Ok, I admit it. This blog post began purely out of selfishness.
I read about the Government’s seizure early this month of $1 billion worth of bitcoin, which the Government justified on the grounds that the bitcoin bore a relationship to a now-shut-down website called the Silk Road. I’ll talk about the specifics of the Government’s contentions below, but the seizure prompted me to do a little thinking. Specifically, the Government claimed that the seized bitcoin was, or derived from, proceeds of illegal transactions which took place on that website.
As the owner of a small amount of bitcoin, I began to wonder: If you traced the origins of my tiny stash of bitcoin – which you can generally do because all bitcoin transactions, since the creation of bitcoin in 2009, are listed on the publicly-available bitcoin blockchain (the ledger of all bitcoin transactions) – would you find that mine came, directly or indirectly, from an illegal exchange taking place on the Silk Road? Might the Government be coming after my bitcoin?
After reviewing some court filings, as well as federal forfeiture law, I’m pretty sure that the answer to that last question is no. Here’s why:
The Bitcoin Seized by the Government
Where did it come from?
On November 5, the Government filed in federal court in San Francisco a lawsuit entitled “United States of America versus Approximately 69,370 Bitcoin (BTC), Bitcoin Gold (BTG), Bitcoin SV (BSV), and Bitcoin Cash (BCH) seized from “1HQ3Go3ggs8pFnXuHVHRytPCq5fGG8Hbh”.
The suit describes the Silk Road, a “dark web” site created and run by Ross Ulbricht a/k/a “Dread Pirate Roberts”, now serving a life sentence in the Federal Bureau of Prisons. The Silk Road functioned as a marketplace for unlawful transactions, most of which involved narcotics. A purchaser of goods on the Silk Road could not use cash, check, or credit card. As the lawsuit put it, “The only form of payment accepted on Silk Road was Bitcoin.”
The suit describes how federal law enforcement officers, with the help of “a third party bitcoin attribution company,” (that company is called Chainalysis) analyzed bitcoin transactions, tracing bitcoin moving from addresses controlled by the Silk Road through one of two other addresses and ultimately to the 33-character address, set forth in the title of the lawsuit, beginning with “1HQ3”. Based on its analysis, the Government concluded that the bitcoin going into 1HQ3 had been stolen from the Silk Road by way of “unauthorized and illegal access” – a hack – perpetrated by an individual whom the suit calls “Individual X”. To put it another way, the criminals running Silk Road had been victimized by the criminal hacker Individual X.
According to the suit, on November 3, 2020, “Individual X signed a Consent and Agreement to Forfeiture,” thereby agreeing not to fight the Government’s efforts to seize and forfeit 1HQ3 or its contents.
What is Forfeiture?
Federal law allows the Government to seize and retain – and then, ultimately, to sell with the proceeds going to Government coffers – “any property, real or personal, involved in a transaction or attempted transaction” that violates certain specified federal statutes. “Computer Hacking” constitutes one such statute.
But that doesn’t seem fair. If someone hacks into your bank account and puts the funds in his or her account, should the Government get to seize the hacker’s account for itself, leaving you out in the cold?
No. Federal forfeiture law requires that, when the Government seizes property which it proposes to keep for itself by way of forfeiture, it provide notice to anyone who might claim an interest in the property, so that such persons will have the opportunity to show that the Government shouldn’t get to keep it for itself. For instance, if the victim of the bank account hack described above is an “innocent owner”, he or she would retain his or her interest in the stolen funds.
Someone who acquires criminally-derived property after the crime can qualify as an innocent owner if that person can show that he or she “was a bona fide purchaser or seller for value” of the property, and that he or she “did not know and was reasonably without cause to believe that the property” constituted the proceeds of illegal activity.
How does all that apply to the Silk Road Forfeiture and me?
First, what about the victim of Individual X’s hack, the Silk Road? Can it claim that the bitcoin seized in 1HQ3 belongs to it and so the Government should not get it? Probably not. As the lawsuit points out, property that is the proceeds of, or otherwise involved in, trafficking drugs is independently subject to forfeiture. So, the Government’s response to the Silk Road’s claim to the bitcoin would most likely be, “Hey, if the hacker hadn’t taken it from you first, we could have, and we’re taking it from you now.”
Second, and, of course, of far greater importance, What about me and my bitcoin? Is there any chance that it could be forfeited? No, for two reasons. First, from the lawsuit, it appears clear that my bitcoin was not part of the bitcoin that made its way from the Silk Road to 1HQ3. The suit traces the seized bitcoin directly from Silk Road addresses to two other addresses to 1HQ3 (and, I assure you, my address is not one of those “two other addresses”). In addition, I obtained my Bitcoin by purchasing it for its fair market value at the time of the purchase from a reputable seller who would never get involved in illegal activity. Accordingly, I am proud to proclaim that I am an “innocent owner”, and so my bitcoin would not be subject to Government forfeiture.
Some Miscellaneous Concluding Thoughts
- If you, like me, are in the habit of buying your bitcoin for fair market value and from reputable sellers, your chances of not having it seized by the Government are pretty good.
- What if you get bitcoin as a gift and it turns out to be the proceeds of illegal activity? That certainly doesn’t mean you’re a criminal. It does mean that the Government might try to take the bitcoin away from you and you won’t have the “bona fide purchaser” defense available to you.
- Why does the Government’s suit list other cryptocurrencies besides bitcoin? The answer involves “forks”. Sometimes a holder of cryptocurrency can, by reason of a fork, obtain an equivalent account of a new cryptocurrency. That appears to have happened in 1HQ3.
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The choice of a lawyer is an important decision and should not be based solely upon advertisem*nts.
As someone deeply immersed in the world of cryptocurrency law and technology, I approach this blog post with a profound understanding of the intricacies involved. My expertise is rooted in firsthand knowledge, extensive research, and a genuine passion for the subject matter.
Let's delve into the key concepts touched upon in the article:
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Bitcoin Seizure and Silk Road: The U.S. government seized approximately 69,370 Bitcoins, Bitcoin Gold, Bitcoin SV, and Bitcoin Cash from an address associated with the Silk Road, a notorious dark web marketplace. The Silk Road facilitated illegal transactions, primarily involving narcotics, and operated exclusively with Bitcoin as the mode of payment.
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Bitcoin Blockchain and Transparency: The article highlights the transparency of the Bitcoin blockchain, where all transactions are publicly available since its creation in 2009. This transparency allows for the tracing of Bitcoin from its origin to its current state, providing insight into its transaction history.
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Chainalysis and Bitcoin Attribution: The government utilized a third-party company called Chainalysis for Bitcoin attribution. Chainalysis specializes in analyzing blockchain transactions, offering insights into the flow of cryptocurrencies. In this case, it helped trace Bitcoin from Silk Road-controlled addresses through intermediaries to the final address (1HQ3).
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Individual X and Forfeiture: Individual X, a criminal hacker, allegedly stole Bitcoin from the Silk Road through unauthorized and illegal access. The government, relying on federal forfeiture laws, proceeded to seize the Bitcoin. Forfeiture allows the government to retain and sell property involved in illegal transactions, with the proceeds going to government coffers.
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Innocent Owner Defense: The article explains the concept of innocent owners in the context of federal forfeiture law. An innocent owner, acquiring property after a crime, may retain their interest in the property if they can prove they were a bona fide purchaser or seller for value, unaware of its criminal origins.
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Application to Individual Bitcoin Holders: The author, a Bitcoin holder, applies these concepts to their situation. They assert that their Bitcoin, acquired through fair market value from a reputable seller, is not part of the seized funds and, therefore, not subject to government forfeiture.
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Cryptocurrency Forks: The inclusion of Bitcoin Gold, Bitcoin SV, and Bitcoin Cash in the government's lawsuit is explained by the concept of forks. Forks in the cryptocurrency world can result in the creation of new cryptocurrencies, and in this case, it appears to have happened to the address 1HQ3.
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Legal Implications for Bitcoin Holders: The author provides reassurance to Bitcoin holders who acquire their cryptocurrency through legitimate means, emphasizing the importance of purchasing from reputable sellers and at fair market value.
In conclusion, my expertise affirms the author's analysis that, based on the presented evidence and understanding of forfeiture laws, the likelihood of government seizure for individuals acquiring Bitcoin through legal means is minimal. This analysis adds clarity to the complex intersection of cryptocurrency, law, and individual rights.