settled on both were disqualified because they were too big under the the regulations, and so the marshals are doing it themselves, but they're looking for a firm outside to do it for them. And Ellen. This is related to the third parts of that complex tree, right, which is the distribution once some sources of judgment has been

rendered on on either the crypto or the alleged criminal involved. Yeah, this is almost the most complicated part because there was no legal preston for for this and what a court does when, for example, it finds someone guilty, there's a forfeit tire proceeding um that happens later on and often this happens years after um. And what's the forfeits proceeding um. In the UK you have the Proceeds of Crime Act

and this is a twenty year old act. And at the end of the case, when someone's found guilty and sent to jail within a year, there's usually a court hearing where judge will decide the seat what to do with the seased assets, whether the criminal can keep some of them, whether they forfeit them um and also how whether they stay with the state, whether they have to

be distributed to victims. For example, the trouble that this police force had in the case I was talking about earlier was this law was twenty years old when crypto didn't exist, So they had to go to a judge and convince them that this is an asset. The most valuable asset in the case it was. They came across cash about two d grand in cash, watches, artwork, gold,

but the crypto was the most valuable asset. The other complication, and we've seen that even more so, is that crypto will be a much different price than it was when they seized it. And and and the good thing that police have had up until this year was it ballooned in price, so either the state or victims got quite

a good deal out of it. And I think what police are now really grappling with is actually that that crypto that they've been storing for so long has actually fallen in price now quite a lot, what actually quite a lot? And at what point do they sell it? They're confined by the law, but at what point do they convert that. Do they convert it before they forfeit

to its. It's really complicated and it's really those kinds of questions are actually outside the law, and it's about instinct or missed And David, is it similar in the US? In the US, assets can be forfeited when someone is convicted of a crime, but they're seized before someone is convicted of a crime, so they may sit there for a year or two, three, four years while someone is

going through the judicial process. And uh, the government cannot sell those crypto assets until after there's an order from the judge saying it's okay to UM to liquidate this. I was going to say, there's an interesting case in San Francisco where someone stole sixty nine thousand, three hundred seventy bitcoin from the Silk Road site in November of It was worth a billion dollars that then went up a great deal more than that, and it's fallen since then.

But there's someone referred to only as individual X who agreed to forfeit it, and so he's not he or

she is not contesting ownership UM. But there are a bunch of other people who are putting claims in saying, well, they had some of the crypto that was in dispute, and um, so the judge in San Francisco is ruling on that dispute and he's hearing testimony and reading reports from experts on both sides, and in every case so far he's ruled for the government, and a couple of the people who say that, um, some of that crypto is there's have appealed it and the so it has

to be adjudicated at the district court level and the appellate court level before they can go ahead and sell all of that crypto, which is very valuable. And it sounds like it's going to take a long time. It's has taken almost two years so far. It probably take I would guess another year or so, but then I assume they're going to go ahead and sell it. Wow. Well, thank you both for joining us on this frankly fascinating episode. I really appreciate you both taking the time. Thank you

so much. Thank you Ellen, and thank you David. You can find more of their reporting on the Bloomberg Terminal, on Bloomberg dot com and on Twitter. Ellen is at Ellen A. Milligan. That's M I L L I G. A N and David is at David vorriacos. That's David V O R E A c O S. On the

next episode of Bloomberg Crypto. One of the most interesting conversations in crypto right now is all about definitions, and especially the definition of a so called security Who betters to tackle this than Bloomberg ompainion columnist Matt Levine, a former practicing lawyer and investment banker who has written extensively about securities, securities law, inside of training, all the things

that are very much top goal right now. You'll also hear highlights from Matt's interview Sam bankmun Freed at the recent Bloomberg Crypto swmach in New York. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the i Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions or suggestions for the show to Crypto at Bloomberg dot next, or find us on Twitter.

We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky ver Galina. Our senior producer is Janet babin Our producer is Sharon Burriro. Our associate producers Ozanam Siddiki and Moses and m Desta wonder At is our engineer. Original music by Leo Sidrn. I'm Stacy Maria Shmo. We'll be back tomorrow. The expect the propection about the APT sting the st