Buckle up: The FBI now has a green light to sell Silk Road bitcoins

By Michael Carney , written on January 17, 2014

From The News Desk

When you know something bad is coming, it’s a bit easier to prepare yourself. But it makes that event’s arrival no less unpleasant. The bitcoin market is collectively going through this experience today, a day after the Manhattan US Attorney’s office announced that a judge had signed a forfeiture order for the first pile of bitcoins that the FBI seized from online black market Silk Road, or as the government calls it, “a global cyber business designed to broker criminal transactions.” That means the Bureau can now liquidate 29,655 bitcoins, which are worth $25.1 million at yesterday’s $847.67 average closing price.

This is a moment that bitcoin observers have been bracing for since the Feds told the public in October that they would “probably just liquidate” the bitcoins, once they were legally free to do so. The sale of $25 million worth of bitcoins represents an unusually large transaction in the cryptocurrency world, which is to say that the impact of such a sale is unknown. The market could be spooked by such an influx of supply, or it could be relieved to have the long-awaited event behind it and any lingering uncertainty removed.

The coins in question once belonged to Silk Road’s customers and were being held in escrow by the marketplace awaiting confirmation that the goods or services paid for had been delivered so that payment could be released. The FBI and the US Attorney have no plans to investigate each Silk Road customer and each transaction to determine whether any were acting legally and thus merit return of seized funds.

“We continue our efforts to take the profit out of crime and signal to those who would turn to the dark web for illicit activity that they have chosen the wrong path,” Manhattan U.S. Attorney Preet Bharara said in yesterday’s release. “These Bitcoins were forfeited not because they are Bitcoins, but because they were, as the court found, the proceeds of crimes.”

U.S. District Judge J. Paul Oetken echoed this explanation, saying previously, “[the assets were] being used to facilitate money laundering.”

The FBI seized an additional 144,336 bitcoins belonging to accused Silk Road creator Ross Ulbricht. At yesterday’s closing, this stash is $119.2 million. Ulbricht, who is facing drug, computer hacking, money laundering conspiracy, and attempted murder (murder-for-hire) charges, has denied creating Silk Road or being the persona known online as Dread Pirate Roberts (aka DPR) and is thus fighting to prevent the government from liquidating his holdings. “Ulbricht has filed a claim in the civil forfeiture action, asserting that he is the owner of the bitcoins found on his computer hardware, and contesting the forfeiture of those bitcoins,” Bharara says in yesterday’s release. Many believe that Ulbricht has as many as 600,000 bitcoins hidden in additional unknown wallet accounts.

The US Attorney has indicated that it will auction the virtual currency, much like it would a mansion or jet or other non-cash asset seized in the course of law enforcement. No date has been provided, but expect it to occur sooner than later and presumably as a semi-private affair rather than as a public spectacle. Potential buyers include the large Bitcoin Trusts now trading on Wall Street, including those created by SecondMarket and the Winklevoss brothers. Second Market’s trust has grown from 18,000 to 70,000 bitcoins since launching in September, suggesting it would be feasible for the entity to absorb the large sum being offered by the government.

It’s uncertain whether the US Attorney will be able to sell the virtual currency at “retail value,” or whether, more likely, the auction will result at the coins being sold at a bulk discount. There are two factors at play. One, it’s difficult to locate such large bitcoin stashes that are available for purchase. So for large entities like the SecondMarket Bitcoin Trust, which make it their business to acquire bitcoins, this is a unique opportunity and may be worth paying for. Two, the very existence of this auction demonstrates that the public exchange market is fairly illiquid at the upper echelon of transaction sizes meaning that any buyer may wish to build in a discount to account for this risk.

Many people, myself included, have predicted that a multi-million dollar sale by the government would rattle the bitcoin market. As I noted earlier this month, the sale represents two days worth of global trading volume in the bitcoin market and nearly 1.5 percent of all bitcoins in existence. But the FBI and the US Attorney have been surprisingly transparent every step along the way, meaning that the sale is anything but surprising. The Bureau announced its intentions to liquidate its virtual currency holdings almost immediately after seizing them and similarly, the Attorney issue a press release yesterday when that process is set into motion.

Perhaps it’s just good business, given that the proceeds of this and any future sales of bitcoins connected to Silk Road will go to the US treasury. Currency and commodity markets – bitcoin falls somewhere in the grey area in between these two – are easily spooked. The government has been wise not to introduce any unnecessary uncertainty.

The bitcoin market has been preparing for the sale of these tens of millions of bitcoins for four months, since Silk Road was seized in October. Given this, it’s not surprising that the market reacted with a collective “meh” to yesterday’s announcement by the US Attorney. Bitcoin opened open the day at $876.83 and closed down 3.4 percent to $847.67 – it’s down another 2.3 percent in early trading today to $828.14. This is hardly a blood in the streets reaction, although no coins have actually sold yet.

Yesterday’s announcement by the US Attorney notes that “the prosecution of this case is being handled by the Office’s Complex Frauds Unit.” Considering the hundreds of millions, if not billions of dollars worth of commerce that secretly flowed through Silk Road in its two-and-a-half-year long operation, calling it complex is a massive understatement.

When they were seized in October, the 29,000 bitcoins in question were worth just $4 million, meaning they have increased in value sixfold since the FBI took custody. So to has the value of the additional 144,000 bitcoins belonging to Ulbricht. But the US government isn’t in the business of holding onto libertarian-leaning virtual assets, and thus the sale is to be expected.

A year ago, such an event may have destroyed the bitcoin market. The fact that it has (thus far) reacted with little more than a whimper is a good sign. There’s a good chance that this will be just first in a series of massive bitcoin auctions by our government. It may be the most profitable thing Washington does all year.

[Image via fdecomite, Flickr]