Dwolla Bitcoin Silk Road

On October 2, 2013, the FBI arrested the “Dread Pirate Roberts” and shut down the Silk Road—a website that served as the Amazon.com of the criminal underworld, selling any matter of illegal drugs online. Dread Pirate Roberts, also known as Ross Ulbricht, purportedly founded the website. Silk Road could only be accessed by using The Onion Router, or TOR, which served to anonymize the buyers and vendors on the website. To further obscure the identities of those engaged in the black market, Silk Road did not make trades in U.S. Dollars or any other government currency. Instead, the website dealt in Bitcoins—an electronic currency that can be used relatively anonymously. When the FBI shut down the Silk Road, it immediately seized 26, 000 Bitcoins from various vendors on Silk Road and seeks to seize another 600, 000 Bitcoins from the Dread Pirate Roberts himself.

“Bitcoin is an electronic form of currency unbacked by any real asset and without specie, such as coin or precious metal.” Bitcoin exchanges allow users to trade the e-currency for legal tender. An algorithm regulates the Bitcoin supply, monitoring the peer-to-peer network and the number of coins in the system. Bitcoins are kept in electronic wallets and accessed using a combination of public and private keypairs, effectively serving as a password. Bitcoin’s use is questionably legal, and the currency is used by a small community of dedicated users.

As Bitcoins are electronic, the FBI cannot “seize” them the way that it could traditional currency. Instead, the FBI must seize the servers that hold the wallets on Silk Road’s website or have access to the private keypairs of the illicit Bitcoins. The FBI has yet to publicly confirm what it will do with the seized Bitcoins. It has suggested that it may liquidate them after the judicial process is over. What the FBI chooses to do with the seized Bitcoins matters. It will serve as a signal to the Bitcoin community regarding whether the U.S. government sees Bitcoin as contraband in-and-of itself or merely an otherwise legal asset that was illegally gained from a website that sells drugs.

This Column’s purpose is to recommend that the FBI liquidate the Bitcoins instead of destroying or freezing them. It will begin with an examination of the statutes that govern how the FBI may use or dispose of assets under forfeiture law. The Column will next address the effect that the Silk Road bust had on Bitcoin prices and what that suggests about how the market perceives the currency’s value. Finally, this Column will examine the implications of government action on Bitcoin.