On June 27, the US Marshals Service conducted the auction of 29,656.51306529 Bitcoins. They have been in the possession of the federal government since they were stolen through civil asset forfeiture from Ross Ulbricht upon his arrest in October 2013 on charges of narcotics trafficking conspiracy, computer hacking conspiracy, and money laundering conspiracy for allegedly running the anonymous Internet marketplace Silk Road.
From a philosophical libertarian perspective, this is a travesty. Agents of the state seized Ulbricht's Bitcoins and sold them under civil asset forfeiture laws, which allow agents of the state to take any person's property and sell it at auction by accusing that person of a crime and confiscating the property as evidence. It matters not whether the person is later exonerated of all charges; neither the property nor its value may be recovered. If a group of private citizens were to act in the same manner, it would be possible to bring federal charges against them of robbery, receipt of stolen monies, transportation of stolen monies, and conspiracy to commit the aforementioned crimes. These crimes carry a maximum combined sentence of 52.5 years in prison and a fine of $750,000. But because the agents of the US Marshals Service are agents of the state, and the state has a monopoly on the enactment and enforcement of laws, they will face no punishment for this conduct.
Of course, the best way to combat injustice is through direct action. While it is too late to stop the theft and auction of Ulbricht's Bitcoins, cryptocurrencies such as Bitcoin provide several mechanisms for preventing other such events from happening in the future. Let us examine some of them.
1. Use strong encryption methods when engaging in state-disapproved activities. Ulbricht failed to do this, even revealing his real name on an Internet forum using an unencrypted connection, which allowed agents of the state to link him to Silk Road and make an arrest. It is possible to encrypt a wallet so strongly that even the most powerful computers cannot crack it by the laws of thermodynamics. One can also use the Tor network and mixing pools to make it more difficult for agents of the state to spy on one's activities.
2. Use cold storage outside of one's computer. Ulbricht kept the Bitcoins being auctioned, as well as another 144,342 Bitcoins linked to Silk Road, on his personal computer. If he had stored them in a cloud-based wallet service, a cryptocurrency exchange, an encrypted USB drive, a silver ring, or some other medium, they would have been much more difficult to seize and auction.
3. Give access to one's Bitcoin wallet to a confidant. This is somewhat risky, as the confidant could betray the Bitcoin user and steal the Bitcoins out of a wallet. But if Ulbricht had done this, then the operating funds of Silk Road along with Ulbricht's personal Bitcoins could have been kept out of state hands and given to another person who could continue running the operation without losing assets.
4. Use assassination markets to discourage agents of the state. An assassination market is a prediction market in which people can anonymously place bounties on people and receive payment for correctly guessing the date of unnatural death of an individual in advance. Several of these already exist. Such a market could be used to increase the hazard level of being a politician who passes legislation against non-aggressive behavior (such as that of Ulbricht in operating Silk Road), or of being an enforcement agent for such legislation, to the point that few would want to take the risk of doing such things.
5. Implement a method of tarnishing stolen Bitcoins. Such a method is not currently part of any cryptocurrency, but a framework for such a method has been created. The idea is to add a function, either to the Bitcoin protocol or as an external supplement, that informs users that a particular amount of cryptocurrency is stolen money or otherwise ill-gotten. This would disincentivize dealing with people who steal cryptocurrencies or use them in the commission of aggressive acts, as well as dealing with people who deal with such people.
6. Convince enough Bitcoin miners to use a majority of the hash rate to stop transfer of seized Bitcoins. This method goes one step further than tarnishing Bitcoins; it effectively freezes them. The blockchain is a public ledger that is a fundamental part of Bitcoin. The process of mining includes maintaining and updating the blockchain. If miners who control a majority of the hashing rate do not wish to see a particular transaction performed, they have the power to stop it by denying it any confirmations. While this is normally a bad thing in the form of a 51% attack on the network, it could be used to prevent governments from selling seized cryptocurrency.
It is thus clear that Bitcoin users have many tools at their disposal to thwart agents of the state who would do to others what has been done to Ross Ulbricht. It is now up to each member of the Bitcoin community to use them as one sees fit.