Earlier this month, the FBI announced the capture in San Francisco, of a young individual by the name of Ross Ulbricht. Allegedly he is the man behind Silk Road, a black market website only accessible through the Tor anonimising network.
Silk Road allowed the trading of all sorts of illegal goods and services, from malicious software to hard drugs, through a user-friendly, Amazon-like interface. Its founder was known by the pseudonym “Dread Pirate Roberts“, also known as DPR, and had become a sort of online ideological celebrity for radical libertarians.
Silk Road relied on the booming Bitcoin currency to enable hard-to-trace payments between buyers and sellers. Rapidly gaining global reach, Silk Road was a profitable endeavour, and DPR amassed a multi-million dollar fortune in Bitcoins. As it was to be expected, law enforcement agencies were on the hunt to shut down Silk Road and to capture its notorious founder, who in the meantime, had started giving interviews to the media.
The first chapter of Silk Road’s downfall, which began with the news of Ulbricht’s capture, reached its end on October 25. On that day, a long series of transactions, each for 324 Bitcoins and totalling over 144,000 Bitcoins was recorded in the Bitcoin public ledger. Later that day, the FBI revealed that the transactions where made by them in order to transfer the funds from DPR’s Bitcoin wallet to another one under their control. The way in which the funds were transferred, in chunks of 324 Bitcoins, conveyed in itself a message: That the FBI had indeed gained control of at least one of the main Silk Road wallets. When typed into a phone’s numeric pad, the number 324 spells “FBI”.
The Federal Bitcoin Reserve?
In Bitcoin, all transactions are public and it is easy to verify any movement via a web browser. The catch is that while Bitcoin addresses are public, the system provides no information about who owns any given address. A user can nonetheless choose to make public his or hers Bitcoin address, which is what the FBI did. The FBI’s Bitcoin address is 1FfmbHfnpaZjKFvyi1okTjJJusN455paPH, and its balance and transactions can be monitored by anyone in real time simply by pasting it to Google and clicking on the first result.
It is highly unlikely that the US will decide to keep a Bitcoin reserve at this point, even one that fell onto its lap as DPR’s coins did. It is still too exotic a financial instrument, and there is probably no legal ground or political will to do such a thing.
Among the many surprising twists that the logic of the Bitcoin system affords is the spamming of notorious addresses like this one. People have started sending tiny payments in Bitcoins with embedded ads to the FBI’s address, ads that will remain tied to that address for as long as Bitcoin exists.
This seizure, the largest in Bitcoin history, means that the federal government of the United States is now the owner of over three percent of the Bitcoins in circulation, and among the top Bitcoin owners in the world. Intense speculation has been sparked about both the implications of this development, and the way the US government will manage the seized Bitcoin treasure. The implications of this development are surprising.
According to the official Guidelines on Seized and Forfeited Property, the seized Bitcoins should be sold at some point in the future. In a press release published in relation to this case, The FBI estimates its current holdings at about $34m:
“Along with a prior seizure of approximately 29,655 Bitcoins, federal law enforcement agents have now seized a total of approximately 173,991 Bitcoins in connection with the Silk Road case, which, at today’s Bitcoin exchange rate, are worth over $33.6 million.”
Although the figure is a drop in the sea in the US government’s budget, it is a substantial amount of Bitcoins relative to the total pool, since there are only over 12 million Bitcoins in circulation. For this reason, a sudden surge in liquidity of this size would cause a drastic collapse in the price, however brief, as buyers would jump on the opportunity of cheap coins.
It is important to point out that the FBI’s calculations are overblown. While market prices of Bitcoin currently oscillate around $200, in the case of a very large sell like this one only a small fraction of the Bitcoins would actually be sold at those prices. In the world of commodity trading this is known as “slippage”, the reduction in prices as subsequent entries in the market order book are fulfilled.
A quick check using an online trading tool shows that a massive and reckless instant sell by the government would result in slippage so significant that profits from the liquidation would be reduced by approximately half, a loss of over $15m. Since such a move would be financially stupid, it is likely that the mechanism would be either a Bitcoin public auction or a low intensity selling operation over time.
The future of Bitcoins
If the US government decided to hold on to the Bitcoins rather than liquidate them into dollars, the political nature of the whole Bitcoin project would be transformed, making it change course in unpredictable ways. Would such a development disillusion the enthusiastic libertarians and anarchists, some of whom are among the more vocal advocates in the Bitcoin community? Would it lead to a more robust sense of legitimacy for the currency? Would it encourage other nations into the acquisition of similar Bitcoin positions for themselves? Or, on the contrary, would the political neutrality of Bitcoin as a whole be tainted, leading to a collective migration to other cryptocurrencies, like Litecoin?
This is of course mostly fantasy, for it is highly unlikely that the US will decide to keep a Bitcoin reserve at this point, even one that fell onto its lap as DPR’s coins did. It is still too exotic a financial instrument, and there is probably no legal ground or political will to do such a thing.
It can be argued that either scenario, liquidation of the coins or holding by the US government, leads to a tacit but strong legitimation of Bitcoin trade. If the coins are sold, either through a traditional exchange or through some kind of public auction mechanism, the US government would be accepting dollars in exchange for Bitcoins. Once that happens, why shouldn’t the rest of society including banks and other financial institutions be able to do the same confidently? Numerous US financial institutions and businesses fear any dealings in Bitcoin would bring stigmatisation; such fears would be rendered obsolete. With the fall of Silk Road and the seizing of its funds, a situation has now been created that in the long term might lead to Bitcoin’s final consolidation as a legitimate currency in the US.
The final outcome of this story is yet to be decided, and all those interested in the future of Bitcoin might want to watch closely.
Nicolas Mendoza is a Colombian scholar, artist and researcher in global media from the University of Melbourne, currently at City University of Hong Kong.
Follow him on Twitter: @nicolasmendo