Seizing cryptocurrencies seems impossible, not least because of the distributed nature of blockchains. Yet, in practice, Russian courts not only issue the relevant orders, they also see them carried out.
The SHARD team looked into how this is done.
Seizure and confiscation: what is the difference
Issues of seizing and confiscating cryptocurrencies have repeatedly reached Russian courts, whose decisions have defined their status in civil and criminal proceedings despite the absence of clear federal regulation. Most courts in Russia now recognise such assets as property.
In criminal practice, particularly in matters of laundering and legalising proceeds of crime, a ruling of the Supreme Court of the Russian Federation dated 26 February 2019 equates cryptocurrencies with money and allows them to be regarded as instruments of crime.
In civil proceedings, one example of recognising digital assets as property is a determination by the Civil Panel of the Supreme Court on 2 February 2021 No. 44-KG20-17-K7, 2-2886/2019. The case concerned a PJSC Sberbank unjust-enrichment claim against a seller of cryptocurrency on a P2P platform who had been caught up in a “triangle” fraud scheme.
The defendant received the disputed funds as payment for cryptocurrency he had sold, and the Supreme Court confirmed that the seller had legal grounds to receive the money, thereby indirectly recognising cryptocurrency as property.
Accordingly, once digital assets are treated as property, Article 115 of the Criminal Procedure Code of the Russian Federation should apply to their seizure, that is, “a prohibition, addressed to the owner or holder of property, on disposing of and, where necessary, using it, as well as the removal of the property and its transfer for safekeeping”.
By the same token, provisions of criminal and criminal-procedure law on confiscation may apply to cryptocurrencies, meaning “the compulsory gratuitous seizure and transfer into state ownership on the basis of a conviction by a court”: Article 104.1 of the Criminal Code lists “other property” among objects subject to confiscation.
Lawmakers have yet to fully set out rules for the circulation of cryptocurrencies and for their seizure and confiscation, but practice has taken shape in a relatively short time.
Seizing cryptocurrencies
The near-impossibility of blocking digital assets in distributed networks means they can be seized only in the following situations:
- if the assets sit with a custodial service, which, on a court order, will freeze the user’s account;
- if the issuer of the digital currency is a private company such as Tether (USDT) or Circle (USDC), which can technically block funds at any address in their network. Issuers of the world’s most popular stablecoins do freeze funds on the basis of Russian court rulings and investigators’ orders, but subject to their internal compliance policies and US legal requirements. Because of sanctions on Russia, further recovery of tokens frozen by the issuer in favour of the state will be impossible;
- if the person whose funds are to be seized voluntarily hands over keys or provides access to a non-custodial wallet or an account at a custodial service. This also covers cases where law-enforcement agencies obtain the keys or access to a crypto wallet (or an exchange account).
Providing access keys—or obtaining them by other means—to a crypto wallet (or exchange account) holding assets subject to seizure does not ensure their safety until they are transferred to a wallet controlled by law enforcement. The same applies to non-custodial storage media: accomplices of suspects may gain access via a wallet recovery function or hold keys to an exchange account.
To exclude third-party access, cryptocurrencies are often moved to non-custodial wallets controlled by law-enforcement officers, with a seizure record drawn up for the property.
In some cases funds may be transferred to the victim’s wallet (for instance, where these are the victim’s stolen assets and such “responsible storage” takes place as part of compensation), though this raises thorny issues of security and control over seized assets.
Another practice is to sell via an exchange service, a crypto exchange or a P2P platform, which can occur, for example, with the owner’s voluntary consent. The fiat proceeds are then seized in the usual manner.
That approach is risky. Conversion chiefly serves as a coercive measure, and if a court later acquits the suspect, he may claim compensation for damage and losses if the sold assets appreciated during the proceedings.
Confiscating cryptocurrencies
At the end of 2023 the State Duma and the Russian Interior Ministry sent the Ministry of Finance an instruction to prepare proposals for a state platform for cryptocurrency confiscations by 1 October 2024. As of November 2024, no information on implementation had emerged.
Where crypto circulation is regulated, confiscated assets are typically liquidated through an exchange and the proceeds flow to the state. Examples of multi-million- and even billion-dollar sales are common in the United States, China, Finland and Germany.
In such jurisdictions, once a court decides, confiscated assets are transferred to state-controlled addresses and can even serve as an investment instrument.
In Russia, although digital assets often feature in criminal and civil cases and victims may have stolen funds returned or losses compensated in fiat, there is still no public information about the state liquidating confiscated cryptocurrency by selling it through a foreign exchange.