New Treasury Reporting Requirements: A Gateway to Enhanced DOJ Administrative Forfeiture of Crypto Assets?
If approved, proposed United States Treasury reporting requirements for digital asset brokers may spark an unprecedented increase in DOJ crypto asset forfeiture filings. As reported by Cointelegraph, these proposed Treasury reporting requirements will enable the IRS to engage in an unprecedented new level of surveillance over cryptocurrency transactions in the United States.
The implications of this step are profound, especially when we consider a 2022 DOJ report responding to Executive Order 14067—President Biden’s inaugural major move on cryptocurrency policy. While initial reactions anticipated a stringent crackdown, the executive order primarily sought comprehensive reports to shape future crypto policies.
The DOJ's extensive report offers insights into four main areas: (1) bolstering prosecutions, (2) enhancing investigative processes, (3) amplifying penalties for crypto-related offenses, and (4) boosting resources for government officials.
This framework could potentially equip the DOJ with advanced capabilities to enforce crypto regulations more aggressively, including the potential for increased asset seizures. As noted in the DOJ’s report:
Federal law has long provided that the Department can forfeit fruits of criminal activity not only by court order, but administratively. The administrative forfeiture process promotes the efficient allocation of government resources, discourages undue burdens on the federal judicial system, and potentially expedites the return of funds to victims, while affording interested parties a prompt resolution through the remission process. Accordingly, Department policy recommends administrative forfeiture when available.
Cryptocurrency investigations regularly involve assets with a high dollar value. Under 19 U.S.C. § 1607, with the exception of monetary instruments as defined in the BSA (31 U.S.C. § 5312(a)(3)), the availability of administrative forfeiture is capped at $500,000.157 Section 6102(d) of the National Defense Authorization Act for Fiscal Year 2021158 took a step toward addressing this by amending that definition of “monetary instruments” to include “value that substitutes for any monetary instrument”—but only insofar “as the Secretary [of the Treasury] shall provide by regulation.” The Department recommends that Treasury exercise its authority to provide that cryptocurrency is a monetary instrument that is not subject to the $500,000 cap on administrative forfeiture. If Treasury does not do so, however, the Department would welcome an amendment to Section 1607 to lift the $500,000 cap for cryptocurrency and other digital assets. The Report of the Attorney General Pursuant to Section 5(b)(iii) of Executive Order 14067
According to Cointelegraph, DOJ claims it is "‘critical’ for it to have the power to seize cryptocurrency from Americans — even if a judge never signs off.”
Some speculate that the DOJ will likely use the consumer information reported to the IRS under the above proposed regulations to ramp-up its administrative forfeiture of crypto assets. Unlike judicial forfeiture, administrative forfeiture would allow DOJ, rather than a judge, to determine if property should be forfeited, circumventing the need to establish a crime in court.
The DOJ has praised this method for its efficiency and for reducing strain on the court system. This preference is evident in the statistics: from 2000 to 2019, administrative forfeitures accounted for a substantial 78 percent of all DOJ forfeitures.
This process bypasses the judicial system, where the standard of proof and Due Process protections are traditionally more robust. Given the DOJ's historical preference for administrative forfeiture, such a shift could mean that individuals' crypto assets might be seized without the safeguard of judicial oversight. This raises constitutional alarms about the fair balance of power and the protection of individual rights against potential state overreach.
Federal prosecutors are empowered to seek the forfeiture of assets, including cryptocurrency, linked to criminal conduct under various statutes. Specifically, 21 U.S.C. § 881(a)(6) allows for the seizure of any assets tied to the exchange of controlled substances, including any proceeds from such illicit transactions. Additionally, 18 U.S.C. § 981(a)(1)(A) provides the authority to forfeit property connected to financial crimes like money laundering (violations of 18 U.S.C. §§ 1956 and/or 1957) or conspiracy to commit money laundering (18 U.S.C. § 1956(h)). These laws enable the government to target and seize assets, including crypto, that are found to facilitate or are the proceeds of criminal activity.
Administrative forfeiture by the DOJ is a non-judicial process where the seizing agency itself declares property forfeitable without a court order, primarily for property that meets certain thresholds and types. In contrast, judicial asset forfeiture is a court-ordered process, necessitating a lawsuit filed in court against the property (not the person), and it often requires proving the connection to criminal activity beyond a reasonable doubt or by a preponderance of the evidence, depending on the nature of the case. Judicial proceedings provide greater due process, allowing for the property owner to contest the seizure in court.
The proposed expansion of IRS surveillance capabilities, as per the U.S. Treasury's new reporting requirements for digital asset brokers, raises significant Due Process concerns. If these proposals are enacted, the DOJ could leverage the influx of data to pursue administrative asset forfeiture—where agencies, not courts, adjudicate the forfeiture of assets—on a scale previously unseen in the crypto sector.