How is Bitcoin actually seized?

Seizure of proceeds of crime by law enforcement involves the State taking
control of seized property to prohibit the transfer, conversion,
disposition or movement of the assets. In most instances, this may involve the
locating and restraining of assets such
as real property, cars, bank deposits, cash, boats, shares and jewellery which
can readily be located and traced.

However as bitcoin is a
decentralised virtual currency, meaning that it is not administered or
regulated by any institutions (e.g. banks or a specific company) and does not
‘physically exist’, potential investigative and legal challenges arise for law
enforcement and the Courts.

In June 2014, the United Nations Office on Drugs and Crime (‘UNODC’)
published a ‘Basic Manual on the Detection and Investigation of the Laundering
of Crime Proceeds Using Virtual Currencies’ (hereinafter ‘Manual’) providing a
guide as to how the Bitcoin can be located and seized.

Bitcoin Wallet 

According to the Manual, the way in which Bitcoin can be located and
seized is by locating and taking control of the Bitcoin wallet. This is because
the bitcoin wallet contains the intrinsic information of the private keys. It
can either be seized by the authorities by taking away the instrument (e.g. the
hard drive) or by transferring the balance to the Bitcoin wallet that is in the
control of the State.

The Bitcoin wallet is a software program which is linked to the private
keys. It contains the balance and allows the user to make transactions using
the program. The Bitcoin wallet can be installed on to the desktop or mobile
app, accessed through internet websites hosted by third parties, or in an
external hard drive.

Bitcoins are intrinsically connected to a specific address or private
keys assigned to an individual. The private keys are the codes which give the
person the effective control over the linked Bitcoins. It is the only
information that identifies the user.

Jurisdictional Issue

The advantage of locating and seizing the Bitcoin wallet is that the
potential complex jurisdictional issues that the use of virtual currencies
creates, (as it operates in the online environment that blurs the national
borders) can be avoided. The physical location of the instrument containing the
Bitcoin wallet will in most cases be considered as the rightful jurisdiction
for the purposes of freezing, seizure and confiscation.

Seizure of Bitcoin Wallet in Australia

The seizure of a Bitcoin wallet was the way in which the Australian
authorities seized bitcoins as proceeds of crime. In 2013, Victorian police
seized 3 electronic bitcoin wallets containing 24,518.4777721 BTC for the first
time in Australia. The seizure was part of a large scale investigation into Mr
Pollard who was suspected of drug trafficking, possession, cultivation,
importation and dealing with proceeds derived from the drug crimes. During the
search warrant, the police examined the computer used by Mr Pollard and located
the Bitcoin wallet.

The seized and confiscated bitcoin was subsequently forfeited to the
State. Later in 2016, the forfeited Bitcoins were arranged to be auctioned.

Preparatory procedures leading to seizure

The ongoing problem faced by the authorities however is with the
detection of the illegitimate use of Bitcoin transactions. Despite the fact
that the transactions involving Bitcoins are recorded in the public ledger, the
process in which the transaction is endorsed (mining) and its anonymity, makes
it practically untraceable.

The Manual has proposed several mechanisms for law enforcement agencies
to implement in order to investigate virtual currencies that are proceeds of
crime. These include;

1.    Initiating
financial investigations

2.    Collection,
collation and analysis of all available financial information between agencies
on an international level relating to criminal activity and movement of assets.

3.    Asset tracing

Implementing ‘red
flag’ indicator systems to notify relevant authorities when the following
exist:

a)    Large number of
accounts held by a single virtual currency exchange company or an individual
which are used as flow-through accounts (potentially for tax evasion purposes
or to disguise illicit profits);

b)    Virtual currency
exchange company or individual holding off-shore accounts (potentially for tax
evasion purposes or to disguise illicit profits);

c)    Frequent movement
of funds between bank accounts held by different persons located in different
countries (potential layering activity which is typically used to launder
money).

Conclusion

Despite the technological difficulty in the early detection of
illegitimate use of Bitcoins, it is nevertheless possible although difficult
for Bitcoins to be seized as proceeds of crime. The most effective way law
enforcement authorities can seize Bitcoins is by obtaining the private keys
which are linked to the Bitcoins or physically confiscating the ‘Bitcoin
wallet’.