Governments May Have Had Some Successes, but Seizing Bitcoin and Crypto Is Still Very Hard

• “It is impossible to confiscate properly stored cryptocurrencies at scale.”
• “The main attack vector would be seizing custodial bitcoin holdings.”
• “What may happen is that governments start limiting self-custody.”

It may have strong competition, but one of the most disturbing things to happen to crypto in 2022 was the Ontario Superior Court of Justice issuing a Mareva injunction. Set against the backdrop of demonstrations and blockades that “paralyzed” Ottawa early this year, this injunction permitted the seizure of cryptoassets belonging to protestors, who had been receiving financial support in the form of bitcoin (BTC) and other cryptoassets.

When combined with reports of the US Department of Justice seizing USD 3.6bn in BTC in February, for instance, the injunction seemed to fatally undermine the notion that cryptocurrency is immune from government control. Indeed, US government agencies have seized cryptocurrencies on numerous occasions in recent years, helping to create a suspicion that any sense of cryptocurrency’s inviolability is mostly an illusion, and that a sufficiently determined government can seize bitcoin, ethereum (ETH), or anything else whenever it wants.

However, figures working within the crypto industry affirm that successfully seizing cryptocurrency ultimately depends on seizing an address’ private key, something which should be more or less impossible, assuming that holders keep their funds in their own self-custodial wallets. That said, they also acknowledge that with the continued popularity of crypto exchanges and increasing anti-money laundering regulations, seizing funds held in custody by a third-party is becoming easier.

‘Properly stored’ bitcoin and crypto

It’s worth pointing out that the aforementioned injunction wasn’t entirely successful in actually seizing cryptoassets donated to protestors in Canada. Based on the latest published information (released by the Royal Canadian Mounted Police), Canadian enforcement agencies managed to freeze only 29% of the cryptoassets sent to demonstrators following the Mareva injunction of February.

This highlights the difficulties in seizing genuinely decentralized cryptoassets. So long as holders are storing their funds themselves in a self-custody hardware wallet (and safely storing their private keys offline), there just isn’t any way governmental agencies can seize crypto right now, according to commentators.

“It is impossible to confiscate properly stored cryptocurrencies at scale,” said Boaz Sobrado, a data analyst.

He highlights that the key phrase here is “properly stored,” since plenty of crypto-based wealth is currently sat in the hands of exchanges and custodians, who are obliged to follow the laws of the countries they operate in. 

“Coins are vulnerable to mass confiscation if you are not the one holding the keys,” Sobrado told Cryptonews.com. “If an individual does hold their own keys, the seizure is trickier, as holding your keys can be as simple as memorizing a 12 or 24-word seed phrase.”

Sobrado also notes that, in theory, it’s not impossible for governments to arrest individuals and require them to reveal their keys. That said, “it requires more coercion and is difficult to do at scale.”

Most other industry players agree that seizing properly self-custodied cryptocurrencies is close to impossible.

“It would be very difficult for governments to seize bitcoin. The main attack vector would be seizing custodial bitcoin holdings, which is why it’s important to take your coins off exchange and learn how to self-custody,” said Samson Mow, the CEO of Bitcoin technology company JAN3. 

Another believer that cryptocurrencies are safe so long as they’re stored properly is Ryan Shea, a crypto-economist at digital investment platform Trakx. However, he points out that there are at least a couple of routes by which a government may be more successful in taking control of funds, with the abovementioned seizure of USD 3.6bn in BTC being possibly the most notable example of one attack vector.

“What made it possible in this instance was the alleged perpetrators stored their private keys in a cloud account and law enforcement obtained a search warrant to access this account,” he told Cryptonews.com.

According to Shea, this was itself only possible because by following transactions on the blockchain – which is publicly visible – law enforcement were able to link the wallet addresses containing illegally obtained coins to personally identifiable information as some of the transactions were conducted via centralized exchanges obligated to conduct KYC (know your customer) checks.

The other route, according to Shea, is to identify wallet owners and blacklist associated wallets, something which may be difficult at scale. Nonetheless, this makes it very hard to move funds onto a regulated exchange and cash out.

“The funds may not be retrievable but they become practically unusable as most exchanges will not knowingly process transactions from blacklisted wallets for fear of coming under greater government scrutiny,” he added.

Future moves

Are governments going to take more legislative steps to make it easier for them to seize cryptoassets? The answer to this question varies from country to country, with opinion mixed on whether new laws are actually needed to make seizure more feasible.

“The question of whether governments will move in this direction or not ultimately depends on their needs. If their economic situation is dire and they need to prop up their fiat currency, it could be likely they move in this direction,” said Samson Mow.

For Ryan Shea, specific legislation for seizing cryptocurrency probably isn’t necessary in most cases.

“Crypto regulation is already being introduced and enforced more rigorously to ensure that to the greatest extent possible this link is established. Seizing cryptocurrencies therefore simply requires governments to prove that the coins in question were obtained illegally, which probably comes under existing money laundering and terrorist financing laws,” he said.

Of course, the application of existing laws depends on funds going through regulated exchanges, which is not always possible. So for Boaz Sobrado, this means that governments may need new regulation to reach those who lean more towards self-custody.

“What may happen is that governments start limiting self-custody, which is likely to be a precursor to confiscation,” he said.

That said, it’s not clear how any government could police some kind of limitation or ban on self-custody, aside from maybe banning the sale of hardware wallets in their jurisdictions (which seems a distant possibility right now).