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> If you were to make the coffee vendors or their customers liable for stolen beans they happen to touch then you can't have a functioning coffee market at all.

That's not true. It just means that reputation, verification and insurance become critical to the coffee market and that friction makes the coffee market way less liquid.

Now, legislatures and courts may choose to provide indemnity to all unknowing parties to reduce that friction, but it is hardly the only course this can go. The coffee vendor could also be held liable for recieving and mixing that stolen property.

With the increasing amounts of money being lost by large insurance companies as a result of this issue and extortion claims, I would not be surprised to see laws in the not too distant future that move that liability off of the insurance companies and onto exchanges and indivuals. Large insurance companies haveich better lobbyists than cryptocurrency exchanges and the government doesn't seem to benefit from making sure cryptocurrency markets have minimal friction.

> It just means that reputation, verification and insurance become critical to the coffee market and that friction makes the coffee market way less liquid.

That is true, but generally everyone wants commodities markets to be low friction and liquid. Your point is well taken that maybe some governments would rather cryptocurrency markets be higher friction.

Also keep in mind that governments put regulations at points that tend to attract problems. Pawn shops in many places are required to keep records that other private buyers and sellers are not required to keep for the very same items.

> Now, legislatures and courts may choose to

Yes, and how this currently works now depends on what choices they have already made regarding stolen property.

In a lot of places the distinction is whether the property is absolutely identifiable as the stolen property. So in the case of a car, iPad, piece of jewelry or similar it is clear. If Malory steals the iPad belonging to Alice and then sells it to Bob then Alice can legally take the iPad from Bob if she can find it. Getting the money back from Malory is Bob's problem now. On the other hand if Malory steals and sandwich from Alice, sell it to Bob, and Bob eats it, then Alice cannot legally force Bob to compensate her. If Bob sold the iPad to Charlie Alice has to take it up with him, she can't make Bob hand over the money Charlie paid.

> I would not be surprised to see laws in the not too distant future

That may happen or may not, but right now the status quo is that once things have been disposed of by an innocent party the innocent party isn't forced to make restitution. Again, I am not going to claim this is how it works in every country on earth, but it is in the places I am familiar with.

Your coffee bean analogy isn't sound.

If someone steals a 50lb bag of beans and sells them to me, I am now in possession of 50lbs of stolen property. If I sell 25lbs of the beans before the police catch me, they will confiscate the remaining 25lbs of beans and those beans become evidence. Then I will go to jail for receiving stolen property. Then the victim will sue me in civil court for reimbursement of 50lbs of beans.

Just because you can flip something that's stolen doesn't mean it's gone forever. The victim in either case doesn't care which beans or coins they get. They just want the value of n coins. You could probably skip giving him any coins at all and just reimburse him a dollar amount for the value of his property.

Let me put this another way.

Please remember that for the purpose of this discussion the receiver of the stolen goods and the person they are sold onward to are 100% innocent and nobody suspects them of being dishonest. If the receiver was in on it then this does not apply.

If someone stole 2 iPhones from you and sells them to a used phone dealer, who then sells those very 2 iPhones - your iPhones - to someone else, does the law require the used phone dealer to give you 2 other iPhones of the same model that he happens to have?

I believe, and perhaps I am wrong here, that it does not. As the victim you may well be happy to made whole with 2 other identical iPhones but that is not what will happen. Furthermore, the used phone dealer will not be required to pay you any of the money he received from the buyer of your phones or reimburse you for the cost of your phones.

If the dealer had sold only 1 of the phones then you would get that back and not have to compensate the dealer for his loss resulting in paying the thief.

If the items were such that you cannot prove you own it, such as with coffee beans, then you get absolutely nothing. You do not get some fair volume of them to compensate you.

That is how I understand the way stolen property is handled in general currently. I am not attempting to pass a moral judgement about it, merely describe how it is. (may not be so in all jurisdictions, but in CA/US/UK/AU/at least some parts of SE Asia)

Someone steals your phone. You can sue that someone for the value of lost property if caught or if the police recover money.

If he sells down the line. Police will follow the chain and if the property is found it will be taken and it will be used in trial and recovered back to you.

The people who bought the used phones may lose them. If they do they can sue the store. If the store hasn't sold them they will lose them and can sue the orginal thief.

Pawn shops hold the goods they purchased for 30 days to give time for someone to make a claim against them as property that was stolen from them. (This is my experience in Canada anyway.) In theory, exchanges could do the same thing for deposits above a certain amount, but this would presumably hurt their business the way things work right now.

Don't pawn shops hold items because they are essentially lending money with the item as collateral. They don't sell the items right away because the person that sold them to the pawn shop has the right to repay the loan and reclaim the item within a certain period of time.

Yeah, I guess it's both things.

You said "Bitcoin works like the coffee example not the bike." after "Now you can't identify your distinct stolen coffee anymore."

But you can identify distinct stolen/tainted Bitcoin. Just like you can identify distinct stolen banknotes.

The difference (according to the article) is that banknotes have special legal status meaning that they're effectively fungible after being spent.

We should also carefully distinguish:

* Bitcoin proponents desire that bitcoin work like the earlier currency example, where an innocent actor who receives stolen currency at part of some transaction for a good or service is protected from having to return those bitcoin.

* Whether an innocent actor in that position is in fact liable or protected in that scenario is fundamentally up to the state(s) involved and their legislative choices.

This (as with the centralization of mining, and exchange prominence) seems to be another example where Bitcoin is -in practice- far more subject to the powers of states than its proponents respresent.

I postulate that few if any states will see any advantage in granting that kind of protection to bitcoin transactions, as states have incentives to ensure their own currencies can be transacted without rigorous detective work, and do not have these same incentives with bitcoin.

You seem to be speculating about some future legislation. What about the situation right now?

>I postulate that few if any states will see any advantage in granting that kind of protection to bitcoin transactions, as states have incentives to ensure their own currencies can be transacted without rigorous detective work, and do not have these same incentives with bitcoin.

Usually these principles apply to all currency, not just the states "own" currency. Why would states need to grant such protection to bitcoin transactions, as opposed to taking away such protection?

The real difference is that coffee and banknotes are property, whereas cryptocurrency is an entry in a distributed database. One can "steal" (or at least gain unauthorized access to) a private key, but one cannot "steal" bitcoins. There is no inherent right to have the rest of the Bitcoin network agree that these bitcoins belong to you. Especially not after the authorized owner of the coins (meaning anyone in possession of the private key) has announced to the network that the coins belong to someone else.

Only after the coffee goes in the big container full of lots of other coffee is it rendered unidentifiable. If the coffee vendor didn't pour the stolen bag of beans into the rest of it then it's still clearly identifiable.

Bitcoins are not quite like the a banknote. If I have a $1 and $20 bill that's 2 things each with a serial number. I can give them to you, and you can give them back to me. Bitcoins on the other hand don't work that way. The movement of them changes them, even though you can trace the flow of the value represented.

Let's say someone steals your 1 bitcoins, sending 0.999998 bitcoins to himself, leaving 0.000002 bitcoins for the miner who confirms the transaction. Then the thief sends 0.999996 bitcoins to someone totally innocent in exchange for a car, leaving another 200 satoshi for that miner.

You find the person who sold that car for those bitcoins and he still controls that balance. Are you entitled to get those bitcoins back?

Well, say the car seller had no other bitcoin. One argument would be that he still has 0.999996 of your bitcoins, so he's obligated to give your property back and he needs to figure out how to collect for the car, tough luck for him. The fact that he doesn't have it all is no different than if his car was stolen and he found just missing a couple of hubcaps.

Another argument could be that no, your bitcoins were the UTXO that you could solve the unlock script for, which you still can, so it's like the car seller had received an item that your bitcoins were exchanged for (new script). I don't think most people would have much sympathy for this argument.

But what if your coins were only 1 input into the transaction sent to the car seller, and then the car seller spent half of on his rent, receiving back the balance to his change address?

Now we've arrived at coffee beans. Even though you can know the balances, you cannot say whether your bitcoins are in the possession of the car seller or his landlord. It makes no sense to say that each of them has half, nor does it make any sense to claim that one or the other has your stolen property.

So assuming bitcoins do not have the special money status and stolen bitcoins are going to be treated like other stolen property is then they are like the coffee beans in that they become unidentifiable without anyone trying to be dishonest.

However as the exchanges are visible it is easy to know the exact amount that has to be returned, therefore theft of such property has a clearly known value (plus damages) as if you kept a precise ledger.

Said value thus does not have to be decided in court to be returned - the question is, do you have to return it in cash of choice or Bitcoin?

The big question is how you find the responsible ransomer if they used a mixer, and whether mixer is culpable for not following KYC for big transaction amounts.

>But you can identify distinct stolen/tainted Bitcoin. Just like you can identify distinct stolen banknotes.

Not at all. You can merge stolen bitcoin with "clean" bitcoin. You can not do that with banknotes.

If you give someone two $10 bills those don't magically turn into a $20. That does happen with Bitcoin though.

> The problem is that if the stolen coin gets traded before exchanges can freeze them you wind up with a lot of innocent people holding those coins and it's not practical to freeze those later.

Isn't this fundamentally _not_ how it works in the traditional financial world? If you are paid in ill-gotten money it can certainly be clawed back no matter how innocent you are.

Are you sure? Do people in some countries lose their money if they, for example, sold their car to a bad guy?

In the US, stolen property is the property of the person it was stolen from. If you bought a stereo from a pawnshop and it turns out it was stolen, the original owner gets his stereo back and you get to try and reclaim your money from the pawnshop. Anything else would create perverse incentives like the grandparent describes.

This rather prominently came into play during the 2008 financial crisis when it turned out banks were forging wet copies of the original mortgage paperwork on foreclosed properties. When banks realized that it was a problem, title insurance started specifically excluding this, so the original owner could take their property back and you would end up with a mortgage on nothing.

The problem is that the stolen coin has been traded before exchanges froze them you, if wound up with a lot of innocent people holding those coins, every alleged victims should reach davidveksler(at)engineer com, he is an expert in applied crytography.

Yeah, but for bitcoin ransoms, isn't one big difference (from the coffee case) that you know the destination address long in advance? In that case, it's much harder for it to reach the point of "too distributed".

if the goods are effectively interchangeable, then I don't see why you wouldn't just rule that 8 pounds of beans were stolen so you give him 8 pounds of beans out of the bin. They don't have to be literally the exact same beans.

This analogy makes no sense and is fundamentally antithetical to what a blockchain is.

Bitcoin literally has chain of hashes that mark a chain of custody and provably verifies transfers between addresses. Just because actors along the route are mixing it into a big wallet and distributing it out only means they are facilitating money laundering and could be easily be proven to have done so, and every transaction that touches that transaction is complicit.