How can government "seize" bitcoins?

Question

Last year the U.S. Department of Justice posted this press release claiming U.S. "law enforcement seized several thousand Bitcoins on November 3, 2020."

How is it possible for anyone to "seize" BTC?

My understanding is that it is technically impossible to transfer BTC without the private key for the wallet holding BTC. And likewise that anyone with the private key can transfer the BTC if they can transmit the transaction. I.e., short of coercing whoever has the private key to disclose it, is it true that no amount of force or authority can cause or prevent the transfer of any particular BTC?

Or am I missing something?

Answer 1

It is not necessarily true that no amount of force or authority can cause or prevent any transfer of Bitcoin. The protocol does not allow arbitrary seizures or blocking, but there are still human factors involved.

Bitcoin is decentralized, so there is no central authority that governments can go to (or coerce) to force or disallow transactions. However Bitcoin is still owned by people, and people can be forced to perform certain actions that they do not necessarily want to do. While a government cannot command the Bitcoin network to make a transaction to happen, they can go to a particular individual who owns Bitcoin and coerce them to make a transaction

Furthermore, governments often have the power to arbitrarily seize assets owned by people. They can do this by force and physically taking things away. This is often how Bitcoin is seized - the hardware that contains the private keys is physically taken by the government. Once they have access to the private keys, the government can perform any transactions that they wish. There is nothing that Bitcoin can do to prevent this; it is up to the individual to ensure the security of their private keys.

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For disallowing transactions, this is much harder. However, as before, there is still a human factor involved. In this case, it's miners who produce blocks. A government could mandate that miners operating in their jurisdiction are not allowed to create blocks containing certain transactions. If all miners were to follow such mandates, then a transaction could remain unconfirmed indefinitely and thus be effectively disallowed.

However this is much harder to do. The decentralized nature of mining means that miners who are in other jurisdictions that do not require censoring certain transactions can mine those transactions. Furthermore, miners who can protect their anonymity and are willing to break some laws can mine those censored transactions too.

Even if no current miner is willing to mine a censored transaction because their governments threaten them, more people could simply begin to mine who do not necessarily follow the same censorship requirements. Mining being decentralized allows anyone to be a miner, albeit at a high initial cost currently. Governments could also try to snuff out the non-censoring miners through force, possibly through seizure or destruction of mining hardware. But even so, people will still be able to mine, and there will inevitably be some miner out there who is willing to make a block that includes a transaction censored by every other miner. So in the end, it really is not possible to disallow a transaction.

Answer 2

A lot of bitcoins reside in a trading platforms or online wallets. These bitcoins are (in the particular bitcoin sense) controlled by the platform. The government (provided the platform/wallet is in a favorable jurisdiction) may simply issue an order that requests the funds to be blocked or transferred to a government-controlled account.

The ordinary bank accounts are seized in the same manner.

In a lot of other cases there is a hardware / storage / printed paper containing the key that the government puts its hands on. The funds are quickly moved to a government-controlled wallet in order to prevent the previous owner transferring them elsewhere using another copy of the key.

p.s. I know of at least one government that obtained the keys and failed to move the funds in a timely manner. The funds disappeared.

Answer 3

Other answers have covered how/if this is possible in theory, but you may be interested in how it actually happened in the specific case you mentioned. The press release links to a PDF of the Complaint For Forfeiture, which includes these paragraphs (bold added by me):

21. Individual X, whose identity is known to the government, was determined to have been involved in a transaction that related to 1HQ3.
22. According to an investigation conducted by the Criminal Investigation Division of the Internal Revenue Service and the U.S. Attorney’s Office for the Northern District of California, Individual X was the individual who moved the cryptocurrency from Silk Road. According to the investigation, Individual X was able to hack into Silk Road and gain unauthorized and illegal access to Silk Road and thereby steal the illicit cryptocurrency from Silk Road and move it into wallets that Individual X controlled. According to the investigation, Ulbricht became aware of Individual X’s online identity and threatened Individual X for return of the cryptocurrency to Ulbricht. Individual X did not return the cryptocurrency but kept it and did not spend it.
23. On November 3, 2020, Individual X signed a Consent and Agreement to Forfeiture with the U.S. Attorney’s Office, Northern District of California. In that agreement, Individual X, consented to the forfeiture of the Defendant Property to the United States government.

A person who the government is not publicly identifying gained control of Silk Road's private key and used it to steal cryptocurrency. Then in 2020 that person voluntarily turned it over to the US government.

What coercion made have been applied we can only speculate, but it's clear there was no special technical means of seizure applied in this case.

Answer 4

You said yourself: " I.e., short of coercing whoever has the private key to disclose it..." And that's exactly how a government can seize bitcoin, or how an unscrupulous criminal can get hold of your bitcoin.

And a government may just be happy destroying your wallet. If they catch a drug dealer who has a million dollars in bitcoin, few governments would need the money. Taking it away from the criminal might very well be enough.

Answer 5

Two possibilities have already been discussed:

• If the bitcoins are in a wallet on your computer, the government must acquire your private key, e.g. by
  • physically seizing your laptop and forcing you to disclose the password
  • physically or remotely installing spyware on your laptop to get your wallet and password
  • forcing Microsoft to install such a spyware through Windows Update
  • ...
• If a third party is managing the bitcoins for you (e.g. a trading platform), the government can seize the bitcoins from there without needing to interact with you

But there is a third, much more general possibility: The government controls the interface points where bitcoins are traded for goods or other currencies, and can simply forbid them from accepting your bitcoins.

The government can publish a list of seized addresses and declare that any address that receives seized funds will be automatically added to the list, and anybody who accepts seized bitcoins in exchange for goods, currency or crypto will be charged with money laundering.

The blockchain is by its very design a public ledger - this means that every single transaction that has ever been recorded is visible online. This is a dream come true for the government. They can completely monitor the flow of funds and automatically tell whether a transaction includes seized funds. They can publish free tools that tell anybody who receives a bitcoin transaction whether those funds were legitimate, and if not, to transfer those funds to the government.

Currently, the amount of money that is being laundered through bitcoin is relatively minuscule, so no government has implemented such a system yet, but I'm convinced that they will once this becomes a significant problem. The government is serious about money laundering, and cryptocurrency just provides the ideal technical basis.

Once a government system like this is online, I predict that seized bitcoins will still circulate and be traded among users. They will be exchanged and traded on a "black market" that ignores the government rules (probably because they're in some tax haven jurisdiction outside of EU/US influence), but these seized bitcoins will be traded at a much lower value.

The government can also discourage miners from processing transactions that involve seized addresses by automatically seizing the mining reward of blocks that include such. It will be economical for miners to occasionally process seized transactions, but the confirmation times will be much higher.

The legal frameworks of various jurisdictions may or may not allow this form of seizure, but they will be adjusted according to the technological development.

Answer 6

I'm a final-year law student.

In order for government to seize your Bitcoin, firslty there has to be some kind of legislation that recognizes Bitcoin as property; secondly, seizures normally occur in cases of fraud, insolvency, and tax evasions where the Taxman attaches tax owed to your valuables.

Currently most countries only have policy issued by the central banks. Those policies are just persuasive sources (you can disregard them if you like)

In short, your Bitcoin cannot be taken by the government if not recognised firstly by government as property that can be bought and sold, only the proceeds or profit made when selling bitcoin for i.e. dollar or buying company shares, even exchanging it for material things, i.e., a car, shoes, house, can be taken but not the Bitcoin.

Check your country's legal stance on Bitcoin with respect to proposed bills or legislation that is already in force. That will answer you better.

Answer 7

Possibilities revealed in How the FBI Got Colonial Pipeline’s Ransom Money Back (published 11 June 2021 in the WSJ): On May, 8 Colonial Pipeline Co. paid a 75 BTC ransom to the Darkside hacking cartel.

Over the next 19 days, court records show, a special agent watched on a publicly visible bitcoin ledger as hackers transferred the 75 bitcoins to other digital addresses. A May 27 transfer of nearly 64 bitcoins landed at a virtual address to which the FBI gained access, providing an opportunity to get a warrant and pounce.

The FBI said in its request for a warrant Monday that its investigators had in their possession the private key for that address. Officials didn’t elaborate on how it obtained the information....

The remaining funds from Colonial that haven’t been recovered by the FBI were consolidated with other crypto tied to ransom payments in a wallet that now holds about 108 bitcoins. “Everyone has their eyes on it to see if those funds are transferred.”

So, apparently, when a government wants to seize someone's BTC, it can follow the money until it is either transferred to a wallet to which the government has access (though the list of wallets the government can access – and how – remains secret), or to the wallet of a known entity.

“We’ve effectively developed a map of hundreds of millions of bitcoin addresses associated with illicit actors all around the world,” said David Carlisle, director of policy and regulatory affairs at blockchain analytics firm Elliptic.