For years, the U.S. government has maintained a side hustle auctioning off bitcoin and other cryptocurrencies. Historically, Uncle Sam has done a pretty lousy job of timing the market.

The 500 bitcoin it sold to Riot Blockchain in 2018 for around $5 million? That’s now worth north of $23 million. Or the 30,000 bitcoin that went to billionaire venture capitalist Tim Draper for $19 million in 2014? That would be more than $1.3 billion today.

The government has obtained all that bitcoin by seizing it, alongside the usual assets one would expect from high-profile criminal sting operations. It all gets sold off in a similar fashion.

“It could be 10 boats, 12 cars, and then one of the lots is X number of bitcoin being auctioned,” said Jarod Koopman, director of the Internal Revenue Service’s cybercrime unit. 

One of the next seizures up on the auction block is $56 million worth of cryptocurrencies that authorities confiscated as part of a Ponzi scheme case involving offshore crypto lending program BitConnect. Unlike other auctions where the proceeds are redistributed to different government agencies, the cash from this crypto sale will be used to reimburse victims of the fraud.

The government’s crypto seizure and sale operation is growing so fast that it just enlisted the help of the private sector to manage the storage and sales of its hoard of tokens. 

For the most part, the U.S. has used legacy crime-fighting tools to deal with tracking and seizing cryptographically built tokens, which were inherently designed to evade law enforcement.

“The government is usually more than a few steps behind the criminals when it comes to innovation and technology,” said Jud Welle, a former federal cybercrime prosecutor. 

“This is not the kind of thing that would show up in your basic training,” Welle said. But he predicts that in three to five years, “there will be manuals edited and updated with, this is how you approach crypto tracing, this is how you approach crypto seizure.”

There are currently three main junctures in the flow of bitcoin and other cryptocurrencies through the criminal justice system in the U.S.  

The first phase is search and seizure. The second is the liquidation of raided crypto. And the third is deployment of the proceeds from those crypto sales. 

In practice, the first stage is a group effort, according to Koopman. He said his team often works on joint investigations alongside other government agencies. That could be the Federal Bureau of Investigation, Homeland Security, the Secret Service, the Drug Enforcement Agency, or the Bureau of Alcohol, Tobacco, Firearms and Explosives. 

“A lot of cases, especially in the cyber arena, become…joint investigations, because no one agency can do it all,” said Koopman, who worked on the government’s Silk Road cases and the 2017 AlphaBay investigation, which culminated in the closure of another popular and massive dark web marketplace.

Koopman said his division at the IRS typically handles crypto tracing and open source intelligence, which includes investigating tax evasion, false tax returns, and money laundering. His team consists of sworn law enforcement officers, who carry weapons and badges and who execute search, arrest and seizure warrants.

Other agencies that have more money and resources focus on the technical components. 

“Then we all come together when it’s time to execute any type of enforcement action, whether that’s an arrest, a seizure or a search warrant. And that could be nationally or globally,” he said.

During the seizure itself, multiple agents are involved to ensure proper oversight. That includes managers, who establish the necessary hardware wallets to secure the seized crypto.

“We maintain private keys only in headquarters so that it can’t be tampered with,” Koopman said.

In recent years, the government has brought back record amounts of crypto. 

“In fiscal year 2019, we had about $700,000 worth of crypto seizures. In 2020, it was up to $137 million. And so far in 2021, we’re at $1.2 billion,” Koopman told CNBC in August. The fiscal year ended Sept. 30.

As cybercrime picks up — and the haul of digital tokens along with it — government crypto coffers are expected to swell even further.

Once a case is closed, the U.S. Marshals Service is the main agency responsible for auctioning off the government’s crypto holdings. To date, it has seized and auctioned more than 185,000 bitcoins. That cache of coins is currently worth around $8.6 billion, though many were sold in batches well below today’s price.

It’s a big responsibility for one government entity to assume, which is part of why the Marshals Service no longer shoulders the task alone. 

The U.S. General Services Administration, an agency that typically auctions surplus federal assets, such as tractors, added confiscated cryptocurrencies to the auction block earlier this year. 

In July, following a more than yearlong search, the Department of Justice hired San Francisco-based Anchorage Digital to be its custodian for the cryptocurrency seized or forfeited in criminal cases. Anchorage, the first federally chartered bank for crypto, will help the government store and liquidate this digital property. The contract was previously awarded to BitGo.

“The fact that the Marshals Service is getting professionals to help them is a good sign that this is here to stay,” said Sharon Cohen Levin, who worked on the first Silk Road prosecution and spent 20 years as chief of the money laundering and asset forfeiture unit in the U.S. Attorney’s Office for the Southern District of New York.

The process of auctioning off crypto, in blocks, at fair market value, likely won’t change, according to Koopman.

“You basically get in line to auction it off. We don’t ever want to flood the market with a tremendous amount, which then could have an effect on the pricing component,” he said.

But other than spacing out sales, Koopman said, trying to “time” the market to sell at peak crypto prices isn’t his objective. “We don’t try to play the market,” he said. 

In November 2020, the government seized $1 billion worth of bitcoin linked to Silk Road. Because the case is still pending, those bitcoins are sitting idle in a crypto wallet. Had the government sold its bitcoin stake when the price of the token peaked above $67,000 last month, coffers would have been a whole lot bigger than if they liquidated at today’s price. 

Once a case is closed and the crypto has been exchanged for fiat currency, the feds then divvy the spoils. The proceeds of the sale are typically deposited into one of two accounts: The Treasury Forfeiture Fund or the Department of Justice Assets Forfeiture Fund. 

“The underlying investigative agency determines which fund the money goes to,” Levin said.

Koopman said the crypto traced and seized by his team accounts for roughly 60% to 70% of the Treasury Forfeiture Fund, making it the largest individual contributor. 

After it’s placed into one of these two funds, the liquidated crypto can then be put toward a variety of line items. Congress, for example, can rescind the money and give the cash to other projects.

“Agencies can put in requests to gain access to some of that money for funding of operations,” said Koopman. “We’re able to put in a request and say, ‘We’re looking for additional licenses or additional gear,’ and then that’s reviewed by the Executive Office of Treasury.”

Some years, Koopman’s team receives varying amounts based on the initiatives proposed. Other years, they get nothing because Congress will choose to rescind all the money out of the account.

Tracking where all the money goes isn’t a straightforward process, according to Alex Lakatos, a partner with Washington, D.C. law firm Mayer Brown who advises clients on forfeiture. 

The Justice Department hosts Forfeiture.gov, which offers some optics on current seizure operations. This document, for example, outlines a case from May where 1.04430259 bitcoin was taken from a hardware wallet belonging to an individual in Kansas. Another 10 were taken from a Texas resident in April. But it’s unclear whether the list is a comprehensive compilation of all active cases. 

“I don’t believe there’s any one place that has all the crypto that the U.S. Marshals are holding, let alone the different states that may have forfeited crypto. It’s very much a hodgepodge,” said Lakatos. “I don’t even know if someone in the government wanted to get their arms around it, how they would go about doing it.”

A Department of Justice spokesperson told CNBC he’s “pretty sure” there’s no central database of cryptocurrency seizures.

But what does appear clear is that more crypto seizure cases are being trumpeted to the public, like in the case of the FBI’s breach of a bitcoin wallet held by the Colonial Pipeline hackers earlier this year.

“In my experience, folks that are in these positions in high levels of government, they may be there for a short period of time, and they want to get some wins under their belt,” said Welle. ”This is the kind of thing that definitely captures the attention of journalists, cybersecurity experts.”

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