Earlier today a “Verified Complaint for Forfeiture In Rem” was filed by Michael Sherwin, the United States Attorney for the District of Columbia, on behalf of the US government against 155 BTC addresses allegedly involved in terrorism financing for Al-Qaeda and associated groups. This asset seizure is part of a larger move by the US Department of Justice in their targeting of terrorist financing with cryptocurrency.
The in rem compliant document confirms previous allusions to ongoing and forthcoming legal actions against non-compliant use of virtual assets made by the US Department of Treasury, the Financial Action Task Force (FATF), and other federal and international law enforcement agencies. The filing states that this “in rem” or against property asset forfeiture “arises out of an investigation by the Internal Revenue Service – Criminal Investigation’s Cyber Crimes Unit (“IRS-CI”), Federal Bureau of Investigation (“FBI”), and Homeland Security Investigations (“HSI”),” and contextualizes it within a broader effort by the US federal government which is “specifically...investigating the unlawful use of the cryptocurrency to support and finance terrorism.”
The filing suggests that the various law enforcement agencies involved have a strong understanding of the inherent traceability of BTC as well as an awareness of the efforts by many in the cryptocurrency space to transition BTC from a pseudonymous payments network into an anonymous payments network. One section reads,
“Although transactions are visible on the public ledger, each transaction is only listed by a complex series of numbers that does not identify the individuals involved in the transaction. This feature makes BTC pseudonymous; however, it is possible to determine the identity of an individual involved in a BTC transaction through several different tools that are available to law enforcement. For this reason, many criminal actors who use BTC to facilitate illicit transactions online (e.g., to buy and sell drugs or other illegal items or services) look for ways to make their transactions even more anonymous.”
When paired with the recent news of the IRS Cyber Crimes Cryptocurrency Initiative which is developing de-anonymizing technology to counteract networks like BTC’s lighting network, it seems that the efforts of many within cryptocurrency to transform Bitcoin (now BSV) into an extralegal system will be met with substantial pushback. How these developments from law enforcement will affect the value proposition narrative and subsequent speculative value of anonymity-seeking coins like BTC remains to be seen.
Unmasking BTC Addresses
The filing provides background on the various Al-Qaeda affiliated groups and lists the BTC addresses they used to finance their activities, which included things like “fundraising campaigns” to “finance bullets and rockets for the Muhajideen.” Although the pseudonymity of BTC makes unmasking the identities behind these terrorist financiers difficult, the immutable evidence trail of the blockchain allows sufficiently motivated law enforcement to track funds until they pass through fiat on/off ramp exchanges which are legally required to perform anti money laundering, know your customer, and counter terrorism financing (AML/KYC/CTF) checks on their users. It appears that this is exactly what the US government did in this instance.
“Between February 25 through on or about July 29, 2019, Defendant Property AQ2 sent approximately 9.10918723 BTC via 38 transactions to an account at a virtual currency exchange (Defendant Property 1).”
In an attached document, “Defendant Property 1” is defined as BTC address: 1421chCK32pV32Tw5MQbiUiKWKvnmj7d91. According to BitInfoCharts, this address is a wallet for the exchange Coinbase, which would align with the filing’s claim that it is an account at a virtual currency exchange. (I am currently unable to say what BitInfoChart’s methodology is for determining when an address is an exchange address and what their level of confidence is in that claim, but I contacted their team to inquire and will update this post if/when they respond. If you are reading this, they have not yet responded.) If Coinbase was receiving funds from these accounts it would have been required to collect and verify the identity of the individual who opened the account, allowing law enforcement to unmask and identify members in the terrorist financing network.
What this means
This legal action has the potential to prove some currently unprecedented features of blockchain technology which run counter narrative to the cryptocurrency consensus which imagines BTC to be an extralegal network. In the “prayer for relief,” the filing requests that “all parties [claiming ownership to these BTC]...appear and show cause why the forfeiture should not be decreed.” Absent individuals coming forward to demonstrate why the US government is mistaken in their BTC chain analysis the assets will “be forfeited to the United States for disposition according to law…” How this forfeiture plays out will be interesting. If exchanges are legally compelled to blacklist addresses or nodes are legally compelled to reassign funds to US government controlled addresses this seizure could finally prove the subservience of “decentralized” networks like BTC to law.
It is Unbounded Capital’s position that successful exchanges like Coinbase or mining nodes/pools based in jurisdictions like China, the United States, Russia (which cumulatively account for nearly 80% of all BTC mining), and all other FATF member nations will comply with rulings from the US federal courts rather than openly evade law and risk losing their entrepreneurial successes. While this might appear like an uncontroversial stance, this is largely a minority position relative to the consensus of “experts” and “thought leaders” in the cryptocurrency space. Proponents of this consensus view maintain the position that the decentralization of networks like BTC serves as a get-out-of-jail-free card for non-compliant network participants.
We will keep you updated as this legal action develops.