Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,
Speaker 1: And this is Bloomberg Crypto, a daily Bloomberg I heard podcast.
Speaker 1: It's Monday, August one. Picture this. You're the FBI trying
Speaker 1: to track down the digital keys that will give you
Speaker 1: access to illicit or stolen crypto. You're rifling through books,
Speaker 1: paper stuffed in suitcases, You're tearing open gum wrappers. It's
Speaker 1: like something out of a movie. But in the world
Speaker 1: of crypto, these odd nooks and crannies have become totally
Speaker 1: normal places for law enforcement to look for digital passwords alone.
Speaker 1: Cops in the U S and the UK sees billions
Speaker 1: of dollars in crypto assets from various different criminal busts.
Speaker 1: With so much money on the line, enforced agencies around
Speaker 1: the world have had to learn and learn quickly how
Speaker 1: to spot these digital assets and seize them from accused criminals. Today,
Speaker 1: I'm joined by Bloomberg reporters Ellen Milligan. They are spending
Speaker 1: all this taxpayer money to train these police officers in crypto,
Speaker 1: and then they're losing them. And David Vorriacos while the
Speaker 1: crypto was in the possession of the US government stole
Speaker 1: it from right under their noses. To discuss how the
Speaker 1: seizures of digital assets are transforming policing policies and protocols
Speaker 1: around the world. Ellen David, thank you so much for
Speaker 1: joining us today. Thanks for having us. We're going to
Speaker 1: talk about something kind of weird, which is how do
Speaker 1: police officers sees imaginary money? And I don't just mean
Speaker 1: imaginary in the sense of contested valuation. I mean imaginary
Speaker 1: as in not cash, not physical, not things that you
Speaker 1: can sort of wrap your head around. You know, people
Speaker 1: are breaking down the door and they're like, freeze and
Speaker 1: we're gonna take all your stuff. You have been writing
Speaker 1: about what happens when cops sees crypto. Tell us more
Speaker 1: about what that's like. Well, police traditionally have sees physical
Speaker 1: items like jewelry, cash, cars, boats, planes, and with crypto,
Speaker 1: they have to know that it's there, and they have
Speaker 1: to be educated enough about the process to understand that
Speaker 1: it has value and there are are unusual ways to
Speaker 1: access it. And so that's what we wrote about. The
Speaker 1: police around the world are educating themselves on what crypto
Speaker 1: is and how to access it. Then once they get it,
Speaker 1: how they store it and how they sell it and
Speaker 1: ellen what does that look like. Well, really, there's a
Speaker 1: few different elements to this. Like David said, there's the
Speaker 1: seizing of the crypto and discovering it, which is easier
Speaker 1: said than done, because often there's not a physical element
Speaker 1: to crypto. Sometimes there is like kind of hardware device
Speaker 1: that crypto wallets kept on or something like that, but
Speaker 1: often these are digital assets, and to discover them and
Speaker 1: then to seize them, you need a seed phrase that
Speaker 1: accesses the crypto wallet. So even if you're holding a
Speaker 1: keep key device for example, police won't know how much
Speaker 1: bitcoin or another cryptocurrency is held on there until they
Speaker 1: can access it using this kind of password. And then
Speaker 1: they're storing it once they've seized it. How do they
Speaker 1: keep this asset safe often for years while you go
Speaker 1: through a criminal trial and then a forfeiture order. Um,
Speaker 1: there's real security issues with hacks for example, but also
Speaker 1: there's you know, in some cases there have been corrupt
Speaker 1: police officers who have taken it for themselves. Um. And
Speaker 1: then the last element is how you release that that cryptocurrency, UM,
Speaker 1: if you give it back to victims or what value
Speaker 1: you give it back to victims if the state keeps it.
Speaker 1: These are the questions that law enforcement has been grappling with.
Speaker 1: And what David and I really discovered is there's no
Speaker 1: standardized procedure of the way that people do this. Everyone,
Speaker 1: as in any of the parts, like each one is
Speaker 1: idiosyncratic exactly, and every different law agency around the world,
Speaker 1: and different law agencies within the same countries do it differently.
Speaker 1: And the police, like the rest of the world when
Speaker 1: it comes to crypto, have had to learn this as
Speaker 1: they go along, and inevitably mistakes have been made along
Speaker 1: the way, and they're still grappling with this. So you
Speaker 1: mentioned kind of three elements, each of which sounds hilariously complicated.
Speaker 1: So let's let's take one of each one in turn.
Speaker 1: First of all, is the the identify kitian, right, like,
Speaker 1: something suspicious is happening. We think that's a suspicious things
Speaker 1: in crypto. We've figured out that that exists. What are
Speaker 1: the steps involved in Okay, we think that this is suspicious.
Speaker 1: We have, you know, good cause we have all the paperwork,
Speaker 1: etcetera that's required. How do they even get those passwords
Speaker 1: in the first place. Well, in identifying the suspicious crypto,
Speaker 1: they can see the movement of crypto on the blockchain.
Speaker 1: That is a public ledger ledger that they can see,
Speaker 1: and they can. What they must first do is trace
Speaker 1: it to criminal activity UH. And once they've traced it
Speaker 1: to criminal activity, they can then get a court order
Speaker 1: two seize wallets that are associated with UM, say stolen crypto.
Speaker 1: At that point they can They cannot actually access those
Speaker 1: wallets without the seed recovery phrases, and they can come
Speaker 1: in different ways. They may be written on slips of paper,
Speaker 1: They may get it from UM inside writers who are
Speaker 1: familiar with it. But if they do not have those
Speaker 1: seed recovery phrases, they can't. The police cannot access the crypto,
Speaker 1: so they can't say compel and exchange to have that
Speaker 1: crypto over to them. There's a case UM that's pending
Speaker 1: in federal court in Washington in which UM, a guy
Speaker 1: named Gary Harmon from Akron, Ohio, UM is alleged to
Speaker 1: have stolen crypto right from out under the noses of
Speaker 1: the Internal Revenue Service, which had seized crypto from Gary's
Speaker 1: brother Larry Harmon, who pleaded guilty UM two charges associated
Speaker 1: with running a crypto mixer and helping to obscure the
Speaker 1: identity of crypto, and the federal government alleges that Gary Harmon,
Speaker 1: while the crypto was in the possession of the U.
Speaker 1: S Government, stole it from right under their noses and
Speaker 1: has a value of many millions of dollars m. He's
Speaker 1: scheduled to go to trial early next year, but there
Speaker 1: have been negotiations that have been spelled out in court
Speaker 1: papers in which uh, the federal government just wants the
Speaker 1: seed recovery phrase so they can have the crypto, and
Speaker 1: Gary Harmon's lawyers say that's essentially tantamount to him admitting
Speaker 1: he committed the crime. Interesting, so all of the big
Speaker 1: parts of jurisprudence that people might be familiar with now
Speaker 1: being applied to the slightly more chaotic entities involved in crypto.
Speaker 1: That sounds like fun. Ellen, you mentioned that that the
Speaker 1: second part of this complex thing around storage. This seems
Speaker 1: to be part of the problem the David is describing
Speaker 1: if if another entity can just be like, nope, that's
Speaker 1: mine and take it once that crypto has been seized
Speaker 1: by the government or by the police, Like, what's going
Speaker 1: on there? What are those fail safes? Exactly? And um,
Speaker 1: a lot of these cases have come out of like
Speaker 1: the teen time where there was kind of the last
Speaker 1: big spike in crypto and then crashed before before spike UM,
Speaker 1: and a lot of those cases came out of hacks,
Speaker 1: and that just shows you even if the police are
Speaker 1: holding it um and storing this crypto in their own
Speaker 1: internal system or outsource system, there's still a danger that
Speaker 1: that could be hacked. And when you've got cases like
Speaker 1: the bit for next case that that David spoke about,
Speaker 1: I mean, the whole world knows how much UM that
Speaker 1: this law enforcement agency has ceased, and it becomes very vulnerable,
Speaker 1: vulnerable because of that. I spoke to a small police
Speaker 1: force in southern England for this story. They stumbled across
Speaker 1: crypto for the first time accidentally really in twenty seventeen.
Speaker 1: So this was a kidnapping case UM where a guy
Speaker 1: was kidnapped. Turned out his house was a cannabis farm.
Speaker 1: So they did some digging around and they found this
Speaker 1: key key device which had a notepad attached to it
Speaker 1: with two seed phrases and it had nine hundred grand
Speaker 1: in bitcoin I think on it. And so what police
Speaker 1: did is that there was no precedent for this. They
Speaker 1: had no idea what to do. Most of them didn't
Speaker 1: really know what crypto was. They bought their own keep
Speaker 1: key device and they transferred UM the bitcoin from his
Speaker 1: wallet to their wallet, their crypto wallet, and then they
Speaker 1: kept this keep key device and the seed phrases in
Speaker 1: a safe and only to hang on like a physical
Speaker 1: a physical safe in the police station. And I need
Speaker 1: two policemen had access to the to the safe. And
Speaker 1: that's because in the silk Row case that David referred to, UM,
Speaker 1: there two police officers ran off in that case in
Speaker 1: the US with some of the money that they were
Speaker 1: storing UM, and so there was a you the police
Speaker 1: were very worried about corrupt police officers, but also about
Speaker 1: losing losing the money. So that's how they did it.
Speaker 1: And then UM they eventually sold it to a trusted exchange.
Speaker 1: Now they don't do that anymore, not surprisingly because it
Speaker 1: is very dangerous to keep such millions of dollars in
Speaker 1: cryptus in a mini like small police station in southern England.
Speaker 1: It's ridiculous now, UM, but these are the kinds of
Speaker 1: ways that they would do it as they were learning
Speaker 1: on the job. And I mean now what they do
Speaker 1: and what most UK law enforcement agencies do, which is
Speaker 1: they have a UM they outsource it to a company
Speaker 1: called Comani, which is backed by a Ledger and others,
Speaker 1: and it's they've got their own secure, high tech like
Speaker 1: system of doing what they say. You know, I guess
Speaker 1: time will time will tell. We'll be right back with
Speaker 1: more from Bloomberg reporters David vore Yachos and Ellen Milligan
Speaker 1: on how law enforcement is keeping up with this new
Speaker 1: digital to mention of financial crime. I want to push
Speaker 1: on something that you're saying here about. You know, they
Speaker 1: tried some stuff, the stuff didn't necessarily work. Now they
Speaker 1: may be getting better at it. How are they getting better?
Speaker 1: Like where are they finding people? You've mentioned outsourcing, but
Speaker 1: they obviously need police officers who are themselves trained in
Speaker 1: knowing what to do. What has that process been like?
Speaker 1: So in the UK UM the police lobbied the government,
Speaker 1: the Home Office UM for funding to train about two
Speaker 1: fifty officers around the country in how to investigate sees
Speaker 1: and realize the value of these assets. They were dubbed
Speaker 1: crypto tactical advisors and I think one or two from
Speaker 1: every force around the country was trained in this and
Speaker 1: that really helped them, and then they did a public
Speaker 1: procurement process UM to outsource this, and I know that
Speaker 1: that's been done in the US less successfully UM, which
Speaker 1: David can tell you about. But actually the trouble that
Speaker 1: they're having now is UM they've lost a number of
Speaker 1: these crypto tactical advisors to coin based chain analysts, these
Speaker 1: firms who can triple their pay. So that's something they're
Speaker 1: really struggling with is they are spending all this taxpayer
Speaker 1: money to train these police officers in crypto and then
Speaker 1: they're losing them to these firms who can pay them
Speaker 1: far more. So let me just make sure I'm understanding this.
Speaker 1: I a US taxpayer, have nominally contributed to somebody working
Speaker 1: for coin base right now essentially potentially I as a
Speaker 1: UK taxpayer definitely UM. In the US I mean, the
Speaker 1: FBI and the Internal Revenue Service have some extremely talented investigators.
Speaker 1: They have a very large databases at their access which
Speaker 1: are able to they're able to use to triangulate to
Speaker 1: figure out who owns a wallet because they can follow
Speaker 1: the movement of crypto across the blockchain in ways that
Speaker 1: people can't do it UM who have only public access,
Speaker 1: and they also work with firms like ch Analysis, which
Speaker 1: um Ellen had mentioned, to help them put together who owns,
Speaker 1: you know, disputed wallets. And I would also say that
Speaker 1: the government is looking to privatize the storage and sale
Speaker 1: of seized crypto assets. The Justice Department, through the marshals
Speaker 1: has had sort of mixed success with that. Marshals used
Speaker 1: to auction crypto themselves and they stopped in They were
Speaker 1: trying to hire an outside firm and the two firms
Speaker 1: that they had settled on both were disqualified because they
Speaker 1: were too big under the the regulations, And so the
Speaker 1: martials are doing it themselves, but they're looking for a
Speaker 1: firm outside to do it for them. And Ellen this
Speaker 1: is related to the third part of that complex tree, right,
Speaker 1: which is the distribution once some sort of judgment has
Speaker 1: been rendered on on either the crypto or the alleged
Speaker 1: criminal involved. Yeah, this is almost the most complicated part
Speaker 1: because there was no legal precedent for for this. And
Speaker 1: what a court does when, for example, it finds someone guilty,
Speaker 1: there's a forfeiture proceeding UM that happens later on and
Speaker 1: often this happens years after UM. And what's the forfeiture
Speaker 1: proceeding UM. In the UK you have the Proceeds of
Speaker 1: Crime Act, and this is a twenty year old act.
Speaker 1: And at the end of the case, when someone's found
Speaker 1: guilty and sent to jail within a year, there's usually
Speaker 1: court hearing where judge will decide the seat what to
Speaker 1: do with the seized assets, whether the criminal can keep
Speaker 1: some of them, whether they forfeit them um and also
Speaker 1: how whether they stay with the state, whether they have
Speaker 1: to be distributed to victims. For example, the trouble that
Speaker 1: this police force had in the case I was talking
Speaker 1: about earlier was this law was twenty years old when
Speaker 1: crypto didn't exist, so they had to go to a
Speaker 1: judge and convince them that this is an asset. The
Speaker 1: most valuable asset in the case it was. They came
Speaker 1: across cash about two hundred grand in cash, watches, artwork, gold,
Speaker 1: but the crypto was the most valuable asset. The other complication,
Speaker 1: and we've seen that even more so, is that crypto
Speaker 1: will be a much different price than it was when
Speaker 1: they seized it. And and and the good thing that
Speaker 1: police have had up until this year was it ballooned
Speaker 1: in price, so either the state or victim got quite
Speaker 1: a good deal out of it. And I think what
Speaker 1: police are now really grappling with is actually that that
Speaker 1: crypto that they've been storing for so long has actually
Speaker 1: fallen in price now quite a lot, what actually quite
Speaker 1: a lot? And at what point do they sell it?
Speaker 1: They're confined by the law, but at what point do
Speaker 1: they convert that? Do they convert it before and they forfeit?
Speaker 1: It's it's really complicated, and it's really those kinds of
Speaker 1: questions are actually outside the law, and it's about instinct
Speaker 1: or mist and David, is it similar in the US?
Speaker 1: In the US, assets can be forfeited when someone is
Speaker 1: convicted of a crime, but they're seized before someone is
Speaker 1: convicted of a crime, so they may sit there for
Speaker 1: a year or two, three four years while someone is
Speaker 1: going through the judicial process, and the government cannot sell
Speaker 1: those crypto assets until after as an order from the
Speaker 1: judge saying it's okay to um to liquidate this. I
Speaker 1: was going to say, there's an interesting case in San
Speaker 1: Francisco where someone stole sixty thousand, three hundred seventy bitcoin
Speaker 1: from the Silk Road site in November of It was
Speaker 1: worth a billion dollars that then went up a great
Speaker 1: deal more than that, and it's fallen since then. But
Speaker 1: there's someone referred to only as individual X who agreed
Speaker 1: to forfeit it, and so he's not he or she
Speaker 1: is not contesting ownership. Um. But there are a bunch
Speaker 1: of other people who are putting claims in saying well,
Speaker 1: they had some of the crypto that was in dispute
Speaker 1: and um. So the judge in San Francisco is ruling
Speaker 1: on that dispute and he's hearing testimony and reading reports
Speaker 1: from experts on both sides, and in every case so
Speaker 1: far he's ruled for the government. And a couple of
Speaker 1: the people who say that, um, some of the crypto
Speaker 1: is there's have appealed it and the so it has
Speaker 1: to be adjudicated at the district court level and the
Speaker 1: appellate court level before they can go ahead and sell
Speaker 1: all of the crypto, which is very valuable. And it
Speaker 1: sounds like it's going to take a long time. It
Speaker 1: has taken almost two years so far. It probably take
Speaker 1: I would guess another year or so, but then I
Speaker 1: assume they're going to go ahead and sell it. Wow. Well,
Speaker 1: thank you both for joining us on this. Frankly, fascinating episode.
Speaker 1: I really appreciate you both taking the time. Thank you
Speaker 1: so much. Thank you Ellen, and thank you David. You
Speaker 1: can find more of their reporting on the Bloomberg Terminal,
Speaker 1: on Bloomberg dot com, and on Twitter. Ellen is at
Speaker 1: Ellen A. Milligan That's m I L L I G
Speaker 1: A N. And David is at David Voiacos That's David
Speaker 1: V O R E A c O s. On the
Speaker 1: next episode of Bloomberg Crypto, one of the most interesting
Speaker 1: conversations in crypto right now is all about definitions, and
Speaker 1: especially the definition of a so called security Who betters
Speaker 1: to tackle this from Bloomberg ompinion columnist Matt Levine, a
Speaker 1: former practicing lawyer and investment banker who has written extensively
Speaker 1: about securities, securities law, inside of trading, all the things
Speaker 1: that are very much topical right now. You'll also hear
Speaker 1: highlights from Matt's interview Sam bankmun Freed at the recent
Speaker 1: Bloomberg Crypto Suwhach in New York. This is Bloomberg Crypto,
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Speaker 1: to Crypto at bloomberg dot net or find us on Twitter.
Speaker 1: We're at Crypto m. The supervising producer of Bloomberg Crypto
Speaker 1: is Vicky ver Galina. Our senior producer is Janet Babin.
Speaker 1: Our producer is Sharon Burriro. Our associate producers of Sanam
Speaker 1: Siddiki and Moses and m Desta wonder At is our engineer.
Speaker 1: Original music by Leo Sidron. I'm Stacy Marie Schmal. We'll
Speaker 1: be back tomorrow.