What To Do If The Feds Freeze or Seize Your Crypto

Federal authorities have scaled back many of their cryptocurrency enforcement efforts over the past year, but one notable exception is the freezing and seizing of wallets and trading accounts connected to suspected crimes.

Last week, the Department of Justice announced that it had seized approximately $15 billion worth of bitcoin in a single investment fraud case, touted as its largest asset seizure ever, with investigators saying that they had traced the alleged crime proceeds through a complex network that included scores of wallet addresses and trading accounts.

And this past summer, the Department also announced that it had seized over $200 million worth of previously frozen USDT in another fraud case, with investigators explaining that they traced the alleged crime proceeds through over 100 accounts at a centralized exchange and dozens of other wallet addresses.

While law enforcement actions like these are supposed to target bad actors such as romance scammers and North Korean hackers, they can easily result in collateral damage. 

Innocent individuals or companies can find their crypto assets frozen or seized because they inadvertently received tokens that were at one point held by a suspected criminal — even if the innocent token holder is several steps removed from the bad actor. Anyone dealing in crypto today should be aware of these risks, and have a basic understanding of the arcane and often misunderstood law around crypto asset freezes and seizures.

Here’s a high-level overview of how U.S. authorities can freeze or seize your crypto, and what you can do about it if that happens, based on my prior experience serving as a federal prosecutor in the Southern District of New York for over a decade. While I’ve since moved on to serve now as a crypto lawyer in private practice, this article should not be taken as providing legal advice (and if your crypto assets are frozen or seized, you should consult with a lawyer about your own specific situation.)

The Legal Basis for Crypto Freezes and Seizures

When a third party such as a bank or cryptocurrency exchange holds assets for a customer, the customer may legally own the assets, but the third party controls them. Similarly, centralized token issuers can maintain control over their tokens even after they have been distributed to customers by using smart contracts to prevent transfer of tokens to or from a particular address.  Indeed, the recently passed GENIUS Act requires stablecoin issuers to develop technology and procedures to allow for the freezing and seizing of funds.

While many crypto assets functionally cannot be frozen or seized by U.S. authorities, such as decentralized tokens held in unhosted wallets as to which investigators lack private keys or secret recovery phrases, the government may be able to freeze or seize your crypto assets without any advance warning to you if the assets are controlled or maintained by a third party or the authorities gain access to your private key or recovery phrase.  The total value of crypto assets potentially subject to government freezes and seizures is immense, numbering at least in the hundreds of billions of dollars.

In the United States, there are generally four legal paths to such asset freezes or seizures: (1) court orders; (2) freeze letters from criminal authorities; (3) administrative seizures; and (4) economic sanctions.

Court Orders

To obtain a court order directing the freeze or seizure of crypto assets, government investigators must provide a judge with some evidence as to why a freeze or seizure is appropriate, such as that the assets at issue derive from a romance scam.

Both criminal and civil authorities have the power to obtain such orders, although the specific process and type of order vary depending on the situation. Generally, evidence is submitted to a judge in the form of a sworn affidavit describing the investigation and some of its fruits, such as the substance of witness interviews, emails, and public blockchain analysis.

Often, there will be gaps in the evidence submitted by the government, for example because a key witness has not yet been interviewed, and investigators commonly ask the court to make a number of inferences that may not ultimately prove correct. Those gaps may result in investigators seizing the assets of innocent parties who were unknowingly paid with tokens from illegal schemes, and which the government may not have pursued had they known all the relevant facts. Of course, unknowing exposure to illicit activity also occurs with fiat currency, but crypto can be more susceptible to freeze or seizure orders because blockchains provide investigators with easily accessible, detailed, and immutable transaction data.

Freeze Letters

Criminal investigators may also temporarily freeze crypto assets solely by sending a written demand to the entity holding or controlling the assets, but this authority is generally limited to cases involving “exigent circumstances” (i.e., emergency situations), and the government is supposed to follow up and obtain a court order within a reasonable amount of time after the initial freeze.

These kinds of freeze letters were in the news earlier this year when a federal prosecutor in the District of Columbia resigned after refusing to issue such a letter at the request of senior Justice Department officials, with the prosecutor who resigned contending that there was insufficient evidence to justify a freeze.

Administrative Seizures

Law enforcement agencies may seek to permanently seize crypto assets without judicial approval through their own administrative procedures, but this power can only be used if nobody comes forward to claim the assets after the government conducts an initial seizure and notifies potential owners. If someone does come forward to assert a valid interest in the crypto assets, the government must pursue a court order. 

Notably, federal agencies are barred from administratively seizing crypto assets valued at over $500,000.

Sanctions

The final way U.S. authorities can freeze crypto assets is by imposing economic sanctions on a country, group, entity, or individual. 

One common misconception is that the government is always directly involved in freezing sanctioned accounts. In fact, the government publishes lists of sanctioned parties (as well as their known crypto wallets), and private companies, including financial institutions and crypto exchanges and issuers, are responsible for rejecting transactions with sanctioned parties and blocking movement of their assets.

How to Handle a Crypto Asset Freeze or Seizure

As an initial matter, the first time you learn of a freeze or seizure may be when you realize your account or wallet has been blocked from engaging in transactions, and you reach out to the provider and are informed of the freeze or seizure. Even then you often will receive very little information, perhaps only the name of the law enforcement agency behind the freeze or seizure and an associated email address.

You should be cautious and thoughtful about your communications with the issuer or exchange at this stage, as law enforcement may later obtain copies of those communications and view any inaccurate statements as evidence of potentially illegal or fraudulent conduct.  

Once you learn that your crypto has been frozen or seized by the government, there are several paths to trying to get it released. It may be possible for you or your lawyer to persuade the authorities to voluntarily release the assets. Generally, if you can show that you obtained the crypto in good faith as part of what you understood to be an otherwise routine and legitimate transaction, the authorities are not entitled to take ownership over those assets and should release them.

If attempts to persuade investigators fail, you can also seek to challenge the freeze or seizure in court.

Voluntary Release from a Freeze Letter or Court Order

If your case involves a freeze letter or court order, you can seek to have your assets released by providing exculpatory information that may have been either unknown to, or not fully appreciated by, government investigators. For example, investigators may have inferred that your wallet was used as part of a criminal scheme because it received crypto from another wallet that was used to repeatedly launder stolen funds, but you may have documents proving you received those funds in a legitimate transaction.

However, reaching out to the government about a crypto freeze or seizure is fraught with risk. If you choose to go this route, you must do so with great care. Government investigators will likely create written notes or a report of any conversation you have with them, and may even record the interaction.

Well-meaning, innocent individuals may have an imperfect memory, and speaking with a federal law enforcement agent can be an intimidating and stressful experience, which can lead you to inadvertently provide incomplete or inaccurate information. This can raise suspicions further and risk criminal charges such as obstruction of justice or lying to a federal officer. Thus, it is likely advisable for your lawyer to reach out to the government on your behalf if you wish to engage with the authorities, rather than you speaking directly with government investigators.

Before reaching out to the authorities, you or your lawyer should thoroughly investigate the potential reasons for the freeze or seizure. This information can help you assess the strength of your position, craft the most credible and persuasive arguments for the release of your crypto assets, and determine the best strategy for the tone and messaging you use in any discussions with the government.

At first, you may have no idea why the freeze or seizure occurred, but you can often use public or commercially available blockchain and wallet data to investigate your transaction history with other wallets that may have raised red flags for government investigators.

You should not assume that the authorities will provide you with any additional information about the reasons for the freeze or seizure, as they may be concerned about compromising a broader investigation.

Be mindful that if you or your lawyer choose to engage with government investigators but are unwilling or unable to answer their questions, it will be difficult to make a persuasive case for law enforcement to voluntarily release your assets, and it may further raise investigators’ suspicions.

For example, in the Department of Justice’s $200 million USDT seizure case from this past summer, investigators described how the efforts of an unnamed “international law firm” to advocate for the unfreezing of crypto wallets had only reinforced investigators’ suspicions of criminal conduct, with the law firm having “never provided answers to simple ownership questions” posed by the government.

Filing a Claim to Prevent Administrative Seizure

The situation is more straightforward if you are dealing with an administrative seizure, since filing a timely and valid ownership claim will prevent the government from proceeding along this path. However, be mindful that filing a claim may invite further government scrutiny, and providing inaccurate information during the claims process raises the same risks as providing false information to a federal law enforcement agent.

Voluntary Removal From a Sanctions List

To the extent a freeze was caused by your inclusion on a U.S. sanctions list (or your wallet or organization being included on such a list), the government has established procedures to challenge those listings.  Such a challenge can be made on a number of grounds, for example that there was an insufficient basis to impose the sanction in the first place, that the sanction should be removed due to changed circumstances, or that the sanction was based on mistaken identity.  This can be a difficult and lengthy process, but every year such challenges result in the successful removal of numerous individuals and entities from U.S. sanctions lists.

Litigation

If you are unable to persuade the government to release your crypto assets, you may be able to successfully challenge the freeze or seizure in court. Your litigation options will depend on whether you are dealing with a criminal or civil investigation, or with a sanctions matter. Be mindful that there may be strict deadlines in your case, and you may lose your opportunity to assert a claim to your assets if you do not move quickly to assert your rights.  

In a civil matter, such as a suit brought by the Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Trade Commission, or components of the Department of Justice that engage in civil litigation, freeze or seizure orders are generally issued without prior notice to the cryptocurrency owner, but once the civil litigation has been brought and the order is in place the owner is generally given a chance to challenge it within a matter of days or weeks.  In other words, you do not need to bring your own lawsuit, and the court will hold a legal proceeding to allow you to submit evidence and challenge the government’s case.

In a criminal matter, if charges have already been brought alleging that the cryptocurrency at issue is connected to a crime, you will generally have to wait until the criminal case is resolved to seek the return of your crypto assets, even if you are not the one who was charged. Once the criminal case against charged defendants is resolved (a process that often takes a year or longer), there is an established procedure for nondefendants asserting an interest in seized property to assert their claims to those assets. 

However, if criminal authorities have frozen or seized crypto assets but not yet brought related criminal charges, there is generally more of an opportunity to challenge the freeze or seizure. You can affirmatively file a motion to seek the return of your assets (a motion that a court would otherwise generally defer if there is a pending criminal case), or in some situations criminal authorities may themselves pursue civil remedies to obtain full legal rights to your assets in a process that will give you a chance to challenge the government’s case.

If your assets were frozen because of economic sanctions, you can file a lawsuit in federal district court challenging the sanctions designation. However, judges afford the government’s sanctions determinations a significant amount of deference, so prevailing in court can be an uphill battle. One example of a recent successful sanctions challenge concerned the crypto mixer protocol Tornado Cash. In that case, a federal appeals court determined that the government made a legal error in determining that it had the authority to impose sanctions on software code, and thus overturned the sanctions designation. 

Concluding Thoughts

Most cryptocurrency holders will likely never experience a government asset freeze or seizure, but the number of people in that unlucky club will no doubt grow in the coming years due to the expansion and proliferation of cryptocurrency markets, continued government interest in crypto asset freezes and seizures, and new laws and regulations mandating that crypto businesses establish technology and policies to facilitate freezes and seizures. Such law enforcement actions can bring with them substantial financial hardship, emotional anxiety, and social and professional stigma.  If you find yourself in the unfortunate situation of dealing with a freeze or seizure of your crypto assets, you will need to understand how and why such freezes or seizures occur, and be aware of the potential paths to reversing them.

This was an op-ed from a contributing writer. Coinage is a community-owned DAO letting our NFT holders become actual co-owners in one of the fastest-growing Web3 media outlets. Mint an NFT and become a member today to open a path to patronage dividends, or stake with us to support our project.