On January 22, the US Marshals Service will auction 3,813 bitcoins that were seized during various criminal and civil forfeitures.
Altogether, the bitcoins are worth just under $40 million at the time of writing. Given Bitcoin’s wild price fluctuations, however, they could soon be worth much more. This was the case with the 144,336 Silk Road bitcoins auctioned over the past few years by the Department of Justice for a paltry $48 million. Today those bitcoins would be worth nearly $1.5 billion.
With this potential for a massive return, one has to wonder: Why isn’t the government keeping seized bitcoins for itself and then selling them for a premium months or years later instead?
The US Marshals Service is a special branch of the DOJ that, among other things, oversees assets seized from convicted criminals. These assets can be anything from cars and private planes to sprawling mansions, and more recently, bitcoins. The proceeds from auctioning these assets are used to repay crime victims or are pumped back into law enforcement agencies.
According to the DOJ website, when a criminal’s assets are seized by law enforcement, they will fall into one of two broad categories: property or cash. Although all seized assets eventually make their way to the DOJ’s asset forfeiture fund, property must first be auctioned whereas cash can be directly deposited in the fund.
A years-long debate within the Bitcoin community centres around whether Bitcoin is cash, or if it’s a store of value (arguably a type of property, like gold). A spokesperson for the DOJ told me that bitcoins are officially classified as a financial instrument. Yet unlike seized foreign currencies, which the DOJ says should be “converted and deposited” into the DOJ’s asset forfeiture fund, seized bitcoins aren’t sold for US dollars on a Bitcoin exchange. Instead, they are auctioned off just like tangible properties such as a car or gold coins.
“If [Bitcoin] is a financial instrument, like foreign currency, it should be treated as such,” Steven L. Kessler, an attorney specializing in asset forfeiture and who was an advisor on the Silk Road case told me over email. “If it's property like gold coins, it should be kept in a vault or sold and the funds deposited into an account. It sounds like the government is mixing the two in this case—treating it like currency but, in the end, auctioning it like property.”
According to Kessler, there doesn’t appear to be a legal reason the DOJ couldn’t hold seized bitcoins and sell them directly on a Bitcoin exchange for a larger profit rather than auctioning them off. It’s simply not the agency’s prerogative. Instead of maximizing profit, the DOJ tries to liquidate the assets for a “fair market value,” according to its own forfeiture guidelines.
Things get trickier with something like Bitcoin, though, since the market value can fluctuate several thousand dollars in a single day, as Tuesday’s crash painfully reminded us. Depending on the way the market is fluctuating, the DOJ may end up making a large profit on the bitcoins without even having to take the coins to market.
A DOJ spokesperson declined to comment on whether it had ever considered selling bitcoins directly on Bitcoin exchanges, saying over email that the department doesn’t comment on internal processes.
In past DOJ bitcoin auctions, however, the bitcoins sold for approximately their market value at the time, and there’s no reason to expect that the 3,813 bitcoins being auctioned later this month will be any different.
Read More: The Origins of 'HODL'
Still, if you’re someone who thinks bitcoins will one day be worth millions of dollars each, this month’s auction would seem like the DOJ is giving away free money. For these Bitcoiners, the auction is an easy way to grab a bunch of the magic internet money outside of the Bitcoin market system and all the fees associated with it.
Yet, from the DOJ’s perspective, it’s also getting a good deal. Most of the 3,813 bitcoins that are being auctioned this month were seized during criminal investigations that presumably began months ago—Bitcoin only passed $8,000 USD in November—and even after Tuesday’s crash, one bitcoin is still currently worth roughly $10,000 USD. The DOJ declined to comment on how much more the bitcoins are worth at today’s market value than at the time they were seized.
So depending on how you look at it, the DOJ has been unintentionally HODLing all along.