How Bitcoins Involved in Crime Can Be Seized by the Feds

http://businessweek.com/articles/2014-02-18/how-the-feds-can-take-even-legally-earned-bitcoin

by jamesbritt • 12 years ago

40 91 12 years ago

shawabawa3• 12 years ago

The article seems to miss out a very key point: How do they seize them?

Do you knock on your door and demand your private keys? How can they do that if you've broken no laws? How do they even know you have them in the first place?

wmf5• 12 years ago

Maybe they'd require US exchanges to seize blacklisted Bitcoin when it gets deposited.

jackgavigan4• 12 years ago

Such a requirement may not be limited to US exchanges. AML provisions require that any exchange (not just those in the US) that support the conversion of Bitcoin to/from USD register with FinCEN. If they were to refuse to cooperate with US LE agencies' efforts to confiscate bitcoins that were the proceeds of crime, they could be judged to have assisted in criminal money laundering.

garrettgrimsley• 12 years ago

To use their example: You own a lawn care company and do lawn maintenance for a client in Deleware for Dr. Olivia Bolles[1]. Unbeknownst to you Dr. Bolles is a drug dealer on Silk Road. She pays you for your services in bitcoin. The bitcoin wallet that her payment is posted to is publicly linked to you or your company through your website or perhaps your payment page. It is reasonable to assume that you are the benefactor of funds that go to this address otherwise you would be exchanging a service for naught! The government raids Dr. Bolles, seizes her wallets and while going over the transactions associated with these wallets discovers your wallet. They could then order you to surrender the funds based on the "nemo dat quod non habet" that they mentioned. Someone else will have to chime in with court cases that support/contradict my reasoning because that's beyond me. [1]http://thedailyrecord.com/2013/12/13/judge-silk-road-doctor-...

natrius3• 12 years ago

You don't have to seize them. You can just declare that funds will not be accepted from any wallets that receive Bitcoin from the flagged wallet. If an entity with enough market power started flagging wallets, services would quickly build in functionality to reject funds from flagged wallets.

gst7• 12 years ago

And how would this work in practice. Let's assume you have one "clean" Bitcoin and I have one stolen/flagged Bitcoin. I'm now sending you 0.1 Bitcoins and you don't know that those are flagged.

So how would this influence your remaining Bitcoins? If you send 0.1 Bitcoins to someone else: Would you sell the stolen Bitcoins first? Would you sell the clean Bitcoins first? Are all of your coins tainted by a given percentage?

(Yes, I know that just receiving those coins would create a separate input that you can ignore in order to avoid tainting your coins. But at some point clean and flagged input will be merged together into a single one.)

driverdan• 12 years ago

There is no way this kind of feature would be added to the Bitcoin protocol.

Houshalter3• 12 years ago

That would be a disaster. People would immediately dump all the worthless "flagged" coins on markets and services that haven't had time to respond to the new protocol. Those people would go bankrupt overnight, possibly before they even have time to realize it's happening and shut down.

wehadfun• 12 years ago

If people can't find stolen bitcoins how can the FBI find bitcoins from illegal activity?

corin_• 12 years ago

I can't find who stole my mobile phone, it doesn't necessarily mean the FBI couldn't (if they wanted to). Obviously this is not relevant to the technical specifications of Bitcoin, but my point is that this comparison isn't really relevant.

andrewfong5• 12 years ago

Do you knock on your door and demand your private keys?

Pretty much. If you're storing your bitcoin with something like Coinbase, they could also knock on Coinbase's door.

How can they do that if you've broken no laws?

Buying stolen artwork is not a crime if you don't know it's stolen. But the government can still seize the stolen artwork and return it to its original rightful owner. The only recourse you have is to go after the person who sold you the stolen artwork -- which may not be very feasible for you to do in the case of semi-anonymous bitcoin transactions.

How do they even know you have them in the first place?

If you use a third-party service like Coinbase, they could just ask them. If you're using your own wallet, they'd have to rely on good-old fashioned deduction -- e.g. if the previous holder of the coins has an accounting log showing payment to you in bitcoins, that's probably enough to infer that you have or did have possession. It might be enough to shift the burden of proof so that you have to show that you don't have possession of the bitcoins.

tlrobinson3• 12 years ago

you have to show that you don't have possession of the bitcoins

How exactly do you prove you don't possess something?

AJ007• 12 years ago

If individual A steals artwork, sells it to individual B, and then uses the cash to buy a car from individual C, and individual C uses the cash to buy a house, is the only person who loses anything individual B? (Assuming individual C didn't break any money laundering regulations)

If the stolen property is BTC rather than art, there would be no reason you couldn't follow a perpetual chain of transactions after it.

Curiously, that could be viewed as a very big strength for BTC rather than a weakness. I think a lot of trouble is saved by calling BTC a programmable currency rather than an anonymous one.

whyenot• 12 years ago

If you buy something at Overstock.com or cash out at Coinbase or an exchange they can find you.

Related: I've met several people who are planning to use bitcoins to avoid paying taxes. I'll leave it as an exercise for the reader why that could be a very bad idea.

evacuationdrill• 12 years ago

At the least, isn't the IRS able to come look at your possessions to approximate your tax liability, or something along those lines?

jfasi• 12 years ago

The FBI already owns 5 to 10 percent of [bitcoins], which are now out of circulation.

Given that money laundering and drug transactions have become major parts of bitcoin's current use case, law enforcement's tendency to seize bitcoins puts yet another deflationary pressure on the system. The biggest obstacle to bitcoin becoming a currency rather than a speculator's darling is the stability of its value. Meanwhile, the system's incentives seem to promote hoarding in hopes of a price spike.

Not that this is problem in and of itself. Bitcoin's decent anonymity creates very real value, and it looks poised to be a medium of exchange. It just puts a damper on the hopes that future transactions will be denominated in bitcoin rather than dollars.

bluedino2• 12 years ago

What are the chances of hackers taking them back?

wmf5• 12 years ago

About the same as the chances of hackers deleting the FBI's evidence against them?

gtCameron• 12 years ago

That is only if the FBI holds onto them forever. However, unless something has changed, I was under the impression that they plan on auctioning them off just like any other seized asset

http://www.forbes.com/sites/kashmirhill/2014/01/16/the-feds-...

dllthomas6• 12 years ago

You raise an important point, but I think you state it too strongly. If the FBI shows a tendency to hold an increasing number of bitcoins (on average, over time) it's a deflationary pressure even if they're not "the same bitcoins". It's similar to other demand by people who want to hold, I guess, except that the FBI doesn't need to pay for theirs at market rate.

negamax• 12 years ago

Actually they have around .5 to 1%. 10% of already mined BTCs would be ~1.2 million coins.

GigabyteCoin• 12 years ago

The FBI does not own anywhere close to 5% of all Bitcoin in existence. Nevermind 10%.

There are ~12M Bitcoin out there right now. There was a total of ~30k seized through Silk Road. That's 0.25%

EA• 12 years ago

I have US dollar bill B03542754F in my pocket right now. I wonder about its "blockchain" and how it has flowed into and through our economy. I wonder if it at anytime in its life has been a part of illegal activity.

1337biz• 12 years ago

Dear Sir, your $100 dollar bill was used in an illegal money transaction in 1972. It is your personal duty as a good citizen to destroy this element of crime immediately !

aestra• 12 years ago

Not too many bills from 1972 are still in circulation.

eterm3• 12 years ago

If your bill turns out to have one of the IDs that is known to have been given to DB Cooper then indeed they'll want it back.

qnaal• 12 years ago

http://www.wheresgeorge.com

bluedino2• 12 years ago

Wheresgeorge.com

jackgavigan4• 12 years ago

"Money is not generally subject to a replevin action unless it is marked or packaged in such as way as to make it distinguishable."

Source: http://rjcesq.com/?p=15

erichocean2• 12 years ago

How is "US dollar bill B03542754F" not distinguishable?

malka• 12 years ago

So bitcoin is or is not money ? cause the US gov seems to want to gives the bitcoin the disadvantages of being considered a currency, without the advantages.

pessimizer• 12 years ago

It isn't connected to a blockchain, which is a distinct advantage over bitcoin.

maxerickson4• 12 years ago

The post is not an attempt to smear bitcoin based on how it is used, it is expressly to point out that bitcoin does not share the special status that cash enjoys under U.S. law.

pjc50• 12 years ago

Slightly relevant: the IRA managed to steal ~10% of all Northern Bank banknotes in a single robbery. The bank decided to recall and print new ones: http://www.telegraph.co.uk/news/uknews/1480673/New-bank-note...

This would correspond to abandoning a blockchain and moving to a new one in response to a big enough fraud.

andrewfong5• 12 years ago

Sure. But the fact that it's legal tender trumps the common law nemo dat rule.

PeterisP5• 12 years ago

"Sting money" used in extortion/bribery/hostage situations can be and is repossessed based on those serial numbers.

Not when it's too far removed, but if it's a few steps down, i.e., cash given to a friend/relative, cash dug underground in a secret location and the loot found by someone else, etc - I believe it would be successfully siezed also in those cases.

walden422• 12 years ago

Trustless mixing will make this nearly impossible for the Feds.

wmf5• 12 years ago

Unless they decide that all the money coming out of the mix is tainted.

erichocean2• 12 years ago

Law enforcement in general only works effectively when a small portion of the population is a target for enforcement. If mixing exchanges represented a significant fraction of bitcoin activity, a "tainting" law would be practically unenforceable.

tlrobinson3• 12 years ago

Or law-abiding users who simply want financial privacy will be afraid to use mixing for fear of (literally) being mixed up in illegal activity, just as most people won't run Tor exit nodes.

PeterisP5• 12 years ago

Bitcoin mixing is trivial to defeat.

(a) Forbid offering and using it;

(b) if 'tainted' money enters a pool, then the operator and/or the participants become jointly liable for returning back all of the money;

(d) observe casual people never ever participating in such mixing after the first publicized case.

All of the above is within powers of legislators+lawenforcement, and there are precedents of them doing different-but-similar things for other ways of money laundering.

walden422• 12 years ago

Just letting you know, trustless mixing means no central operator.

Technically they could do this down the line. But it'll be very difficult to enforce as bitcoin is a global currency. Your laws may not apply to my country, and everyone else will be using them.

logfromblammo• 12 years ago

If no one gives what he does not have, then no one takes what he cannot hold.

The Feds cannot seize your Bitcoins unless they have your cooperation or can obtain your private keys by other means. In order to search your property and make a seizure, the police must at least have a reasonable suspicion that you, yourself, have committed a crime, and that the property to be seized is either evidence of or proceeds from that crime.

That's the legality. In reality, police will illegally search your computers, transfer your coins while you are cuffed, and then you will have no practical recourse.

Begin protecting yourself with encryption and strong passwords now, and help your non-technical acquaintances learn how to use it. It is only a matter of time before you or someone that you know ends up on the wrong end of an injustice.

Karunamon• 12 years ago

Even if they do have your private keys, they have no assurance that they have the only copy of them.

If you're forced to hand over private keys to a wallet that more than one person has keys for, there's nothing that prevents the other person from (with bad intent or otherwise) moving those funds to another wallet.

tlrobinson3• 12 years ago

I'm not sure what your point is. Upon seizure they'd presumably sweep the coins to their own account.

Multi-sig transactions can prevent any one person from running off with the funds, and will likely become common in the next year or so.

jnbiche• 12 years ago

They were smart enough to transfer the seized Silk Road coins to an address under their control immediately upon seizing them.

maxerickson4• 12 years ago

The will quickly gain legal powers to investigate transactions coming from addresses where they have the paperwork to seize them but not the keys.

(I would speculate that they could easily get subpenas to support that type of investigation, without any new law)

Houshalter3• 12 years ago

Absurd. No one demands that you give cash back if it turns out to have been used in a crime. Imagine if your employer was accused of a crime, or sold something to a criminal, etc.

cjg• 12 years ago

I read your comment and thought, yes it would be absurd to apply this to cash and therefore it seems also absurd to apply it to bitcoin. However, there are people who would like bitcoin to fail, perhaps because they are part of the established financial system and so, it's possible that a court might rule that because an individual bitcoin amount can be traced back to a crime it should be confiscated.

The thing is, that potentially that causes problems for cash. As soon as technology is capable of tracking cash in the same way the same legal argument could be used. This is already relatively easy for electronic balances, but technology that tracks bank notes is quite easily imaginable.

I wonder what the case law for electronic cash balances is.

ZachPruckowski• 12 years ago

Sometimes they do - for instance money used in stings and busts by law enforcement might have its serial numbers recorded. If you're subsequently searched and found to have money used in a drug bust, there are gonna be some tough questions and the money might get confiscated.

If someone uses a fraudulent credit card to buy something from you online, you're not going to be able to keep that money when the fraud's reversed.

If you (unknowingly) buy stolen property you can be forced to give it back, and then it's up to you to go after the guy who sold it to you. If you knowingly buy stolen property you're in trouble.

Given that BTC serial numbers are in plain view as opposed to stolen goods or dollar bills where you need a warrant, it's a lot easier to demand the BTC back.

mistercow• 12 years ago

The FBI already owns 5 to 10 percent of them, which are now out of circulation

The FBI has seized around half a billion dollars worth of bitcoin, and they've just "taken it out of circulation"? I realize that half a billion isn't that much in the grand scheme of things, but still, this hardly seems like ideal management of seized assets.

wmf5• 12 years ago

That BTC is going to be auctioned; it's only out of circulation temporarily.

andrewfong5• 12 years ago

Hypothetical: Suppose you owned a car, and this was stolen. If the car were sold intact, then presumably you could reclaim the car from the buyer because of the nemo dat rule.

But now suppose the thief sold the car to a salvage yard. The salvage yard breaks the car down into scrap metal, which is melted down and recycled for use in other products.

I'm not very familiar with this area of law, but presumably you would no longer have a claim to the car or the scrap because the original piece of property to which you had title, the car, was destroyed. You might have a claim against the scrap yard for not checking title on the car and could recover the fair market value of the vehicle.

Same with bitcoin -- once someone comingles the stolen coins with other coins, the original balance of coins has been destroyed. There is no action against parties further down the blockchain. Your only remedy should be to recover the fair market value of the coins from the party that "destroyed" the coins.

How Bitcoins Involved in Crime Can Be Seized by the Feds

Related Stories