With the Internal Revenue Service (IRS) making strides in its plan to enhance cryptocurrency surveillance, a previous report could offer insight into how this information might be utilized in practice. Essentially, as the IRS prepares to monitor Americans’ cryptocurrency usage through an anticipated 8 billion new tax returns, it appears that the Department of Justice (DOJ) may soon possess the necessary tools to confiscate cryptocurrency at an unprecedented rate.
The origin of this issue can be traced back to a 2022 report authored by the DOJ in response to Executive Order 14067. For those who may not recall, Executive Order 14067 marked President Biden’s initial major cryptocurrency initiative. While many initially feared an imminent crackdown, the executive order primarily postponed sweeping changes by calling on agencies to issue reports that would inform future policies concerning cryptocurrency and related matters.
The DOJ’s report covered a wide range of topics, falling into four main categories. The recommendations focused on aiding prosecutions, improving investigations, expanding penalties for cryptocurrency-related crimes, and increasing resources available to government employees.
What is particularly intriguing in the current context is the DOJ’s argument for enhancing its ability to seize cryptocurrency. The report asserts that “it is crucial for the United States to have the authority to confiscate the proceeds of cryptocurrency fraud and manipulation as a means of deterring such activities and divesting offenders of their illicit gains.” Consequently, the DOJ suggests expanding its authority over criminal, civil, and administrative forfeiture.
The DOJ has justified these updates by claiming that its experience with cryptocurrency-related cases has revealed limitations in the forfeiture tools used to deprive wrongdoers of their ill-gotten gains and, in certain cases, restore funds to victims.
However, it is challenging to comprehend this argument considering the government’s successful seizure of cryptocurrency over the years. In fact, the report itself references such cases. Between 2014 and 2022, the FBI confiscated approximately $427 million in cryptocurrency, while the IRS seized an additional $3.8 billion between 2018 and 2021.
With over $4 billion already seized, the DOJ’s assertion that the U.S. government is struggling to confiscate cryptocurrency is not as evident as the report’s recommendations suggest.
Nevertheless, the IRS’s proposed broker regulations shed new light on the DOJ’s report, given the extensive surveillance that these regulations would likely entail. This surveillance could potentially facilitate a higher rate of cryptocurrency confiscation.
The issue lies in what is known as administrative forfeiture. As explained by Nick Sibilla in Forbes when the report was initially released, “Under ‘administrative’ or ‘nonjudicial’ forfeiture, the seizing agency – not a judge – decides whether a property should be forfeited.” In other words, agencies do not have to prove to a judge that a crime was committed in order to seize the property.
The DOJ commends this process for promoting efficient allocation of government resources and avoiding undue burdens on the federal judicial system. In fact, administrative forfeitures accounted for 78% of the DOJ’s forfeitures between 2000 and 2019.
With the IRS collecting vast amounts of new information on Americans’ cryptocurrency usage, it is possible that the DOJ may suddenly identify new opportunities for cryptocurrency confiscation. It is important to emphasize that these confiscations do not necessarily require an actual crime to have been committed—mere suspicion is enough.
Considering the IRS proposal in this context highlights one of the major risks associated with mass data collection. Whether it is the DOJ seeking to expand its confiscation activities, the IRS aiming to increase audits, or hackers looking for vulnerabilities, extensive government databases present tempting targets for internal and external abuse.
If the IRS moves forward with its proposal, cryptocurrency users should closely monitor how the government ultimately utilizes that data.
Nicholas Anthony is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives. He has authored “The Infrastructure Investment and Jobs Act’s Attack on Crypto: Questioning the Rationale for the Cryptocurrency Provisions” and “The Right to Financial Privacy: Crafting a Better Framework for Financial Privacy in the Digital Age.”
This article provides general information and should not be construed as legal or investment advice. The views expressed here are solely those of the author and do not necessarily represent the views of Cointelegraph.