How the US Government Lost $10 Billion Selling Bitcoin Seized from Online Drug Market - The Silk Road
And what will it do with the $3 Billion of Bitcoin that it still has?
One of the most often-expressed objections to Bitcoin voiced by skeptics is that it facilitates and enables criminal activity. It’s a common misconception, often voiced by those in government and positions of influence, who don’t understand it and conveniently overlook that cash has facilitated the anonymous operation of criminal enterprises for as long as it’s existed.
This perspective was recently aired at a Berkshire Hathaway investors meeting. Investing guru Charlie Munger, business partner of Warren Buffet pulled no punches in describing Bitcoin as follows:
“Of course I hate the Bitcoin’s success and I don’t welcome a currency that’s so useful to kidnappers, extortionists and so-forth… I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization.”
So, not a fan then Charlie?
The response on Twitter to Munger’s comments was as might have been expected — scathing to say the least:
Most would defer to Munger’s many decades of success as an investor, but his comments betrayed a lack of genuine understanding of Bitcoin, and a reliance on the usual cliches and rhetoric in the absence of genuine knowledge.
And yet, as much as statistics prove that the volume of criminal transactions involving Bitcoin are declining year-on-year it’s understandable how such perceptions might seem accurate. The first time most people heard of Bitcoin was as an associated and integral part of the operation of The Silk Road — a dark net website where drugs, guns, and hacking tools could be purchased freely and anonymously using Bitcoin.
The US Government finally caught up with and arrested Ross Ulbricht, the founder of the Silk Road in late 2013. Activities to dismantle the site and to apprehend its employees and affiliates have continued in the years since.
In November 2020, these investigations concluded when the IRS intercepted and confiscated a haul of 69,370 Bitcoin believed to have been stolen from the Silk Road by a hacker.
It raises the question — what does the US Government do with Bitcoin that it has seized?
Bitcoin and The Silk Road
In the course of 2021, I’ve become fascinated by Bitcoin and blockchain technology more generally. I made a tiny investment at the start of the year, largely as an experiment. Since then I’ve been trying to understand what it is, how it works, and whether there is any genuine substance to the objections that are most commonly raised by its detractors.
I’ve tried to remain objective in my research, inspired (ironically) by another quote from Charlie Munger:
“I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I have reached that state.”
Overlooking that Munger seems to have forgotten this creed given his recent outburst regarding Bitcoin, the approach seems sound. Rather than simply looking for reasons to believe in something it makes sense to investigate where the concerns and cynicism originate from.
And so as part of my learning about Bitcoin I set out to explore the history of the Silk Road. I devoured the book “American Kingpin” by Nick Bilton and I now understand and appreciate how and why Bitcoin was intrinsic to the operation of the Silk Road.
Early in the book we learn that the dark web, the Tor browser, and Bitcoin were the essential elements that Ross Ulbricht (a.k.a. Dread Pirate Roberts) used to build the online marketplace from the ground up. It was a manifestation of his libertarian ideals and a bid to allow customers to buy what they wanted online, without interference or oversight from the prying eyes of the government.
Visitors to the site could buy a variety of drugs and other illicit goods, paying anonymously using Bitcoin in just the same way as people pay criminals for such goods using cash hopes of avoiding detection. The parallels are clear, but it’s undeniable that Bitcoin made it possible for the Silk Road to exist and thrive online for as long as it did.
At its height, the site was generating tens of thousands of dollars in sales each day. At the point of his arrest, Ulbricht had an estimated net worth of $28.5 million. When FBI agents raided his apartment immediately following his arrest in a San Francisco public library, instead of discovering suitcases full of cash they found various USB thumb drives containing Ulbricht’s stash of Bitcoin.
I couldn’t help but wonder what happened to these Bitcoin. Given that the majority of the Silk Road saga unfolded pre-2013 when the price of a single Bitcoin was beneath $1,000 it seemed likely that the US Government might have lucked-out if the thumb-drives were still in their possession?
What to do with the Silk Road Bitcoin?
In November 2015 the BBC reported that a final batch of 22,000 Bitcoin had been seized from the Silk Road. That brought the total to around 175,000 Bitcoin that had been confiscated by the US Government following Ulbricht’s arrest to that point.
According to the FBI’s website, civil asset forfeiture laws make provision for the appropriate handling of the proceeds of crime, and of money and goods seized during investigations.
Guns that have been seized are generally destroyed unless they can be sold and the resulting money used for good. Buildings, cars and other property may be repurposed and used for public good or for law enforcement purposes, otherwise they’re sold and the resulting funds used to compensate victims. Money that has been seized (whether in cash or electronically) will often be returned to victims where possible and appropriate.
During Ulbricht’s trial, the government submitted 5 letters in evidence, written by families of unfortunate people who’d bought drugs from the Silk Road and died as a result of accidental overdoses and adverse reactions to the drugs. There’s a moral case for compensating the family of these victims even though it wouldn’t bring their loved-ones back. How that would work, or whether it happened is unclear though.
In terms of tracking the movement and origin of money, while Bitcoin can be used to protect the anonymity of those holding and using it the movement of individual coins can be easily tracked via the blockchain. The trail left by each coin is permanently and immutably recorded for all time and maintained in digital ledgers across the network. This actually increasesthe transparency of how each unit of the cryptocurrency moves from one person to the next.
It’s this transparency that enabled law enforcement agencies to track Bitcoin that had been stolen from the Silk Road to be seized. It also helped Federal Agents discover that two agents working on the case — Carl Force and Shaun Bridges — had themselves turned rogue and stolen Bitcoin from the Silk Road during the investigation, later trying to sell it for their own gain.
The transparency was also instrumental in allowing the feds to track and seize 69,370 Bitcoin that had been stolen by a hacker from the Silk Road, over 7 years after Ulbricht was arrested.
The seizure of these Bitcoin must have presented the US Government with something of a dilemma. To this day, key figures in positions of great importance within the US Government are dismissive of Bitcoin to say the least. Fed Chairman Jerome Powell has recently described Bitcoin as little more than “a speculative asset”, while Treasury Secretary Janet Yellen has pointed out that Bitcoin is “inefficient” as a currency.
It seems unlikely then that Powell, Yellen, or any of their predecessors would sanction the US Government holding onto the Silk Road Bitcoin — this probably explains why they did what they did next.
They sold them (and likely at a discount)
In the case of the 175,000 Bitcoin seized to the end of 2015, the government auctioned them off to the highest bidder. It’s unclear what was actually paid for these Bitcoin but a BBC article suggests that the last batch of 22,000 were sold in lots of 2,000 coins to 11 separate bidders.
It’s probable that the coins sold for less than market rate (I can’t imagine there’s any kudos associated with owning the specific coins that had been used to buy drugs on the Silk Road). Indeed the BBC reported that the auction attracted a “low turnout”of just 11 bidders in total — so everyone left with something.
While trying to figure out how much the government might have made, it’s pertinent to consider the price fluctuation in Bitcoin over the years.
The price peaked at $1,164 in November 2013 just after Ulbricht was arrested (could this be linked, I wonder?). From that point up until November 2015 the price was never higher than $375.
If we assume the best case, and that the 175,000 Bitcoin were sold at $375 each, the total raised through auctioning them off would be $65.6 million.
If they’d held onto these Bitcoin, and sold them at this year’s high of $61,000, they’d have made $10.7 billion.
In short, they’ve missed out on over $10 billion by selling the Bitcoin rather than HODL-ing them (Bitcoin slang for holding the coins in offline cold-storage).
What to do with the 69,370 Bitcoin seized in 2020?
The question now seems to be what (if anything) the Federal Government should do with the Bitcoin seized by the IRS in November 2020. I’ve been unable to find any reports of anything having been done as yet, but it seems a matter of some importance given the current price and the prevailing political sentiment.
Those Bitcoin have a value of $3.9 Billion at today’s price ($56,519 per coin).
It raises quite an ethical dilemma for the government.
If they were to sell the coins on a crypto exchange it could come across as an official endorsement of Bitcoin to a degree far beyond what they’ve been willing to provide so far.
- It would be an acknowledgment that Bitcoin does indeed act as an effective mechanism for storing and distributing value.
- It would demonstrate acceptance that Bitcoin can work effectively as an investment asset that can appreciate in value (and has done, significantly since these coins were used on the Silk Road).
- It would be an acknowledgment of sorts that Bitcoin and blockchain aren’t dangerous as a result of the anonymity that they enable — indeed the fact that they’ve been recovered by the government at all is down to transparency that Bitcoin enables by virtue of the design of blockchain.
- It would be akin to the government benefiting financially from Bitcoin as a technology which many senior government figures have been keen to disparage and distance themselves from.
Perhaps they’re gradually selling the Bitcoin already, a little at a time so as to convert them to dollars at the best price possible and in a bid to avoid making these acknowledgments publicly? This would help them avoid losing out on such astonishing amounts of money as they did when they auctioned the other Silk Road Bitcoin.
Or maybe, just maybe they’re holding onto them to see what happens?
One final option
There is one final scenario that occurs as a slim but real possibility — the government destruction of the Silk Road Bitcoin as a matter of principle.
If the US government were genuinely against Bitcoin and saw no real utility or purpose for the technology — unlikely, but possible I guess — they could simply opt to destroy the coins themselves by securely disposing of the hardware devices containing their cryptographic keys.
Stories emerge from time-to-time of Bitcoin holders who’ve lost physical storage devices holding large sums of Bitcoin. Others have lost passwordsand recovery phrases and are thus prevented from accessing their Bitcoin. Either way, those Bitcoin are gone forever.
There will only ever be a maximum of 21 million Bitcoin issued across the network — this is built into the computer protocol and is a finite number. Any Bitcoin that are on lost storage devices are gone for good. It’s estimated that up to 20% of all Bitcoin that have been issued so far could be permanently lost.
If the US government believes Bitcoin has no real value then it could make a statement and permanently destroy those 69,370 Bitcoin, further reducing the volume in circulation. I have a sneaking suspicion they won’t do that though.
Bitcoin played an undeniable and important role in the rise and fall of the Silk Road. It may be argued that the Silk Road couldn’t have happened without Bitcoin, and this is probably true to some degree. That said, if Bitcoin hadn’t existed or hadn’t been so easy to adopt, an alternative means of processing payments and preserving anonymity would likely have evolved.
It’s also relevant to remember that cash has always allowed people to pay anonymously for goods and services — Bitcoin has merely taken that attribute and enabled it in an online setting. As described above, the anonymity of ownership comes along with greater transparency — by interrogating the blockchain it’s easy to follow the movement of Bitcoin between users. This feature played an important role in capturing corrupt government agents and in recovering Bitcoin that had been stolen by hackers, recovering the proceeds of crime associated with the Silk Road.
We may never know what the US government decides to do with its holding of Bitcoin from the Silk Road (and any that it may hold from other criminal proceedings and investigations). Nonetheless, it amuses me to think that the Federal government holds over $3 Billion in Bitcoin — a cryptocurrency that many senior figures within it repeatedly describe as largely pointless and potentially dangerous.
I wonder if Charlie Munger secretly holds a few too?
Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.