Government Sale of Bitcoin Establishes Fungibility Precedent by Jon Matonis

The US Marshals Service (USMS) will auction off the bitcoin seized from Silk Road to the highest bidder tomorrow. It amounts to 29,656.51 BTC contained in wallet files residing on Silk Road servers.

In total, there will be nine blocks of 3,000 bitcoin and one block of around 2,656 bitcoin offered in the auction, representing the amount stated in the forfeiture order by the court on 15th January, 2014.

Although the authorities hold more coins, the auction does not include the approximate 140,000 BTC contained in wallet files that resided on computer hardware belonging to Ross William Ulbricht that were seized on 24th October, 2013 and are known as "DPR SEIZED COINS".

Establishing equivalent value

Regardless of the morality of pre-trial asset forfeiture, the sale via auction of approximately $17 million worth of bitcoin by the USMS will establish the first governmental precedent for bitcoin fungibility, which could become significant for future bitcoin-related cases involving 'blacklisting', or 'tainted bitcoin'.

Fungibility refers to the concept that every unit or sub-unit remains equivalent and identical to any other unit or sub-unit. It is the property of a good or commodity in which individual units are capable of mutual substitution.

Blacklisting and the notion of tainted bitcoins refers to the concept that certain bitcoins may be treated different due to their origin and/or usage, thereby resulting in a valuation differential.

Each bitcoin sold in the government's auction is made without representation and also without any disclaimer or restrictions on their subsequent usage and transfer within the bitcoin block chain.
In additional clarifying statements, the auction notice says:

"The USMS will not answer any questions regarding (a) the associated criminal or civil cases that resulted in the seizure of the bitcoins being auctioned, (b) Bitcoin characteristics, uses or value, or (c) specifics of the auction process other than information provided in these documents;

The USMS will not sell to any person who is acting on behalf of or in concert with the Silk Road and/or Ross William Ulbricht, and bidders will be required to so certify;

The USMS will not transfer bitcoins to an obscene public address, a public address apparently in a country restricted by the Office of Foreign Assets Control (OFAC), a public address apparently associated with terrorism, other criminal activities, or otherwise hostile to the United States;

The winning bidder will receive a signed Bill of Sale from the United States Marshals Service prior to the transfer of the bitcoins."

A bitcoin is a bitcoin

None of these statements carry any indication that the USMS or the Department of Justice view these coins to be 'legally different' or 'subject to special treatment' by exchanges and market participants. Conversely, the USMS is attempting to maximize its return of the sale of these bitcoin assets by specifically not disrupting their implied fungibility.

No special discounts apply to the sale and if they are bulk discounted by virtue of the wholesale bidding process, it would neither be due to the source of the bitcoin assets nor their alleged use on the Silk Road for various transactions.

“For now, a legally-orchestrated sale of bitcoin assets demonstrates that a bitcoin is a bitcoin is a bitcoin.”

Furthermore, there is no intent to blacklist or whitelist the coins for subsequent circulation, because this would negatively impact the valuation at auction. All bitcoins obtained from the auction sale process are able to be freely transferred and circulated around the world.

An interesting Scottish monetary case from the 1700s suggests that blacklisting or mandatory coin validation is a misguided premise. Fortunately, in that particular case, the judges upheld the principle of unrestricted fungibility.

The auctioned bitcoin are theoretically being sold at par to other circulating bitcoin. In the future, governments or free markets may determine that certain bitcoin addresses carry a taint or don't trade at par for some reason, but, for now, a legally-orchestrated sale of bitcoin assets demonstrates that a bitcoin is a bitcoin is a bitcoin.

Market role

As covered on Bloomberg TV, SecondMarket's Barry Silbert even organized a bidding syndicate to allow smaller investors the opportunity to obtain bitcoin at favorable bulk pricing, where 10% of any auction fees received by SecondMarket will be donated to the Electronic Frontier Foundation.

While the government's actions and announcements regarding bitcoin fungibility play a critical role in setting expectations for the market, the globally distributed bitcoin network spans many jurisdictions and true fungibility is ultimately determined by what the market will bear. Not all market participants have to adhere to fungibility determinations in the same way.

The list of possible Silk Road bitcoin bidders can be seen here and the introductory form to participate in the syndicate organized by SecondMarket and the Bitcoin Investment Trust can be found here.

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