The US government has once again seized large sums of bitcoin from those involved in the online drug trade. Late last week the US Attorney’s office announced that it had seized $3,030,000 worth of bitcoins from 22-year-old Dutch citizen Cornelis Jan Slomp, aka “SuperTrips,” who is accused of being one of the largest drug dealers on the now-defunct Silk Road marketplace. Slomp has agreed to plead guilty to a federal drug conspiracy charge.
What’s unique in the Slomp case is that, unlike in the past where federal officials held bitcoin pending the outcome of the underlying case before ultimately selling them, in this instance the virtual currency was “exchanged” – with little explanation of where or how – into cash, seemingly immediately.
The mechanics and implications of this currency exchange are fascinating. Surely the government didn’t sell these seized bitcoins on a public exchange, but rather via a private auction. If the coins were sold as a single lot, then it’s reasonable to assume that they were sold at a slight discount to the “retail” market value for a single bitcoin, such as the price quoted on the Coindesk Bitcoin Price Index. If the coins were sold in multiple smaller lots then the auction may have brought in close to this index value.
The issue is, Bitcoin’s price fluctuates, often dramatically, on a daily and even hourly basis. How did the government decide when was the right time to sell and at what price? Are there cryptocurrency experts within the various federal departments involved in making this decision? And what is the government’s duty, both to its citizens and to the still accused but (at the time) not yet convicted owner of those assets to maximize their value?
If the government, hypothetically, sold these bitcoins at an average price of $500, but then two weeks later they were worth 50 percent more at $750, did the government act foolishly, irresponsibly, or even recklessly? According to Wikipedia, the US Marshals Service currently manages approximately $2.4 billion worth of seized and forfeited property with the goal of maximizing the net return of this property at auction.
In the most basic terms, the government must hold seized property until such a time as the accused is either convicted and thus loses any legal right to the property, or acquitted and thus entitled to its return. In most cases, this would mean holding non-cash assets like cars in storage until such a time as the case is resolved one way or another. But, under certain circumstances, the government may liquidate these assets and eventually accomplish the same asset return with cash rather than the original items of value.
Assuming that the asset value is determined at the time of return, rather than at the time of seizure or liquidation, it’s entirely possible that the government could ultimately owe Slomps a sum far greater than the cash it received upon exchanging his bitcoins.
Given the charges and Slomp’s upcoming guilty plea, don’t expect these seized bitcoins to be returned in any form. The US Attorney explains that it plans to seek forfeiture of these assets, which it describes as the “alleged proceeds from Slomp’s drug trafficking.”
According to the FBI.gov website, the federal government uses criminal asset forfeiture laws to “‘take the profit out of crime’ by helping to eliminate the ability of the offender to command resources necessary to continue illegal activities”:
A criminal forfeiture action must be judicial… While there is some disagreement among the appellate courts, generally, the government must meet the legal standard of proof, beyond a reasonable doubt, necessary to convict the defendant in order to forfeit the property. The property may be forfeited in this manner only if the defendant is convicted of the underlying offense charged, and the trier of fact finds that the property named in the indictment was illegally tainted.
As a general rule, the seizure of the property through criminal forfeiture may not occur until after the property has been forfeited. The district court then issues an order to seize the property, and the seizure is made by the United States Marshals Service (USMS). There are some exceptions to this rule. For example, a seizure warrant may be used in certain circumstances in a criminal forfeiture matter under the Controlled Substances Act (CSA) and under the Money Laundering Control Act (MCLA).
A news release by the US Attorney’s office in the Northern District of Illinois alleges that Slomp collected some 385,000 bitcoins as payment in more than 10,000 Silk Road transactions, making the seized assets just a fraction of his alleged total proceeds. He was accused of distributing:
104 kilograms of powder 3,4-methylenedioxy-N-methylamphetamine, also known as MDMA; 566,000 ecstasy pills containing MDMA; four kilograms of cocaine; three kilograms of Benzodiazepine; and substantial quantities of amphetamine, lysergic acid diethylamide (LSD), and marijuana, in addition to allowing substantial quantities of methamphetamine, ketamine, and Xanax to be distributed through his SuperTrips vendor account from March 2012 through August 2013.
Sounds like a Hunter S. Thompson novel.
If convicted, Slomp faces a mandatory minimum sentence of five years and a maximum of 40 years in prison and a $5 million fine, according to the US Attorney’s office. But regardless of the outcome of this case, Slomp’s bitcoins have already been exchanged, and a new precedent has been set.