Tuesday, October 29, 2013

Silk Road Case Could Set Bitcoin Legal Precedent For Many Years

By Jon Matonis
Saturday, October 18, 2013


Now that an all-star attorney has been selected for the Silk Road operator’s defense, the big show moves to key disclosure laws and whether the Silk Road assets can ever be confiscated by the government.

While the government presumably has control over the 26,000 or more bitcoin held in escrow for Silk Road customers, the larger asset base is the primary bitcoin addresses containing over two years worth of operating commissions. FBI estimates place this amount at nearly 600,000 bitcoin (currently worth $80m), however it is probably significantly less than 600,000 since earlier bitcoin was not worth what it is now and some of it would have been paid out to employees or reinvested back into ongoing operations.

Regardless, if access to those bitcoins is maintained via a brain wallet, then the only way for the government to gain access would be by compelling the defendant, Ross Ulbricht, to reveal his passphrase and private keys. A high-profile case such as this one making its way to the US Supreme Court would be as significant for bitcoin user rights as Roe v Wade is for women’s abortion rights.

In the US, the government has typically run into the Fifth Amendment when attempting to gain access to passphrases and demand private key disclosure. Last year, Marcia Hoffman of the Electronic Frontier Foundation gave an excellent presentation on the evolving nature of these legal cases and how the privilege against self-incrimination is seen by the government as having boundaries and limitations.

Bitcoin may not have tremendous anonymity by default, but it does have tremendous deniability and that would be the preferred legal route for Ulbricht, according to Susan Brenner, professor of law and technology at the University of Dayton.

For deniability and beyond the “forgone conclusion” test, Brenner suggests in TIME that Ulbricht must demonstrate surrendering the password makes it evident that the bitcoin are his:
“If I represented Ulbricht, I would argue that while the generic existence of the bitcoins is a foregone conclusion, his ‘possession’ of them is not . . . and that by providing the password would conclusively establish that they belong to him, which would mean that he would, under the act of production as testimony standard, be ‘testifying’ and, since the testimony would incriminate him, he could take the 5th Amendment.”
Executive editor of Laissez-Faire Books and organizer of the Crypto-Currency Conference, Jeffrey Tucker, asks:
“But what’s the message here? That bitcoin is a hugely valuable property, that it is hard for the government to rob, that it is the real thing and an authentic store of wealth, that it is a viable replacement for the dollar. These are the messages that are being sent by the government’s actions.
The supreme irony: the Silk Road shutdown and looting might go down in history as the greatest boost to private currency ever. We could look back and see this as the event that finally unraveled the government’s money monopoly and the world’s problem with dollar imperialism.”
And there you have it. The most interesting aspect of the Silk Road case may not be the demonstrated capability of a regulation-free commercial zone. Nor may it be the breakthrough in merchant anonymity with a ratings system powering a digital agorism.

The most interesting aspect of the Silk Road case will most likely be the sweeping legal precedent set for compulsory key disclosure and the Fifth Amendment. If your online wealth cannot be robbed by common bandits or government officials, then the world truly has a digital money worth paying attention to.

Compelling an individual to turn over passwords or private decryption keys affects more than just access to financial property and information. It extends into any digital property or private information that is under the custody of an individual where its revelation constitutes self-incrimination.

But, it is the bitcoin area that has the greatest relevance for financial matters because access to the distributed bitcoin block chain is how ownership and transfers of that ownership are determined. Comprehending bitcoin ‘ownership’ requires an understanding of both peer-to-peer distributed computing and public key encryption for bitcoin addressing.

When it comes to financial matters, protected wealth beyond confiscation has profound implications that alter society from its current trajectory of absolute financial surveillance. Key disclosure laws have much to say about how this scenario plays out and it will vary among jurisdictions. Due to growing and pervasive cryptography in our lives, it will come to be the single defining issue for liberty in the digital age. We must have universal and unconditional privileges against compulsory self-incrimination.

The effect of upholding the Fifth Amendment against compulsory key disclosure benefits not just drug crime defendants, but everyone that uses non-retrievable passwords.

For instance, pretrial legal funds could be segregated and deployed when necessary so that targeted defendants are no longer drained of the means for immediate and complete representation, as was the case with Kim Dotcom.

The alarming and repeated abuses of civil asset forfeiture would thankfully become a thing of the past.

Tax haven assets and other offshore banking activity, such as Cyprus, would no longer be subject to the trust of a bank or third-party custodian that shifts trusted privacy policies based on the latest politics or Nation-State bullying.

Levels of overall financial privacy, including retirement and inheritance instructions, would be determined by the individual without inversely asking for permission to retain your financial privacy.

The government is only discovering the power of the bitcoin block chain for the first time now, but its liberating properties are seductive on multiple levels. Even if the government and police are able to seize access to the bitcoin property involved in a criminal or civil asset forfeiture, they can no longer secretly divvy up the booty as graft and that is good for all of us.

Friday, October 18, 2013

Bitcoin Foundation Comments on the Shutdown of Silk Road

By Jinyoung Lee Englund
Bitcoin Foundation
Friday, October 4, 2013


We received several requests to comment on the shutdown of Silk Road. First and foremost, it is important to note that the sanctity of the Bitcoin protocol remains intact and it was not a weakness of the core protocol that led to the apprehension of Mr. Ulbricht. Although Bitcoin is not anonymous by default, Bitcoin addresses were not a factor in solving the case.

“The FBI was able to capture an alleged criminal without any new investigative methodologies being needed and without having to get into changing the nature of the Bitcoin protocol,” Bitcoin Foundation General Counsel Patrick Murck said. “They caught him the same way they would catch somebody using cash.”

This is good for the Bitcoin economy in general and the reputation in specific because it proves that Bitcoins are in and of themselves a neutral store of value or medium of exchange and that privacy does not necessarily have to be compromised for law enforcement purposes.

Bitcoin’s principal attributes of irreversibility and user-defined privacy continue to provide benefits for bitcoin users globally. The Bitcoin Foundation would like to reaffirm that financial privacy sits on a sliding scale expressed differently by different individuals. However, within the Bitcoin transaction network, the specific level of that privacy is determined, managed, and set by the user.
Furthermore, the FBI acknowledged that “Bitcoins are not illegal in and of themselves and have known legitimate uses.” (DOJ Filing Section 21, Subsection v)
For more information on Bitcoin and anonymity, please see:
For Tor and the Silk Road takedown, please see:

Saturday, October 12, 2013

SecondMarket's Bitcoin Offering Defines New Asset Class

By Jon Matonis
Monday, October 7, 2013


It’s not every day that a new asset class is born. The last time was probably a few decades ago when managed futures funds became an accepted asset class among portfolio managers.

Now, alternative trading system company SecondMarket has launched The Bitcoin Investment Trust (BIT), an open-ended, private trust that is exclusively invested in bitcoin and derives its value solely from the price of bitcoin.

The private investment vehicle is based in the US and open to institutional and accredited individual investors. Alternative Currency Asset Management (ACAM), a wholly-owned subsidiary of SecondMarket, is BIT’s sponsor and SecondMarket has also made a $2 million seed investment in the BIT.

Certainly, a bitcoin trust can be thought of as a unique proxy for investing in bitcoin startups that would not carry the specific risk of management team execution or adopting the correct business model.

Not many other currencies in the world can serve as a proxy investment for an entire high tech, venture-funded sector. Until the bitcoin ecosystem matures and deepens, it will be possible to bet on its success simply by going long on the actual monetary unit.

Generally, the bitcoin funds, or trusts, can also be thought of as precursors to more retail-oriented exchange-traded funds (ETFs) which require substantially more due diligence and regulatory clearance.

When bitcoin ETFs start appearing on a regular basis, bitcoin will have completed its transition into both retail and wholesale asset class.

The bitcoin offering from SecondMarket has been in development for over a year now and it will set the standard for best practices of bitcoin as an asset class in the US.

Non-correlated to other investment classes and alongside more conventional portfolio components like equities, bonds, real estate, and commodities, a position in bitcoin allows a portfolio to participate in the potential upside from an economy based on digital currencies.

Following Exante’s Bitcoin Fund from Malta which debuted last year, SecondMarket also intends to facilitate two-way trading of the trust shares on its proprietary platform enabling both long and short positions. This is significant because commercial processors and large merchants of bitcoin would have a reliable method to hedge their bitcoin inventories without having to liquidate actual bitcoin on a daily basis.

For instance, if a bitcoin merchant processor, such as BitPay, wanted to “lock in” a certain aggregate exchange rate for their merchants or for their own books, they could initiate a short position in the Bitcoin Investment Trust without the need to sell bitcoin on the open market.

The company has established relationships with over 100 players in the bitcoin space, including large merchants, early adopters, and exchanges which should aid in the development of additional liquidity.

The critic's view

Last week, the forlorn and chronic bitcoin skeptic Felix Salmon, of the Reuters blogging world, took a shot at SecondMarket and their new trust. Salmon says that “no sensible investor should go anywhere near it” and he doesn’t “really understand why [Silbert's] doing this.”

Correctly stating that bitcoin is a combination of currency and commodity, Salmon goes on to claim “this trust strips out the interesting bit, which is the currency part, leaving just the stupidly speculative commodity aspect.”

As with most professional critics at the beginning of a new asset class, the cries of disbelief and suggestions of investor imprudence are to be expected because prior to becoming portfolio orthodoxy an element of risk weeds out the non-brave.

I wouldn’t expect Salmon to promote the adoption of largely undefined risk, but I would expect him to understand why a particular investment vehicle makes sense for certain investors.

Firstly, there is the aspect of institutional participation and the possibility of favorable tax treatment for investments made through retirement funds.

Many endowments and institutions that administer investment funds have strict guidelines for placing those investments such as placement must be with registered broker-dealer. Therefore, a straight investment into bitcoin “on your own” would not satisfy those institutional parameters.

Secondly, Salmon must also realize that larger aggregated wholesale purchases of bitcoin can be accomplished at more preferential pricing terms than smaller individuals would be able to achieve acting on their own. The consolidated purchasing power of a trust could easily make up for a good portion of those fees.

Thirdly, and most importantly, the custodial features of safe-keeping and private key management are paramount.

The Bitcoin Investment Trust administrative and safekeeping fee is analogous to the storage fee assessed on gold and precious metals warehousing. Also, a professionally-managed trust provides protection against a slew of risks that could prove overwhelming for the casual weekend bitcoin investor.

For instance, as enunciated by Exante, top-level risks include data loss risk, hardware failure risk, jurisdictional risk, external hacker risk, dishonest employee risk, and employee death or disability risk. Also, succession planning and inheritance are just as important with a bitcoin asset as with any other asset.

Perhaps some year in the future Salmon will look back at this bitcoin article and say “I was not a True Believer when I really should have known better.” Or, maybe he will be smugly proud of himself for establishing a massive short bitcoin position in 2013. I doubt the latter.

According to the private placement memorandum, ACAM has retained prominent service providers including Sidley Austin LLP (legal counsel), Ernst & Young (auditor), Continental Stock Transfer & Trust (transfer agent) and SecondMarket (marketplace, custodian and authorized participant).

Investors who purchase shares in the BIT will have the opportunity to gain liquidity through periodic auctions on SecondMarket beginning in 2014. The Net Asset Value (NAV) of the BIT will be calculated daily and made publicly available.

Disclosure: Author is Executive Director of Bitcoin Foundation and participates on the Advisory Board for Alternative Currency Asset Management (ACAM).