In a memo disclosed last Monday, the Department of Justice (DOJ) indicated its intention to reassess the procedures for compensating investors in digital assets that are forfeited during fraud and theft cases. The DOJ’s communication highlights significant bankruptcy incidents from 2022 involving FTX, Voyager Digital, Celsius Network, Genesis Global, BlockFi, and Gemini Trust. While not all of these cases involved criminal charges, the DOJ emphasizes that many resulted in substantial losses of digital assets due to fraudulent activities and theft, alongside a notable appreciation in the value of these assets over time.
### FTX Bankruptcy Case Highlights Price Disparity
Taking the FTX situation as a case in point, when former CEO Sam Bankman-Fried filed for bankruptcy on November 11, 2022, Bitcoin was valued at $17,500. Since then, its price skyrocketed to over $108,000 by January 2025. Creditors, over 300 of whom have submitted letters to the federal judge overseeing the case, will receive compensation in fiat currency based on the value from November 2022, missing out on the significant price increases. Although the courts do not intend to inflict hardship on these creditors, existing bankruptcy laws stipulate that forfeited assets must be returned to victims at the dollar valuation they held at the time of the fraudulent act. This may seem inequitable, but experts argue that this regulation exists for a critical purpose, and amending it could prove challenging.
### The Challenge of Timing in Asset Payouts
Calvin Koo, a partner at Kobre and Kim who focuses on claim monetization, highlights a fundamental issue with establishing a payout system linked to current asset prices. Such a system would place the court in a position to time the market effectively. Koo states, “A process not anchored to a specific time may seem procedurally ‘unfair’ as it could hinge on market timing luck. This might even lead some victims to attempt to influence the timing of distributions based on anticipated market fluctuations.” He asserts that if policymakers can devise a method that secures gains for victims while also being perceived as fair, it would be welcomed, yet achieving this balance might be more complicated than it appears due to various logistical challenges.
### Current Regulations Aim to Protect Victims
A lawyer, who chose to remain anonymous due to previous work with the DOJ’s asset disbursement division, explained that existing regulations are in place to safeguard victims from financial losses, an occurrence that is far more common than the chance to realize gains. In general, assets—ranging from stolen yachts to cash—are often not entirely recovered and tend to depreciate in value between the time of the fraud and when victims receive compensation.
### Fair Market Value and Pro Rata Distribution
The DOJ memo specifically references regulation 28 C.F.R. § 9.8(c), which dictates that financial losses returned to victims should be evaluated at the fair market dollar rate as of the date of loss, without accounting for interest or any collateral expenses. Additionally, in instances involving multiple victims, the assets are distributed on a pro-rata basis, meaning victims receive an equal share of the total forfeited losses rather than compensation tailored to their individual losses. This can seem unjust in cases of crypto exchange failures, as it may result in knowledgeable investors receiving the same compensation as those who made unwise investments.
### Flexibility in Compensation Distribution
The “ruling official,” usually a judge, has the discretion to adjust the compensation shares for victims on a case-by-case basis, influenced by factors such as the reliability of loss evidence, the financial hardship of a victim, their cooperation with federal authorities, and submitted petitions. For instance, in the FTX bankruptcy, most victims received compensation that was nearly 20% higher than the assets’ value at the time of the incident, proportionate to their holdings in the exchange. In extreme cases, a victim facing significant losses might be awarded more than their proportional share as determined by a judge. However, under standard regulations, victims typically receive an equal portion of the forfeited assets valued in fiat currency at the time of the crime.
### Calls for In-Kind Asset Returns
Some victims of the FTX incident contend that the most equitable solution would be to return their assets in the form of cryptocurrency tokens that they originally purchased. One victim articulated to the judge, “I did not gamble with leverage trading or random meme/scam coins; I researched quality projects and made long-term investments to try and change my life.”
### Risks of Returning Assets in Cryptocurrency
However, implementing a policy for returning assets in kind, especially in cryptocurrency cases, poses considerable risk for victims. Most cryptocurrencies do not merely decline in value over time; they can plummet to zero. This risk is amplified in cases of fraud or theft, particularly those outlined in the DOJ memo, which are often linked to failing businesses. Given the interconnected nature of the crypto market, different assets may fluctuate in value at different rates. This variability complicates the timing for returning assets and could lead to difficulties in addressing situations like the FTX hack, which resulted in a loss of $477 million in crypto shortly after the bankruptcy filing.
### The Complexity of In-Kind Distributions
The DOJ’s memo, while focused on digital assets, also references regulations that apply to all forfeited assets, including those that require the federal government to incur costs for maintenance during legal proceedings, such as seized vehicles or other non-financial property. Koo points out that numerous obstacles and variables could arise when attempting to distribute assets in kind, and even if a method is found, the process could involve significant time and taxpayer expenditures.
### State-Level Differences in Asset Recovery
In a notable contrast, the New York Attorney General made a different decision when resolving its case with Gemini Trust, allowing victims to receive compensation in kind. However, the DOJ memo pertains only to cases it manages for asset recovery, and does not dictate how individual state attorney general offices handle these matters. As Sheehan explains, “This potential ‘fix’ by the DOJ memo would only address how the DOJ manages asset recoveries for victims of crime. It does not clarify how a bankruptcy trustee or independent state AG offices would approach the issue.”
### Future of DOJ Policy Revisions Uncertain
The DOJ has not specified a timeline for when it will propose any “improvements” to its compensation policies. While Congress holds the authority to amend statutes, the DOJ possesses the ability to implement new rules or revise existing regulations based on Congressional guidance. The memo appears to encourage Congress to address the issue through legislative changes, and the DOJ would subsequently need to adjust its regulations to align with any directives from lawmakers. The DOJ has not responded to inquiries regarding further details on potential policy updates or the timeline for their introduction.
