This is an opinion editorial by Rowdy Yates, a former Marine and practicing lawyer.
When most people hear the words “frozen bank account” or “asset forfeiture,” they likely picture a sophisticated government black box worthy of a Hollywood montage, with some mysterious synth music overlaid. The truth is far less glamorous but no less troubling. A sober examination of the government’s tools for seizing and forfeiting property helps to illuminate a key attribute of bitcoin’s value. In this piece, I dissect how the government legally seizes property and why bitcoin is the asset class best positioned to resist this seizure.
First, we should discuss some basic terminology before we discuss this legal process in low resolution. A “target” is a term to refer to a person or business being investigated that is typically not yet charged with a crime. “Asset seizure” means the government takes one’s property and puts that property in government custody; think of this as temporary incarceration of property. “Freezing” means that the government denies you the ability to sell, move or transfer your property, but it does not necessarily take custody of the property; think of this as house arrest for your property. Finally, “forfeiture” (a topic for another day) means the government obtains a legal right to the property. After a forfeiture, the government can lawfully transfer, sell or destroy that property; think of this as final and permanent confiscation of property. In other words, your property rights went to the electric chair. Notably, forfeiture begins with a seizure.
With that lexicon in place, we can think of government confiscation as a three-step process. Law enforcement agents often receive a tip about a target committing a crime. If that crime is lucrative, the agents try to determine what assets the target controls: money in a bank account, Lambos, real estate etc. This is step one. If the agents can find evidence that the assets are tied to a crime, the agents can ask a judge for permission to seize those assets — step two. Once agents have their permission from the judge, they can start interfering with the target’s property rights, which is step three.
With that overview in place, let’s walk through the stages of seizure and examine each stage through the lens of third-party custody, self-custody and the bitcoin ledger, specifically.
Step One: Identifying Assets
In a third-party custody world, many institutions are obliged by the Banking Secrecy Act to proactively give the government information about you and your assets — sua sponte. For example, if you conduct any kind of financial transaction in the third-party custody world that exceeds $10,000, the institution you use creates a currency transaction report (CTR) and any unusual activity in your accounts is documented by a suspicious activity report (SAR). These reports are delivered to law enforcement at regular intervals; no work is required by law enforcement to obtain this invasive information. If the agents want more in-depth information — no problem. They run to a government attorney, who prints out a subpoena in less than five minutes (no judge will likely ever see this, let alone sign it). The agent then runs that subpoena to a fractional reserve banker or other representative and presto: That custodial company provides any invasive data the agent wants.
In a self-custody world, you are not obliged to report to law enforcement when, for example, you move gold from your backyard to your underground lair. The government needs to find this information on their own. Certain assets are easier to find, e.g., cars registered in your name, but for the most part, agents will need to conduct physical surveillance to identify your assets. This may not be hard for agents, but it’s not easy (contrast with the paragraph above). The agents also lose their cheap trick of using subpoenas in the self-custody world. Imagine for a second how useless it would be for a Bureau of Alcohol, Tobacco, Firearms and Explosives’ agent to serve a subpoena on a gangbanger keeping a stack of $100 bills. Keep in mind, agents actually have limited resources and they are more likely to seize assets that are easy to find than ones that are hidden.
In a Bitcoin ledger world, the ledger is public but pseudonymous. Bitcoin does not deliver reports to law enforcement, although data analytics firms do. Analytics may be able to identify which UTXOs belong to you, but if you take precautions the identification process will be laborious, costly and confusing for agents. To move forward with the legal process, agents have to convince a judge that a particular UTXO is under your custody and control. This process will require competence across several dimensions of knowledge and a significant aggregation of data. Newsflash: Law enforcement agents are just people; they fall asleep in school, fail chemistry and get bad grades — just like us. In the Bitcoin ledger world, identification is hard. For a deeper exploration on the expertise and difficulty involved, read Namcios’ article describing the multi-year saga of law enforcement’s attempts to seize bitcoin from the 2016 Bitfinex hack.
Step Two: Boring Paperwork
In the United States, the government has a limited toolbox to legally1 interfere with your personal property in this manner. Whether it is the FBI, Homeland Security or another federal agency, the process is conceptually the same. Government agents work with government attorneys to draft some paperwork for a judge to review and sign. Agents must accomplish three critical tasks with their writing:
- Identify the assets they want to seize.
- Describe where the assets are.
- Most importantly, they need to tell the judge why these assets are bad (typically this means telling the judge the assets are used to commit a crime or they are proceeds from a crime).2
If the judge thinks the agent is wrong (this is quite rare), then the judge kicks the paperwork back to the agent and perhaps gives the agent an opportunity to revise the paperwork. If the judge agrees with the agent (this happens 99% of the time), the judge signs an order or a warrant. This signed order or warrant is nothing more than a piece of paper that says the agent is legally authorized to seize (take custody of) or freeze the property.
Step Three: Taking Property
Step three involves two parts for our agent:
- Service: The agent has to hand over the paperwork signed by the judge to whoever has custody of the assets.
- Transfer assets: Logistically moving the assets to government custody or otherwise denying the target access.
As we explore below, each step can range from simple to impossible depending on the nature of the asset and the manner of its custody.
In a third-party custody world, the agent’s job is trivial when the property is the custody of a “law-abiding” custodian — like a fractional reserve banker or financial services firms (e.g., Edward Jones or Charles Schwab). The agent just hands over the paperwork to the representative. Often, the agent can submit the paperwork via internet portals and never even leave the comfort of their air-conditioned office. The bank or financial services firm will then transfer money to a government account or lock the target out of the account (this was the very basic maneuver executed by Trudeau against his subjects during the trucker protest). The custodian does not care about your property rights, and they are perfectly willing to crush them.
In a self-custody world, the agent’s job is more difficult. There is no custodian listed in the White Pages to make serving the paperwork easy and the logistical task of moving assets can be more complex yet. With conspicuous assets, agents may be able to easily locate the property, but larger and bulkier items require more logistics to seize (think about planes belonging to the cartel; the agent has to rent a hangar). With inconspicuous property, the task difficulty is increased dramatically. Imagine an agent trying to seize a clandestine stockpile of gold from some sharp-shooting gun nuts. The agent has to try and find hidden property in meat space by either conducting physical surveillance, developing a snitch network or hoping the gun nuts send a treasure map over Facebook. Self-custody presents problems in meat space because the custodian (you) does care about property rights.
In a Bitcoin ledger world, there are manifold problems for our agent. First, there is no address (physical, email or otherwise) to find a Bitcoin representative that our agent can serve with his signed official paperwork. There is no clerk, CEO or representative — period — let alone one that can effectuate the network transfer of your satoshis to a public address controlled by the government. The decentralized nature of Bitcoin is a huge problem for our agent. Importantly, this advantage goes out the window if you don’t self-custody your bitcoin. Second, with properly stored seed phrases, our agent needs to physically locate the phrases or coerce you or negotiate with you to give up the phrases. This task becomes more daunting with multisig.
Bitcoin Is Peace Of Mind
When planning for asset protection it is important to remember the old story about you and a friend encountering a grizzly bear in the forest. You don’t have to outrun the grizzly; you just have to outrun your friend. When the government wants to seize cryptocurrency, they will go after Vitalik Buterin or another CEO to whom they can serve legal documents. When the government wants to seize bitcoin, they will go after yield-seekers and assets in third-party custody. That’s because it is always easier for the government to deal with centralized organizations and assets, whether for taxation purposes, social-credit-score purposes or for seizure purposes. You should always be a hard target for bad actors and your wealth should be no different.
Stay sovereign, my friends.
1. I specify “legally” here because the government can always exceed these bounds and interfere with property illegally, but this is risky for the government.
2. In case you’re wondering, items that are illegal per se are not subject to this process. The legislature has deemed cocaine, LSD, meth, etc. to be contraband. So a police officer can just take these items without going through this process.
This is a guest post by Rowdy Yates. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.