Examples of Extreme Government Overreach in Cryptocurrency Asset Forfeiture

For years, the government has treated blockchain analysis as an infallible “digital fingerprint.” However, in civil asset forfeiture cases, the government often seeks to seize cryptocurrency without providing adequate notice. That failure is especially troubling when the same Assistant United States Attorney also fails to clearly explain the alleged tracing from the victim’s funds to the target wallet.

This case stands out because courts do not always scrutinize tracing at this level—particularly in default proceedings.

To understand this problem with government overreach when seizing cryptocurrency, let’s look at a recent case decided on March 3, 2026, in the United States District Court for the Northern District of New York.

In United States v. 674,739.480211 USDT of Tether Cryptocurrency, No. 5:25-cv-01040 (BKS/PJE) 2026 U.S. Dist. LEXIS 42940 (N.D.N.Y. Mar. 3, 2026), the trial court issued an order that denied default judgment based on critical deficiencies after the government’s attempt to seize nearly $675,000 in Tether (USDT). Then the trial court gave the government an opportunity to “renew their motion for default judgment by filing, within thirty days of the date of this Order, a renewed motion for default judgment with affidavits or evidence and a memorandum of law addressing the issues raised in this decision.”

The opinion provides a rare and perfect case study in what happens when federal agencies and the Assistant United States Attorneys (AUSAs) who represent them in court – fail to show their work while not even notifying the potential claimant. The opinion represents a rare example of a court demanding rigor at the pleading stage of a civil asset forfeiture case.

In United States v. 674,739.480211 USDT of Tether Cryptocurrency, Chief Judge Brenda K. Sannes denied the government’s motion for default judgment. The order identifies big problems that many judges overlook.

In this case, the trial court found the government lacked both an adequate tracing basis and failed to provide constitutionally sufficient notice. That is a dangerous combination because an innocent owner can’t raise these issues if they don’t know the government is attempting to obtain a default judgment.

Most importantly, the trial court holds the government to the “substantial connection” requirement found in 18 U.S.C. § 983(c)(3).

The government’s case began with a classic “pig butchering” scheme where a victim lost approximately 4.13 Bitcoin (BTC). The government attempted to trace these funds as they were converted from BTC to USDT across multiple blockchains (Bitcoin to Thorchain to Tron). On January 27, 2026, a Special Agent with the FBI Albany Division wrote a request to the court that provided: “If feasible, my office requests expedited review….”

For the forensic accounting community, the trial court’s critique of the government’s “clustering” and tracing logic is the most critical takeaway. The trial court identified several failures in the government’s tracing methodology.

First, the government alleged that funds moved from a specific Bitcoin wallet to Thorchain, and then “additional tracing” identified transactions to a specific USDT wallet. The trial court noted that the government failed to identify the actual origin of those USDT transactions or explain how the “additional tracing” connected the two wallets. The court noted the government “does not identify the origin” of the USDT transactions and does not explain what “additional tracing” means. Id. at *19. As this case shows, courts should not accept “additional tracing” as a substitute for admissible, step-by-step attribution.

Second, the trial court notes a glaring oversight. The government alleged that the victim lost 4.13 BTC, yet only 2.74 BTC was traced to the exchange. In other words, the government failed to account for the full 4.13 BTC and did not explain how only a subset of those funds ultimately generated the traced USDT.

Third, the government claimed 443,953 USDT was traced to the “Target Wallet,” but even using a high-end benchmark cited by the court (~$124,000/BTC), the original 2.74 BTC was only worth approximately $340,543. The government failed to explain where the extra $100,000 came from.

Fourth, the government attempted to seize the entire balance of the Target Wallet—674,739 USDT—despite only alleging that 443,953 USDT was linked to the victim. The trial court refused to allow the forfeiture of the remaining $230,000 simply because it was commingled, stating the government had not shown a “substantial connection” between the entire amount and the crime.

Fifth, beyond the technical tracing errors, the government failed its basic due process obligations. In civil forfeiture, the government must provide notice that is “reasonably calculated” to reach potential claimants. In this case, the public notice published by the government provided:

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF NEW YORK COURT CASE NUMBER: 5:25-CV-01040; NOTICE OF FORFEITURE ACTION

Pursuant to 18 U.S.C. § 981, the United States filed a verified Complaint for Forfeiture against the following property: 674,739.480211 USDT from Tether account number #XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX5usu, held in the name of Best Acct# XXXXXXXXXXXXXXXXXXXXXXXXX (25-FBI-003794) seized from Tether on May 22, 2025 in Albany, NY.

The notice described the property as being held in a Tether account ending in “#…5usu”. However, the verified complaint identified the seized funds as being in “Wallet TNj4y6nnTX”. The Court pointed out that there was no explanation of how these two identifiers were connected, meaning a potential claimant looking for their wallet address would never have found the notice. Strangely, “5usu” is not listed in the government’s complaint at all.

The public notice further complicates the identification by referencing a Tether account number ending in #…5usu, rather than providing the full alphanumeric blockchain address. Instead, the complaint alleges:

18. Additional tracing identified seven transactions totaling 286542.299 USDT to wallet 0xFf4bBDc981EbE275630704E680C2086498576909 (“Wallet 0xFf4bBD”). Wallet 0xFf4bBD then exchanged the Tether onto the Tron blockchain (simply a different network, but it retains the same value per USDT token) on December 15, 2024, for 118743.317351 USDT TRON, and on December 17, 2024, for 167225.897073 USDT TRON to wallet TDoj7UUpKZieJFK5CHfZcuDpJkWw55Dg3J (“Wallet TDoj7UUp”).

19. Wallet TDoj7UUp made two transfers to the Target Wallet TNj4y6nnTX on December 15, 2024 of 194479.719531 USDT TRON and December 17, 2024, of 249473.322623 USDT TRON. A total of 443,953 USDT TRON was traced from the Victim’s accounts to the Target Wallet.

Sixth, the government claimed there were “no known potential claimants,” yet they made zero effort to contact the email or mailing addresses associated with the “Know Your Customer” (KYC) data typically held by exchanges.

Seventh, the trial court questions whether the government’s theory even fits within the statutory framework of the federal money laundering laws. In this case, the trial court flagged a critical problem that appears in many prosecutions but is rarely addressed: whether the alleged cryptocurrency transfers qualify as “monetary transactions” under 18 U.S.C. § 1957.

That statute requires a transaction involving “funds” or a “monetary instrument,” typically conducted through a “financial institution.” The government, however, made no effort to explain whether cryptocurrency constitutes “funds” within the meaning of the statute, whether the platforms involved qualify as financial institutions, or whether decentralized blockchain transfers satisfy the statutory definition at all. This omission is not merely technical. If the transaction does not meet the definition of a “monetary transaction,” then § 1957 does not apply—regardless of how persuasive the tracing analysis may be.

This case serves as a vital reminder that the government cannot simply say “blockchain analysis” and expect a free pass. When reviewing government forfeiture actions or performing independent tracing, civil asset forfeiture attorneys look for logical continuity:

• Does every hop in the chain have a specific Transaction ID (TXID) and a verified source?
• Is the government attempting to seize “clean” funds that were merely present in a wallet alongside “tainted” funds?

This decision shows that when the government takes shortcuts in crypto-forensics, they risk losing the entire case. But because the trial courts so rarely identify these obvious problems, the government often wins a default judgment before an innocent wallet holder even knows what happened to their funds.

This case illustrates that courts—when they engage rigorously—should require the government to:

1. establish a legally sufficient “substantial connection,”
2. explain each step in blockchain tracing without relying on conclusory heuristics, and
3. satisfy constitutional notice obligations in a way that actually identifies the target property.

Checklist to Spot Sloppy Blockchain Analysis

This checklist is designed to help civil asset forfeiture attorneys and forensic experts scrutinize government tracing reports for logical and mathematical integrity.

1. The “Hop” Attribution Test
   • Identify the Source:
     • Does the government identify the specific origin and Transaction ID (TXID) for every transfer?
   • Explain “Additional Tracing”:
     • Does the report rely on conclusory phrases like “additional tracing” to bridge gaps between disparate wallets?
   • Verify Cross-Chain Connections:
     • Is there a clear, documented link when assets move from one blockchain (e.g., Bitcoin) to another (e.g., Tron/USDT)?
2.  Value Reconciliation (Fiat-to-Crypto)
   • Historical Benchmarking:
     • Does the fiat value at the time of the “hop” remain consistent with market rates?
   • The “Surplus” Check:
     • If the value of the seized assets exceeds the value of the original theft, has the government accounted for where that extra value originated?
   • Partial Tracing:
     • If only a subset of funds was traced (e.g., 2.74 BTC out of 4.13 BTC), does the government explain what happened to the remainder?
3.  The “Commingled Funds” Audit
   • Substantial Connection:
     • Has the government established a “substantial connection” between the entire seized balance and the alleged crime?
   • Separation of Taint:
     • Is the government attempting to seize the full balance of a “Target Wallet” simply because some tainted funds passed through it, without accounting for “clean” deposits from other sources?
4.  Statutory & Regulatory Compliance
   • Asset Classification:
     • Does the cryptocurrency in question meet the specific statutory definitions of “funds” or “monetary instruments” under 18 U.S.C. § 1956/1957?
   • Entity Verification:
     • Do the platforms involved qualify as “financial institutions” or “money transmitting businesses” under the law?
5.  The Due Process “Sanity Check”
   • Identifier Consistency:
     • Do the wallet addresses or account numbers in the public notice match the addresses identified in the seizure complaint?
   • Claimant Search:
     • Did the government perform “reasonable steps” to provide direct notice to the person associated with the seized wallet address?
   • KYC/AML Data:
     • Did the government use available Know-Your-Customer (KYC) data to identify and notify potential legitimate claimants?

Attorney Leslie Sammis represents innocent owners after their cryptocurrency is frozen or seized for civil asset forfeiture. Read more about problems with cryptocurrency tracing and blockchain analysis.