Crypto haven: Why the US govt has a $5 billion stash in bitcoin

This is because Uncle Sam's stash of around 200,000 bitcoins was confiscated from cybercriminals and darknet markets. It is primarily offline on encrypted, password-protected storage devices known as hardware wallets that are controlled by the Department of Justice, the Internal Revenue Service, or another agency.

What the federal government does with its bitcoin has long been a topic of interest among cryptocurrency traders because any sale could potentially swing prices or cause other ripple effects in the trillion-dollar digital asset market.

The United States has been notoriously slow to convert its bitcoin reserve into dollars. This is not HODLing, crypto-speak for “holding on for dear life” and never intending to sell. Nor is it about waiting for Bitcoin to go “to the moon” so you can sell your holdings and make a considerable profit. Rather, that big pile of bitcoins is more a byproduct of a lengthy legal process than strategic planning.

“We don't play in the market. "We basically look at the timing of our process," said Jarod Koopman, executive director of the IRS's cyber and forensic services section, which oversees all cybercrime-focused activities.

Three recent seizures alone put more than 200,000 bitcoins into government coffers, according to an analysis of public records by crypto company 21.co. Even after selling about 20,000 bitcoins, U.S. holdings are still worth more than $5 billion, analysis shows. The size of the government's total fund is likely to be much larger.

From seizing illicit bitcoins to receiving the final order to liquidate the tokens in exchange for cash, the legal process can take years. In some cases, that worked in the government's favor because the cryptocurrency appreciated greatly in value.

For example, in 2016, when convicted tech entrepreneur Ilya Lichtenstein hacked cryptocurrency exchange Bitfinex, bitcoin was trading around $600. When Lichtenstein and his wife, Heather Morgan, were arrested in 2022 and the Department of Justice announced its largest financial seizure of around 95,000 bitcoins, the token had risen to $44,000. Today it is around $27,000.

The U.S. government didn't seize any cryptocurrency in last year's high-profile FTX stock market crash, but it did seize hundreds of millions of dollars in assets, mostly made up of cash and shares of brokerage Robinhood Markets. Robinhood bought back the shares seized from the US Marshals Service in August. FTX crypto assets are part of its bankruptcy estate; The company is expected to eventually use that money to help fill its $8 billion hole in customer funds or restart the exchange.

When a government agency takes control of a crypto asset, Uncle Sam is not the immediate owner of that asset. Only after a court issues a final forfeiture order does the government take possession and transfer the tokens to the U.S. Marshals Service, the lead agency tasked with liquidating seized assets.

While the case is pending, the government retains the bitcoin as evidence or proceeds of crime. The Justice Department has been storing seized bitcoins in hardware wallets since the 2013 closure of the online drug bazaar Silk Road. In recent years, the agency seized 69,000 bitcoins that once belonged to Silk Road founder Ross Ulbricht and 50,676 bitcoins from a Georgia man who pleaded guilty to stealing tokens from the bazaar.

"The government usually moves very slowly to get rid of those assets because it has to do a lot of due diligence, the cases are often complicated and there is a lot of bureaucracy," said Nicolas Christin, a computer science professor at Carnegie. Mellon University.

The Marshals Service liquidation process has evolved along with the development of the crypto industry. In the early days of cryptocurrencies, the agency held auctions to sell cryptocurrencies directly to interested buyers, many of whom made substantial profits, at least on paper.

Venture capitalist Tim Draper, who has made a fortune investing in cryptocurrencies, bought more than 30,000 bitcoins from the government through two auctions in 2014. In one auction, he paid $632 for each token when they were trading at $618. After bitcoin fell to about $180, he paid about $191 per token in another auction. Cumberland, the crypto unit of high-frequency trading company DRW, won 27,000 bitcoins at an auction the same year.

For the first time, in January 2021, the Marshals Service decided to liquidate some of its stocks of digital currencies seized on crypto exchanges. Historically, you have sold crypto assets in multiple batches rather than all at once to avoid the adverse impact of a large sell order on the market. With its current practice, the agency takes additional steps to ensure that the market is not negatively affected, including liquidating cryptocurrencies over a longer period of time.

One of those sales occurred in March, when the government sold 9,861 bitcoins through Coinbase. The Marshals Service confirmed the sale. Coinbase declined to comment.

"Our goal is to dispose of the assets in a timely manner at fair market value," an agency representative said.

In many cases, proceeds from government sales go toward reimbursing victims. Bitfinex said in July that it received more than $300,000 in cash and $6,917 worth of a cryptocurrency called Bitcoin Cash, valued at about $1,900 at the time, from the Department of Homeland Security. Government agencies investigating increasingly sophisticated crimes may also request help to cover expenses such as licensing encryption tracking software.

"It's difficult for us to adapt quickly," said the IRS's Koopman. "What has happened in less than 10 years in the crypto sector took the financial industry the same amount of time in 100 years."

Write to Vicky Ge Huang at vicky.huang@wsj.com