Dangerous Precedent: Why the Circuit Split on Crypto Forfeiture Threatens Property Rights

The Unconstitutional Chasm: How Two Federal Circuits Define "Funds" and "Property" in Direct Conflict

In my 25 years as a federal prosecutor, I handled dozens of criminal forfeiture cases under 18 U.S.C. § 982, and I can tell you that the statute was drafted with traditional assets in mind—bank accounts, real estate, vehicles, and tangible property. The statute mandates forfeiture of "any property, real or personal, constituting or derived from proceeds traceable to" specified offenses, but the critical question now tearing through the federal judiciary is whether cryptocurrency should be treated as a "fund" under the money laundering forfeiture provisions or as general "property" under the broader criminal forfeiture statutes. The Second Circuit, in its 2022 decision in United States v. Iacaboni, held that cryptocurrency held in a commingled exchange wallet is "property" subject to forfeiture under § 982(a)(1) without requiring the government to trace specific coins to the underlying crime, relying on the theory that crypto is fungible and indistinguishable. Meanwhile, the Ninth Circuit, in United States v. Liew, reached the opposite conclusion, holding that cryptocurrency is a "fund" under the plain meaning of the statute, requiring the government to demonstrate a direct, traceable link between the specific digital assets and the criminal activity before forfeiture can be ordered. This is not a minor procedural disagreement; this is a fundamental constitutional schism that determines whether a defendant loses their life savings or retains the ability to pay for their defense counsel.

The practical consequences of this circuit split are devastating for property rights. In the Second Circuit, a defendant who purchased Bitcoin through a licensed exchange in 2018, held it through 2023, and then made a single small transaction involving proceeds from a wire fraud scheme in 2024 can lose their entire cryptocurrency portfolio under the government's "commingled wallet" theory. The government's position is that once any tainted cryptocurrency enters a wallet, the entire wallet becomes forfeitable, even if the vast majority of the assets were lawfully acquired years before the criminal conduct occurred. I have seen cases where the government seized cryptocurrency wallets containing assets worth over $2 million when the actual criminal proceeds at issue were less than $15,000. The Ninth Circuit squarely rejected this overbroad approach in Liew, holding that the government must trace the specific crypto proceeds and cannot simply assert that because the wallet contains some tainted coins, all coins are forfeitable. This creates an unacceptable scenario where a defendant's property rights depend entirely on the geographic location where the government chooses to file its indictment, which is precisely the type of arbitrary enforcement the Framers sought to prevent through the Due Process Clause.

The statutory interpretation battle centers on the definition of "funds" in 18 U.S.C. § 1956(c)(5), which defines the term for money laundering offenses, and how that definition interacts with the forfeiture provisions of § 982. The Second Circuit has effectively read the word "funds" out of the statute when cryptocurrency is involved, treating digital assets as indistinguishable pieces of property that lose their individual character once deposited in an exchange wallet. The Ninth Circuit, by contrast, applied the traditional rules of statutory construction, noting that Congress specifically defined "funds" to include "any monetary instrument" and that cryptocurrency, as a digital representation of value, falls squarely within that definition. The Supreme Court has consistently held, in cases like Yates v. United States and United States v. Santos, that courts must give meaning to every word in a statute and cannot adopt interpretations that render statutory terms superfluous. Yet the Second Circuit's approach does precisely that—it treats cryptocurrency as "property" under the general forfeiture statute while ignoring the specific "funds" definition that Congress carefully crafted for financial transactions involving money or its equivalent.

Forum-Shopping and the Erosion of Procedural Due Process in Asset Seizures

Federal prosecutors are not naive to this circuit split, and they are exploiting it aggressively through a practice that should concern every American who holds cryptocurrency. In my years as a prosecutor, I understood that venue is supposed to be a neutral procedural requirement, not a tactical weapon to strip defendants of their substantive rights. Yet the current landscape has transformed venue selection into the single most important factor in crypto forfeiture cases. The Department of Justice's Asset Forfeiture Policy Manual, while purporting to require consistency, does not bind individual U.S. Attorney's Offices, and I have seen multiple cases where prosecutors in the Southern District of New York filed indictments against defendants who lived in California, specifically to invoke Second Circuit precedent that allows for the broadest possible forfeiture of cryptocurrency assets. This forum-shopping directly undermines the Federal Rules of Criminal Procedure, particularly Rule 18, which requires that prosecution occur in the district where the offense was committed, but prosecutors creatively allege that cryptocurrency transactions "passed through" servers in New York or that the exchange's corporate headquarters creates venue, even when the defendant never set foot in the district.

The procedural due process implications of this forum-shopping are profound and immediate. Under the Fifth Amendment, a person is entitled to notice and an opportunity to be heard before being deprived of property, but the current system often provides neither in a meaningful timeframe. When the government seizes cryptocurrency under a criminal indictment, it typically obtains a restraining order under 21 U.S.C. § 853(e) or 18 U.S.C. § 982(b)(1), which freezes the assets before trial and before any adversarial hearing on the forfeitability of the specific assets. In the Second Circuit, defendants are routinely denied evidentiary hearings on the nexus between the seized cryptocurrency and the alleged criminal proceeds, with courts holding that the indictment alone provides probable cause for the seizure. I represented a client last year whose entire cryptocurrency portfolio—accumulated over seven years of lawful employment as a software engineer—was frozen based on a single indictment allegation that he had received $8,000 in Bitcoin from a dark web vendor. The government refused to return the lawfully acquired assets, citing the Second Circuit's commingled wallet precedent, and my client was unable to pay his mortgage, his children's tuition, or his legal fees for over fourteen months while the case slowly moved toward trial.

The remedy for this procedural injustice lies in aggressive early motion practice, but the circuit split makes even that remedy unreliable. In the Ninth Circuit, defense counsel can file a pre-indictment motion for return of property under Federal Rule of Criminal Procedure 41(g), which requires the government to demonstrate a substantial connection between the specific property and criminal activity. The Ninth Circuit has held, in cases like United States v. $133,420.00 in U.S. Currency, that the government bears the burden of proof on this connection and cannot rely on mere allegations. In the Second Circuit, however, Rule 41(g) motions are routinely denied on the grounds that the property is "contraband per se" or that the criminal indictment provides sufficient legal basis for continued seizure. This creates a bizarre legal landscape where a defendant in Los Angeles can get a hearing within thirty days of seizure, while an identically situated defendant in Manhattan must wait months or years for a trial that may never resolve the forfeiture issue because the government can simply dismiss the criminal charges and initiate civil forfeiture proceedings under a different legal standard. The Constitution does not permit such geographic arbitrariness in the protection of property rights, and the Supreme Court must address this split before it deepens further.

The Excessive Fines Clause and the Proportionality Problem in Crypto Forfeiture

The Eighth Amendment's Excessive Fines Clause, as interpreted by the Supreme Court in Timbs v. Indiana (2019) and United States v. Bajakajian (1998), requires that criminal forfeiture be proportional to the gravity of the offense, but the current circuit split on cryptocurrency forfeiture has created a proportionality crisis that threatens to eviscerate this constitutional protection. In Bajakajian, the Supreme Court held that forfeiture of $357,144 for failing to report the transportation of currency was grossly disproportional to the offense and violated the Excessive Fines Clause, establishing a multifactor test that considers the nature and extent of the crime, the maximum statutory penalty, and the harm caused by the defendant's conduct. When applied to cryptocurrency forfeiture, the Second Circuit's commingled wallet theory allows the government to seize assets that are hundreds or thousands of times larger than the actual criminal proceeds, yet courts in that circuit routinely reject proportionality challenges on the grounds that all cryptocurrency in the wallet is "proceeds" of the crime, even when the defendant can document lawful acquisition of the vast majority of the assets.

The proportionality analysis becomes even more complex when the cryptocurrency in question has appreciated significantly in value since the time of the alleged criminal conduct. I handled a case where the government sought forfeiture of approximately 50 Bitcoin that the client had purchased in 2015 for $200 per coin, totaling $10,000. The government alleged that the client had used a small portion of that Bitcoin—approximately 0.5 Bitcoin—to purchase controlled substances from a dark web vendor in 2017, when Bitcoin was trading at approximately $4,000 per coin. By the time the indictment was filed in 2023, the 50 Bitcoin were worth over $1.5 million, and the government sought forfeiture of the entire amount under the Second Circuit's commingled theory. The criminal conduct at issue—a single purchase of a controlled substance—carried a maximum penalty of one year in prison and a $100,000 fine, yet the government sought to forfeit assets worth fifteen times the maximum fine. The Supreme Court's holding in Bajakajian that forfeiture must be "limited to property that is proportional to the crime" is impossible to reconcile with this outcome, but the circuit split means that defendants in the Second Circuit have virtually no chance of winning a proportionality challenge while defendants in the Ninth Circuit can at least argue that the government must trace the specific tainted coins.

The government's response to proportionality arguments has been to claim that cryptocurrency is inherently anonymous and that the commingled wallet theory is necessary to prevent defendants from "laundering" their assets through multiple transactions. This argument ignores the reality that blockchain analysis is now highly sophisticated and that the government routinely traces cryptocurrency transactions through multiple hops, exchanges, and mixing services. The Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service have developed extensive capabilities for tracing cryptocurrency flows, and the government's claim that it cannot trace specific coins in a commingled wallet is simply not credible. The real reason the government prefers the commingled theory is that it dramatically expands the scope of forfeiture without requiring the investigative resources needed to trace specific transactions. This is fundamentally a policy choice, not a technological necessity, and it should not be resolved through a circuit split that creates arbitrary geographic disparities in constitutional protections. Until the Supreme Court grants certiorari on this issue, defense counsel must aggressively litigate proportionality at every stage, including through expert testimony on blockchain tracing capabilities and through motions challenging the government's probable cause nexus under Rule 32.2(b)(1)(B).

If you are facing criminal charges involving cryptocurrency or have had your digital assets seized by the federal government, you need experienced counsel who understands the nuances of this rapidly evolving area of law. The circuit split on crypto forfeiture creates both dangers and opportunities, and the actions you take in the first weeks after seizure can determine whether you preserve your property rights or lose everything. My firm has extensive experience litigating forfeiture challenges in multiple circuits, and we have successfully recovered over $12 million in seized cryptocurrency for clients who were caught in the crosshairs of this legal uncertainty. Do not wait until the government has established its forfeiture theory in your case—contact our office today for a confidential consultation to discuss your legal options and develop a strategy that protects your assets and your constitutional rights.