Speaker 1: Hi, this is Vickie with the Bloomberg Crypto podcast team.
Speaker 1: We've been taking a break this week to recharge our
Speaker 1: batteries for the new year, and we'll be back tomorrow
Speaker 1: with some fresh episodes for you. But today we're re
Speaker 1: upping the last in our series of our team favorites,
Speaker 1: and this one is definitely in my top ten. It's
Speaker 1: a fascinating interview with Bloomberg reporters Ellen Milligan and David Vorriacos.
Speaker 1: They walk us through how police and FBI agents have
Speaker 1: had to rethink how to recover stolen goods when they're
Speaker 1: dealing with digital assets. This sort of turns into a
Speaker 1: Keystone Caper's type adventure with agents trying to track down
Speaker 1: digital keys after a raid or a seizure, all the
Speaker 1: gain access to stolen crypto. All of us here on
Speaker 1: the Bloomberg Crypto team hope you had a great end too,
Speaker 1: and we look forward to what the new year will bring.
Speaker 1: Hope you enjoyed this one picture this You're the FBI
Speaker 1: trying to track down the digital keys that will give
Speaker 1: you 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, enforcement agencies around
Speaker 1: the world have had to learn and learn quickly how
Speaker 1: to suppot these digital assets and seize them from accused criminals.
Speaker 1: Today I'm joined by Bloomberg reporters Ellen Milligan. They are
Speaker 1: spending all this taxpayer money to train these police officers
Speaker 1: in crypto, and then they're losing them. And David Vorriacos
Speaker 1: while the crypto was in the possession of the US government,
Speaker 1: stole it from right under their noses. To discuss how
Speaker 1: the seizures of digital assets are transforming leasing policies and
Speaker 1: protocols around the world. Ellen, David, thank you so much
Speaker 1: for joining us today, Thanks for having us. We're going
Speaker 1: to talk about something kind of weird, which is how
Speaker 1: do police officers sees imaginary money. And I don't just
Speaker 1: mean imaginary in the sense of contested valuation. I mean
Speaker 1: imaginary as in not cash, not physical, not things that
Speaker 1: you can sort of wrap your head around. You know,
Speaker 1: people are breaking down the door and they're like freeze
Speaker 1: and we're gonna take all your stuff. You have been
Speaker 1: writing about what happens when cops sees crypto. Tell us
Speaker 1: more about what that's like. Well, police traditionally have sees
Speaker 1: physical 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 and so that's what we wrote about. The police
Speaker 1: around the world are educating themselves on what crypto is
Speaker 1: 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 a kind of hardware
Speaker 1: device that crypto wallet is kept on or something like that,
Speaker 1: but often these are digital assets and to discover them
Speaker 1: and then to seize them, you need a seed phrase
Speaker 1: that accesses the crypto wallet. So even if you're holding
Speaker 1: a keep key device, for example, police won't know how
Speaker 1: much bitcoin or another cryptocurrency is held on there until
Speaker 1: they can access it using this kind of password, and
Speaker 1: then they're storing it once they've seized it. How do
Speaker 1: they keep this asset safe often for years while you
Speaker 1: go 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
Speaker 1: cryptocurrency um, if you give it back to victims or
Speaker 1: what value you give it back to victims if the
Speaker 1: state keeps it. These are the questions that law enforcement
Speaker 1: has been grappling with, and what David and I really
Speaker 1: discovered is there's no standardized procedure of where that people
Speaker 1: do this every as in any of the parts like
Speaker 1: each one is idiosyncratic exactly, and every different law agency
Speaker 1: around the world and different law agencies within the same
Speaker 1: countries do it differently. And the police let the rest
Speaker 1: of the world when it comes to crypto, have had
Speaker 1: to learn this as they go along, and inevitably mistakes
Speaker 1: have been made along the way, and they're still grappling
Speaker 1: with this. So you mentioned kind of three elements, each
Speaker 1: of which sounds hilariously complicated. So let's let's take one
Speaker 1: of each one in turn. First of all, is the
Speaker 1: the identification, right, So, like something suspicious is happening, we
Speaker 1: think that's a suspicious things in crypto. We've figured out
Speaker 1: that that exists. What are the steps involved in Okay,
Speaker 1: we think that this is suspicious. We have, you know,
Speaker 1: good cause we have all the people work, etcetera. That's required.
Speaker 1: How do they even get those passwords in the first place. Well,
Speaker 1: in identifying the suspicious crypto, they can see the movement
Speaker 1: of crypto on the blockchain. That is a public um
Speaker 1: ledger ledger that they can see, and they can What
Speaker 1: they must first do is trace it to criminal activity. Uh.
Speaker 1: And once they've traced it to criminal activity, they can
Speaker 1: then get a court order two seize wallets that are
Speaker 1: associated with UM say stolen crypto. At that point they
Speaker 1: can't they cannot actually access those wallets without the seed
Speaker 1: recovery phrases, and they can come in different ways. They
Speaker 1: may be written on slips of paper. They may get
Speaker 1: it from UM insiders who are familiar with it. But
Speaker 1: if they do not have those seed recovery phrases, they
Speaker 1: can't The police cannot access the crypto, so they can't
Speaker 1: say compel and exchange to have that crypto over to them.
Speaker 1: There's a case UM that's pending in federal court in
Speaker 1: Washington in which UM a guy named Gary Harmon from Akron, Ohio. UM.
Speaker 1: He is alleged to have stolen crypto right from out
Speaker 1: under the noses of the Internal Revenue Service, which had
Speaker 1: seized crypto from Gary's brother Larry Harmon, who pleaded guilty
Speaker 1: UM two charges associated with running a crypto mixer and
Speaker 1: helping to obscure the identity of crypto. And the federal
Speaker 1: government alleges that Gary Harmon, while the crypto was in
Speaker 1: the possession of the U. S Government, stole it from
Speaker 1: right under their noses and has a value of many
Speaker 1: millions of dollars. He's scheduled to go to trial early
Speaker 1: next year, but there have been negotiations that have been
Speaker 1: spelled out in court papers in which Uh, the federal
Speaker 1: government just wants the seed recovery phrase so they can
Speaker 1: have the crypto. And Gary Harmon's lawyers say that's essentially
Speaker 1: tantamount to him admitting he committed the crime. Interesting, so
Speaker 1: all of the big parts of jurisp it and so
Speaker 1: people might be familiar with now being applied to the
Speaker 1: slightly more chaotic entity is involved in crypto. That sounds
Speaker 1: like fun Ellen, you mentioned that that's the second part
Speaker 1: of this complex thing around storage. There seems to be
Speaker 1: part of the problem the David is describing if if
Speaker 1: another entity can just be like, Nope, that's mine and
Speaker 1: take it once that crypto has been seized by the
Speaker 1: government or by the police, Like, what's going on there?
Speaker 1: What are those faiel safes exactly? And Um, A lot
Speaker 1: of these cases have come out of like the eighteen
Speaker 1: time where there was kind of the last big spike
Speaker 1: in crypto and then crash before before spike. Um, and
Speaker 1: a lot of those cases came out of hacks. And
Speaker 1: that just shows you even if the police are holding
Speaker 1: it um and storing this crypto in their own internal
Speaker 1: system or outsourced system, there's still a danger that that
Speaker 1: could be hacked and when you've got cases like the
Speaker 1: bit for next case that David spoke about, I mean,
Speaker 1: the whole world knows how much UM that this law
Speaker 1: enforcement agency has ceased, and it becomes very vulnerable, vulnerable
Speaker 1: because of that. I spoke to a small police force
Speaker 1: in southern England for this story. They stumbled across crypto
Speaker 1: for the first time accidentally really in twenty seventeen. So
Speaker 1: this was a kidnapping case UM where a guy was kidnapped.
Speaker 1: Turned out his house was a cannabis farm. So they
Speaker 1: did some digging around and they found this keep key
Speaker 1: device which had a notepad attached to it with two
Speaker 1: seed phrases, and it had nine hundred grand in bitcoin
Speaker 1: I think on it. And so what police did is
Speaker 1: that that there was no precedent for this. They had
Speaker 1: no idea what to do. Most of them didn't really
Speaker 1: know what krypto was. They bought their own key key
Speaker 1: device and they transferred UM the bitcoin from his wallet
Speaker 1: to their wallet, their crypto wallet, and then they kept
Speaker 1: this keep key device and the seed phrases in a
Speaker 1: safe and only to hang on like a physical a
Speaker 1: physical safe in the police station. And I need two
Speaker 1: policemen had access to the to the safe. And that's
Speaker 1: 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 storing. UM,
Speaker 1: and so there was a you know, the police are
Speaker 1: very worried about corrupt police officers but also about losing
Speaker 1: losing the money. So that's how they did it. And
Speaker 1: 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 a millions of dollars
Speaker 1: in 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 Kamani, which is backed by a Ledger and and others,
Speaker 1: and it's they've got their own secure, high tech like
Speaker 1: system of James. So 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 Vorriakos and Ellen Milligan on
Speaker 1: how law enforcement is keeping up with this new digital
Speaker 1: to mention of financial crime. I want to push on
Speaker 1: something that you're saying here about. You know, they tried
Speaker 1: some stuff, the stuff didn't necessarily work. Now they may
Speaker 1: 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 obvious we need police officers who are themselves trained
Speaker 1: in 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. Yes, and I think one or two
Speaker 1: from every force around the country was trained in this
Speaker 1: and that really helped them. And then they did a
Speaker 1: public procurement process UM to outsource this and I know
Speaker 1: that that's been done in the US less successfully UM,
Speaker 1: which David can tell you about. But actually the trouble
Speaker 1: that they're having now is UM they've lost a number
Speaker 1: of these crypto tactical advisors to coin based chain analysts.
Speaker 1: These firms who can triple their pay. So that's something
Speaker 1: that really struggling with is they are spending all this
Speaker 1: taxpayer money to train these police officers in crypto and
Speaker 1: then they're losing them to these firms who can pay
Speaker 1: them far more. So let me just make sure I'm
Speaker 1: understanding this. I a U S taxpayer, have nominally contributed
Speaker 1: to somebody working for coin base right now, essentially potentially
Speaker 1: I as a UK taxpayer, definitely um I would say
Speaker 1: also in the US, I mean the FBI and the
Speaker 1: Internal Revenue Service have some extremely talented investigators and they
Speaker 1: have a very large databases at their access which are
Speaker 1: able to they're able to use to triangulate to figure
Speaker 1: out who owns a wallet because they can follow the
Speaker 1: movement of crypto across the blockchain in ways that people
Speaker 1: can't do it um who have only public access. And
Speaker 1: they also work with firms like Analysis, which um Ellen
Speaker 1: had mentioned, to help them put together who owns, you know,
Speaker 1: disputed wallets. And I would also say that the government
Speaker 1: is looking to privatize the storage and sale of seized
Speaker 1: crypto assets. The Justice Department, through the Marshals has had
Speaker 1: sort of mixed success with that. Marshals used to auction
Speaker 1: crypto themselves and they stopped in They were trying to
Speaker 1: hire an outside firm and the two firms that they
Speaker 1: had settled on both were disqualified because they were too
Speaker 1: big under the the regulations, and so the marshals are
Speaker 1: doing it themselves, but they're looking for a firm outside
Speaker 1: to do it for them. And Ellen. This is related
Speaker 1: to the third parts of that complex tree, right, which
Speaker 1: is the distribution once some sources of judgment has been
Speaker 1: rendered on on either the crypto or the alleged criminal involved. Yeah,
Speaker 1: this is almost the most complicated part because there was
Speaker 1: no legal preston for for this and what a court
Speaker 1: does when, for example, it finds someone guilty, there's a
Speaker 1: forfeit tire proceeding um that happens later on and often
Speaker 1: this happens years after um. And what's the forfeits proceeding um.
Speaker 1: In the UK you have the Proceeds of Crime Act
Speaker 1: and this is a twenty year old act. And at
Speaker 1: the end of the case, when someone's found guilty and
Speaker 1: sent to jail within a year, there's usually a court
Speaker 1: hearing where judge will decide the seat what to do
Speaker 1: with the seased assets, whether the criminal can keep some
Speaker 1: of them, whether they forfeit them um and also how
Speaker 1: whether they stay with the state, whether they have to
Speaker 1: be distributed to victims. For example, the trouble that this
Speaker 1: police force had in the case I was talking about
Speaker 1: earlier was this law was twenty years old when crypto
Speaker 1: didn't exist, So they had to go to a judge
Speaker 1: and convince them that this is an asset. The most
Speaker 1: valuable asset in the case it was. They came across
Speaker 1: cash about two d 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 victims 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 they forfeit
Speaker 1: to its. It's really complicated and it's really those kinds
Speaker 1: of questions are actually outside the law, and it's about
Speaker 1: instinct or missed 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 uh, the government cannot
Speaker 1: sell those crypto assets until after there's an order from
Speaker 1: the judge saying it's okay to UM to liquidate this.
Speaker 1: I was going to say, there's an interesting case in
Speaker 1: San Francisco where someone stole sixty nine thousand, three hundred
Speaker 1: seventy bitcoin from the Silk Road site in November of
Speaker 1: It was worth a billion dollars that then went up
Speaker 1: a great deal more than that, and it's fallen since then.
Speaker 1: But there's someone referred to only as individual X who
Speaker 1: agreed to forfeit it, and so he's not he or
Speaker 1: she is not contesting ownership UM. But there are a
Speaker 1: bunch 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 that 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 that crypto, which is very valuable. And it
Speaker 1: sounds like it's going to take a long time. It's
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 vorriacos. 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 than Bloomberg ompainion columnist Matt Levine, a
Speaker 1: former practicing lawyer and investment banker who has written extensively
Speaker 1: about securities, securities law, inside of training, all the things
Speaker 1: that are very much top goal right now. You'll also
Speaker 1: hear highlights from Matt's interview Sam bankmun Freed at the
Speaker 1: recent Bloomberg Crypto swmach in New York. This is Bloomberg Crypto,
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