How Bitcoins Involved in Crime Can Be Seized by the Feds
businessweek.com
businessweek.com
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>
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?
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.
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.
How exactly do you prove you don't possess something?
For example, if someone says "I paid tlrobinson 2 bitcoins for mowing my lawn on Sunday," you could produce evidence that you were on a business trip on Sunday and therefore couldn't be the same tlrobinson referenced in the previous statement. Or argue that the person making that statement is a liar. Or point out that 2 bitcoins is an absurd amount to pay for mowing a lawn. Etc.
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.)
For some reason I now need to refund the buyer. Do I now first need to transfer all but 0.1 coins to somewhere else, so that I can send the remaining 0.1 coins back?
You make it sound like this is a burden. It seems easy to me, as long as you track taint per-output rather than per address. Just pretend people followed best practices and used a unique address for every output.
So let's take eterm's suggestion that clean coins always come out first. So all we need to do is build a transaction with at least .1 tainted coins, put the non-refund coins as the first output, and put the .1 tainted coins as the second output. First output is an address we control, second output goes back to the person we're refunding.
That's assuming you already mixed up your coins and can't just send back the exact same transaction they sent you in the first place.
Or forfeit it to the feds, at which point they can mark them untainted before they auction them off.
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.
Also, it would be inadvisable for the staff of such exchanges to travel to (or transit through) the United States. http://en.wikipedia.org/wiki/David_Carruthers#Arrest_during_...
The reason why those P2P-style exchanges aren't common in the United States is because it's hard to directly transfer money between two people. With SEPA transactions in Europe you can directly transfer money to any recipient, usually for free (or at a very low cost).
[1] Instead, they can sue you locally, even if they crime happened in another country. However, this lawsuit will be according to local laws. So if the crime is only illegal in the other country they can't sue you.
Can you elaborate on which countries do you have in mind for "comply with the local laws, which are often much less strict in terms of AML provisions" ?
For extradition you mention Europe, but the EU AML directive is already comprehensive enough to make illegal most suggested bitcoin-for-laundering use cases; and it can be expected that if there are major loopholes found, then (continuing with their existing AML policy) EU legislation will be quickly adapted to close them.
Also the US is not the world power anymore. They have no authority to 'flag' any currency.
Source: http://rjcesq.com/?p=15
(Serious question; most of the regulatory activity I've seen has been pointing out to people accepting dollars that they are money transmitters)
This would correspond to abandoning a blockchain and moving to a new one in response to a big enough fraud.
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.
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.
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.
(I would speculate that they could easily get subpenas to support that type of investigation, without any new law)
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.
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They'll only get better at this.
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.
http://www.forbes.com/sites/kashmirhill/2014/01/16/the-feds-...
There are ~12M Bitcoin out there right now. There was a total of ~30k seized through Silk Road. That's 0.25%
Now admittedly, the FBI also has a lot of experience keeping short bits of data secret (for instance, the real identities of moles and protected witnesses). But they don't exactly have a perfect record on that count.
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.
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.
(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;
(c) seize money from whomever is easiest to reach.
(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.
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.
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.