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Due to a surge of cryptocurrency-fueled crimes, federal law enforcement is seizing a lot of bitcoin. Now the US government is figuring out what to do with all of it.

This week, a small platform for safekeeping cryptocurrency called Anchorage Digital announced it had won a contract from the Department of Justice to store and liquidate digital assets that federal law enforcement seizes following criminal investigations. The government has essentially hired a bank to store and sell billions of dollars worth of forfeited cryptocurrency, including troves of bitcoin and ethereum. Anchorage Digital, which is based in San Francisco, is an obvious choice for a partner, as its the first federally chartered bank for crypto.

Theres no traditional bank that actually offers these services because this is extremely complex from a technical perspective, Diogo Monica, Anchorages co-founder and president, told Recode. Its very hard to store these safely. In fact, there are many, many stories of people losing access to their bitcoin and other cryptocurrency wallets and just losing access completely to them without the ability to be recovered.

That the US Marshals Service needs to hire a cryptocurrency company for help is a reminder that, as these kinds of digital assets go mainstream, theyre also becoming more popular with criminals. In fact, as law enforcement shut down illegal cryptocurrency operations, from ransomware schemes to illegal online markets, its clear that the US government could hold a very large amount of bitcoin, ethereum, and other cryptocurrency. Accordingly, Uncle Sam might even become a more significant player in the crypto marketplace in the months and years to come.

Since its creation, cryptocurrency has been popular for criminals because the accounts and transactions are difficult to trace back to any one person. Now crypto is at the center of a wide swath of illegal schemes, including blackmail scams, Covid-19 vaccine counterfeits, money laundering operations, and illicit sales on the darknet. In the first half of this year, people sent more than $2 million worth of cryptocurrency to Elon Musk impersonators following a grift on social media, according to the Federal Trade Commission (FTC). And earlier this month, a Swedish man was sentenced to 15 years in prison after he pleaded guilty to orchestrating one of the largest cryptocurrency-based Ponzi schemes the US government has ever prosecuted. The man had tricked people into sending him bitcoin, as well as other digital payments, under the guise of a (fake) gold-backed investment opportunity.

Cryptocurrency is not government currency, so its very international in scope, which is why it has become even more popular with transnational organized crime, as well as terrorism, said Suzanne Lynch, a Utica College professor who focuses on economic crime.

Through investigating these crimes and prosecuting the perpetrators, federal law enforcement has acquired a sizable cache of cryptocurrency. In June, the DOJ seized about $2.3 million worth of bitcoin the FBI had obtained after tracking the movement of a ransom payment associated with the Colonial Pipeline cyberattack earlier this summer. This was after the agency seized about $1 billion in cryptocurrency that once belonged to Ross Ulbricht, creator of the online black market Silk Road, which federal officials shut down in 2013. Ulbricht was arrested that year and convicted in 2015 of distributing narcotics and money laundering.

Theres no differentiation here between crypto and an oil tanker, for lack of a better example, or car or fiat [currency], when it comes to how it will ultimately be used in an asset forfeiture regime, said Ari Redbord, a former prosecutor and the head of government affairs at TRM, a cryptocurrency fraud detection startup.

The US Marshals Service is the agency in charge of holding and auctioning off many seized assets, including art, rare collectibles, and real estate, from disgraced pharmaceuticals CEO Martin Shkrelis Wu-Tang album to Bernie Madoffs apartments. Since at least 2014, the DOJs asset forfeiture program, which is run by the marshals, has taken the same approach with cryptocurrency and opened up the stores of crypto it seizes to bids from the public. But the Marshals Service announced in 2019 that it was looking for more help managing all these digital assets.

Pricing, how to price them, how to evaluate it, how to liquidate it, how to safe keep it people are being forced to deal with the asset class because its so prevalent now, Monica, of Anchorage, told Recode. To do that well can be especially tricky since cryptocurrency markets can be extremely volatile.

As the DOJ moves forward with its plan to manage digital assets, calls for tighter regulations on cryptocurrency are coming from higher and higher up. Sen. Elizabeth Warren (D-MA), for instance, said this month that cryptocurrencies should face tighter rules, while some senators recently proposed taxing cryptocurrency transactions to fund President Joe Bidens infrastructure plan. Earlier this month, Federal Reserve Chair Jerome Powell even suggested that the federal government could launch a digital version of the US dollar as an alternative to cryptocurrencies, though hes still undecided on whether thats a good idea.

Despite lawmakers and regulators growing concern about cryptocurrencies, their popularity is forcing the government to adapt. One recent survey from NORC, a research institute at the University of Chicago, found that 13 percent of people in the US bought or traded crypto in the past year alone, compared to the estimated half of US households that have invested in the stock market, according to Pew.

This all serves as a reminder that cryptocurrencies are only becoming more prevalent, which means that crypto scammers arent going away anytime soon. So beware of demands for cryptocurrency payments from fishy romantic prospects, too-good-to-be-true investment opportunities, supposed blackmailers, and people claiming to be Elon Musk. If youre not careful, your bitcoin might end up in the federal governments new crypto bank.

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Bitcoin-based scams mean the federal government now needs a crypto bank - Vox.com