FBI proves seizing bitcoins isn't the same as owning them

While the FBI may have its hands on the founder of Silk Road’s bitcoin wallet, that doesn’t mean it has access to what's inside. Ross Ulbricht, despite his own self-incriminations as the mastermind behind the online black marketplace, was able to do one thing right: secure his bitcoins.

A reported 600,000 BTC belonging to Ulbricht is in the FBI’s hands. But they can’t access the bitcoin wallet because it is encrypted. This supposedly is separate from the 26,000 BTC that was left in an escrow account, which was being used to exchange money between the marketplace’s users and dealers.

For law enforcement, taking on new technologies isn’t always a smooth operation. As criminals adopt new concepts, cops have to figure out new crime-solving methods.

With bitcoin that’s no exception. But what most people in the bitcoin community can pretty much agree upon is the fact that killing off Silk Road was a good thing for the future of bitcoin.

"Taking down Silk Road was an important step in helping legitimize and bring bitcoin into the mainstream. Liquidity is a big problem right now that impedes bitcoin's growth, hopefully this 5% stash can be recovered and reinserted into circulation to get more people and businesses using BTC,” said Travis Skweres, CEO of bitcoin exchange CoinMKT.

The feds owning bitcoin

It may make some BTC investors wary that a government entity is in possession of so many bitcoins. After all, it is fear of the Feds trying to shut down decentralized virtual currencies that may be the biggest risk of all right now for considering bitcoin as an asset class.

“I’ll be glad to see these bitcoins transitioned to the wider community,” says Jaron Lukasiewicz, the founder of Coinsetter, a high-performance bitcoin exchange designed for traders.

Not only will investors delight on seeing these bitcoins back on the market, such a huge amount being back in circulation will help volume, and thus liquidity overall.

“Without the private key, it would be impossible for the government to access the bitcoins,” says Ankur Nandwani, who runs bitcoin micropayments service BitMonet.

Conceivably, the government could make some sort of deal with Ulbricht to provide the key to the bitcoin wallet holding the approximate 489,000 bitcoins it cannot currently access.

It will be interesting to see if the government will try. It has made various statements in the past that it believes bitcoin is real money, but they can literally put money where their mouth is by making a deal to release those coins.

After all, 489,000 bitcoins is no small sum, amounting to over $92m in BTC using the latest CoinDesk Bitcoin Price Index valuation.

Not talking

The feds certainly aren’t talking about what access they have to Ulbricht’s stash of bitcoins, but the block chain can prove to us a few things, says Dan Held of Zeroblock.

“We know the FBI has access to 144,000 bitcoins since they moved them on 10/25. Whether or not they have access to the remaining 489,000 bitcoins is debatable,” says Held.

Indeed, on 25th October, approximately 144,000 bitcoins were moved to this address. They were moved in segments of 324 BTC, which has been presumed to stand for “FBI” on a dial pad. Also, the phrase “DPR Seized Coins” was added as a note to each transaction on the block chain.

What might be the most intriguing aspect of these bitcoin seizures is just how the Feds will eventually get fiat for them. As it stands right now, dumping the amount of bitcoins that it has in its possession could take a long time, since exchanges are not used to handling that sort of volume.

The FBI has told Forbes that they will sell their bitcoin holdings after Ulbricht’s trial. But there might be a problem doing that all at once.

“Mt.Gox, BitStamp, and BTC-e combined don't have the volume necessary to facilitate a sale of that size,” said Zeroblock’s Held.

He’s probably right – daily volume for the top five exchanges is currently around 58,000 BTC, using the most recent 24-hour data from Bitcoin Charts.

The feds may have to ultimately auction off the coins, which might be of interest to any bitcoin investor out there.

“If they auction off the coins, it will most likely be at a discount to current prices, as there is not enough demand to execute at the current market price,” says Held.

What do you think about the FBI’s ownership of so many bitcoins – is there any way for them to access an encrypted wallet without Ulbricht’s help? Will the feds have to dump a huge amount of BTC on the market at some point? Let us know in the comments.

Featured Image: Flickr