The U.S. government’s bitcoin bonanza: How, where and when to sell?

The U.S. government’s bitcoin bonanza: How, where and when to sell?

7:17pm EST

By Emily Flitter

NEW YORK (Reuters) – U.S. prosecutors in Manhattan are sitting on a multimillion-dollar bitcoin gold mine. And it could get much bigger. Federal authorities hauled in 29,655 units of the digital currency – worth $27 million at current exchange rates – through an official forfeiture by Bitcoin this week.The bitcoins had belonged to Silk Road, an anonymous online black market that authorities say was a conduit for purchases of drugs and computer hacking services – even a place where assassins may have advertised. It was shuttered after an FBI raid in September, when agents took control of its server and arrested the man they say was its founder in San Francisco.

No one stepped forward to claim these bitcoins, which were found in electronic “wallets” used to store the digital currency. An additional 144,336 bitcoins, worth more than $128 million today, were also discovered, but the government’s claim on them is being disputed by Ross William Ulbricht, 29, who U.S. authorities say was the founder and main operator of Silk Road. They had been stashed on his laptop.

It all puts authorities in an unusual position, given their concerns about the way in which bitcoins and other digital currencies are used by criminals to circumvent regulations intended to prevent money laundering. By trading in bitcoins, the government could give the currency some legitimacy.

Bitcoin is essentially software code that defines units of value, which users can move back and forth among themselves. Unlike other virtual money transmitters, its value isn’t pegged to a hard currency like the dollar or the euro; it is determined by the demand for bitcoins.

The U.S. Marshals Service, which is in charge of liquidating such seized assets, will have to decide whether to sell the units on a Bitcoin exchange or find a private buyer, perhaps through an auction.

A spokeswoman for Preet Bharara, the U.S. Attorney for New York’s Southern District, said Friday that the government is still trying to decide what to do with the forfeited bitcoins.

The timing of any sale could make a big difference in the amount the government could realize.

Bitcoin’s value has fluctuated wildly over the past six months. When Silk Road was seized, the bitcoins found on the server were worth $3.6 million, far below their current $27 million value. Friday’s exchange rate was about $900 per bitcoin, according to the Tokyo-based Bitcoin exchange MtGox.

It is unclear whether a large sale of bitcoins by the government could drive down the price. Friday’s volume on MtGox, which is the largest Bitcoin exchange, was 8,656 units.

“If it’s worth $27 million now, is that a high part of the market? A low part of the market? That’s one of the decisions they’re going to have to make,” said Louis Rulli, a professor at the University of Pennsylvania Law School.

“It would seem to me that they would probably convert those bitcoins into cash relatively quickly.”

Barry Silbert, the founder of one of the first investment funds that lets retail investors gain exposure to Bitcoin, declined to offer an opinion on what the government should do with its stash or how a sale would affect the market.

Marco Santori, a lobbyist for the Bitcoin Foundation, which is Bitcoin’s official trade group, said the group did not have an official position on the matter.

‘THIS WON’T BE DIFFICULT’

Most goods seized by U.S. authorities end up in the hands of the U.S. Marshals, where they are auctioned or, at times, repurposed for government use. But the Marshals aren’t just practiced at unloading forfeited SUVs or houses; they also deal with complex financial instruments, foreign companies and other kinds of obscure assets forfeited by criminals.

“While Bitcoin is a somewhat new form of asset, it’s not unusual for them to have to find out how to liquidate a new asset,” said Jeffrey Alberts, a partner at Pryor Cashman and a former federal prosecutor in Manhattan. “This won’t be difficult for them, whether they do it through an exchange or find a buyer who wants to buy it directly from them.”

Ulbricht was arrested October 1 in a San Francisco public library and charged by prosecutors in New York with one count each of money laundering, computer hacking and drug trafficking. He is being held at a federal detention center in New York without bail. He has not entered a formal plea but has maintained his innocence through statements by his lawyer.

Prosecutors last week asked a judge to grant them a default judgment in the civil forfeiture case they filed after the raid on Silk Road and Ulbricht’s arrest claiming Silk Road’s assets. U.S. District Judge J. Paul Oetken signed an order to that effect on Wednesday, giving the government control of the 29,655 Bitcoins from Silk Road’s server but not of the bitcoins – the larger sum – discovered on Ulbricht’s computer. Those are still in dispute.

The proceeds from any sale would be turned over to an asset forfeiture fund from which the U.S. Justice Department can draw for law enforcement activities. If any money were to come back to prosecutors’ budgets, it would be distributed evenly among U.S. attorneys’ offices, a policy meant to prevent individual offices from unduly seizing assets to pad their budgets.