Policies have had a poor reputation in the law enforcement community for many years. We have all heard about a new policy written because of someone’s poor action or bad decision. Some of us even look at policies as a way of limiting our decision-making or hindering our ability to do our job. But if we stop and consider reality, policies are there to protect us as well as our agencies, and maybe we should learn to appreciate them. A well-written policy should provide you with a road map for daily operations and help you perform your job, not inhibit you.
When working in a world that involves virtual currencies, policies are important and necessary. Whether your agency has a virtual currency policy or needs one, there are a few things that should be considered. For example, does your policy protect only the seizure of assets? Should it encompass the use of virtual currency in investigations? What is the proper method of storing virtual currency? Should it be stored? Should it be converted and then stored? How is this accomplished operationally?
Cryptocurrencies can have high volatility, and this is something agencies must contemplate when making policy decisions. When seizing assets including virtual currencies, with their fluctuation in value, agencies need to ensure that their policy clearly indicates what should be done with those funds while awaiting court proceedings. One must examine the upside and downside with every method. Consider the following examples. An officer seizes Bitcoin and converts it to USD, and the value of Bitcoin increases by $20,000. The officer then loses the seizure hearing. The suspect may say that the officer now owes them the $20,000 difference because they would not have sold the Bitcoin. Or alternatively, the officer holds the Bitcoin and the value drops by $20,000. The suspect will claim the officer owes them yet again because they would have sold the bitcoin at the higher value and their loss (due to the officer’s actions) is again $20,000. If the officer follows agency policy, they will be protected and may have fewer legal challenges.
Current best practice recommendations are to hold the virtual currency asset as it was seized, much as you would do with a house or a vehicle. You wouldn’t seize a home, auction it and show up to the seizure hearing with cash. Your policy should dictate the specific action for each asset seized, and you should always follow that policy to protect yourself and your agency from litigation.
So now we know what we are going to do once we’ve obtained the cryptocurrency, but how do we actually seize it? Your policy should dictate how funds will be moved. If you are dealing with a compliant exchange, or one that will cooperate with legal service, you should present legal service. Keep in mind that there are other things to consider and plan for. If your suspect is aware of your seizure attempts, then exigency exists to move those funds out immediately. Once cryptocurrency is moved from a wallet, you are now back at square one trying to follow the funds. If you find yourself needing to move funds without serving legal service to an exchange, you will need to create an agency-controlled wallet. Do not make the mistake of using a personal wallet to move the funds. Everything an officer uses should be created, owned and controlled by the agency. This includes the computer used to create a wallet, the wallet itself, etc. Ensure that any actions taken during the seizure are witnessed by a third party that is affiliated with your agency and can attest that the proper steps were taken by all parties, and all actions are documented.
If there are multiple wallets within the same case, current best practices recommend having a separate wallet for each suspect wallet to ensure there is no comingling of any funds. Should an officer lose a hearing on one out of four wallets, then it is easier to transfer the affected wallet or funds back to the suspect. Regarding transfers, your policy should clearly explain the seizure process, including performing a test transaction from the suspect’s wallet to the agency wallet before moving all of the funds. This trial can be a nominal amount of cryptocurrency, just to ensure that the addresses have been listed correctly and there are no typos. Please keep in mind that with cryptocurrency, once the transaction is sent, it cannot be undone. If you send the funds to the wrong address, you could be liable for the losses.
Cryptocurrency controlled by an agency must have a thorough audit policy and procedure to ensure those assets aren’t stolen or moved without approval. Current best practices recommend quarterly random audits at a minimum. If your agency is storing funds at an exchange, such as Coinbase, there is an option to submit audit reports on a schedule. This ensures that if the funds were misused or stolen, the responsible party could quickly isolate the timeframe of the offense.
The agency policy should also clearly identify who may authorize the use of virtual funds in active investigations such as undercover purchases, prostitution cases or vice operations. As with traditional currencies, if too many people can authorize the use of the funds, then it becomes much harder to determine the “chain of custody” of those funds. Current best practices recommend having no more than two people authorized to use cryptocurrency assets and require a report or memo generated each time a request is made for logging purposes. At a minimum, the report should include the case number, the requesting party, the authorizing party and how the funds were to be used. This safeguard may reduce access and abuse of the assets.
For cryptocurrency policies, many crucial items need to be included. This information is designed to give agencies and officers a road map for operational decisions related to cases involving virtual currency, but it is not meant to be all-inclusive. Ultimately, the goal is to reduce the likelihood of abuse, errors or “lost” funds. Anytime funds are going to be transferred or used, there needs to be good policy and a clear documentation trail to protect everyone.
Model cryptocurrency policy and other important resources can be found at nw3c.org/investigative-resources#CryptocurrencyResources.