
How Bitcoins Involved in Crime Can Be Seized by the Feds - jamesbritt
http://businessweek.com/articles/2014-02-18/how-the-feds-can-take-even-legally-earned-bitcoin
======
andrewfong
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.

<standard "this is not legal advice" disclaimer goes here>

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shawabawa3
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?

~~~
natrius
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.

~~~
gst
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.)

~~~
natrius
Every wallet that receives funds from the flagged wallet is tainted until they
send it back to that wallet. All of the funds, not just the tainted amount.

~~~
gst
This doesn't work in practice. Transactions using Bitcoin "addresses" are just
one (out of many) transaction types. As far as I understand the protocol it's
possible that you receive those coins via a transaction type that doesn't have
an associated Bitcoin sender address.

~~~
dllthomas
"Every wallet that receives funds from a tainted wallet becomes tainted"
doesn't (in any way I see) conflict with the notion that there are
transactions without a sender.

~~~
gst
I meant the "until you send it back part". If "every wallet becomes tainted"
and "you can't send it back" this would make it trivial for an attacker to
taint a large number of wallets in the Bitcoin network.

~~~
dllthomas
If there is no sender, how does the receiver become tainted?

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EA
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.

~~~
jackgavigan
"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](http://rjcesq.com/?p=15)

~~~
erichocean
How is "US dollar bill B03542754F" not distinguishable?

~~~
jackgavigan
I never said it wasn't. :-)

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logfromblammo
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
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.

~~~
tlrobinson
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.

------
jfasi
> 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.

~~~
gtCameron
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-...](http://www.forbes.com/sites/kashmirhill/2014/01/16/the-feds-are-
ready-to-sell-the-silk-road-bitcoin-kind-of/)

~~~
dllthomas
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.

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Houshalter
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
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.

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walden42
Trustless mixing will make this nearly impossible for the Feds.

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

~~~
erichocean
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.

~~~
Fomite
That assumes that "a significant fraction of bitcoin activity" is not also "a
small portion of the population"

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mistercow
>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.

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

