The problem of liens on Bitcoin

Izabella Kaminska writes:

George K Fogg at law firm Perkins Coie has been thinking about the problem of past claims (or liens) on bitcoins for nearly 14 months now.

His conclusion: under the United States’ UCC code (uniform commercial code) as long as bitcoins are treated as general intangibles, no high value investor can be sure that an angry Tony Soprano won’t show up one day to claim the bitcoins they thought they received in a completely unencumbered manner are in fact his. In fact, it’s only if and when Tony Soprano publicly renounces his claim to the underlying bitcoin collateral he is owed that the bitcoins stand a chance of being treated as unencumbered. Until then, a hot potato claim risk exists for every future acquirer of Soprano’s bitcoin.

Indeed, given the high volume of fraud and default in the bitcoin network, chances are most bitcoins have competing claims over them by now. Put another way, there are probably more people with legitimate claims over bitcoins than there are bitcoins [emphasis added]. And if they can prove the trail, they can make a legal case for reclamation.

This contrasts considerably with government cash. In the eyes of the UCC code, cash doesn’t take its claim history with it upon transfer. To the contrary, anyone who acquires cash starts off with a clean slate as far as previous claims are concerned. It is assumed, basically, that previous claims on cash are untraceable throughout the system. Though, liens it must be stressed can still be exercised over bank accounts or people.

There is more at the FT link here.  And I have a simple question for all you Bitcoin partisans out there: how large is the largest private sector transaction on Bitcoin to date?  I’m not “anti-Bitcoin,” and I am glad the regulators have allowed the experiment to proceed, still I’m not persuaded by the arguments that it is going to be a big deal.

Comments

Depends what you mean by "transaction". If you mean it in the technical sense of moving BTC from one address to another, then I believe it's about $150M, and was related to a bitcoin exchange moving some of its balances around when reshuffling its security measures. If you mean in the sense of "exchange of bitcoins for goods and services" (excluding the purchase of bitcoins for fiat currency), then I'm not sure, but I'd speculate the largest transactions (in this sense) are in the $1M ballpark and involve the purchase of computer equipment (probably for bitcoin mining).

I thought the largest transaction to date was for a pizza before BTC took off in value, and, with the value of the BTC adjusted for today's value (or maybe peak bitcoin value) the pizza cost over $1M USD equivalent. From a thread I was reading at the Bitcoin Forum.

I actually think some dude bought some young Filipino hookers with BTC before it took off.

filipin*a* ... he's not that adventurous. er...

How do you know?

It won't surprise me at all if someone files a lawsuit under a UCC based theory at some point, but one thing should be clear: this is a novel legal theory that has never been tested in court.

The closest circumstances to her scenario pre-bitcoin would be a shop that receives Ithaca Hours or some other local currency substitute and then passes them on while insolvent prior to filing for bankruptcy. I'm not aware of any bank pursuing the recipients of the currency substitute on the grounds that it has a lien against the business's assets. A single example of the sort of action she's conceiving would make her argument a lot more credible.

I think the difference here is that the bitcoins bring with them some transaction history. That's what makes them theoretically provably The Same Bitcoins That Were Stolen.

Trying to assert that particular claim forces the court to try to understand the technical details of the bitcoin protocol. I don't know how a judge would categorize the bitcoin transaction process under law. Any number of analogies come to mind but I don't know which one would be most illuminating.

Would a court see the scenario as equivalent to a bankrupt fuel oil distributor who sells the last of his stock to a wholesaler which commingles the oil with other sources in a tank and and then sells out of that tank to other distributors? If 1% of your oil can be traced by the paperwork back to the bankrupt company does a lien of some kind exist under the UCC against all or a portion of your product?

Very good point.
Ordinary cash is untracable, which inherently limits the ability of victims of theft to claim ownership over particular dollars several transactons down the chain.

I don't know whether this is a good thing or a bad thing, but it certain creates legal complications. In some ways it could be a good thing, since it makes it much easier for victims to be made whole, but it also opens a can of worms and makes the currency not "work" so well as a currency, since all bitcoins are no longer equally "good" if some of them have potential leins against them. Now, before you accept a bitcoin as currency you're going to want to check that bitcoins history to see if it was ever stolen. You never had to do that before with any pre-existing currency.

The fact that Bitcoin is so popular with the crazy branch of the libertarians is that the odds of someone claiming something like an admiralty court or the redemption movement relating to Bitcoin approaches 1

So, bitcoins have a smell.

I don't see how this is possible. Bitcoin is a ledger system; there are not distinct "bitcoins" in the way that there are dollar bills or dimes. As such, I don't see how such a encumbrance model can survive transit of the asset through a fungible store. If Tony Soprano* transferred a thousand bitcoins to Gordon Gekko, who had a million bitcoins, then transferred a hundred bitcoins to you, does Tony have an encumbrance upon zero, a hundred, a tenth of a bitcoin, or some other amount? What do you do if there's enough levels in the transaction chain that everything gets really blurry? Bitcoin doesn't generally offer a way to distinguish different sums that have been aggregated together; I don't think this concern passes the sniff test for anyone beyond the immediate recipient of encumbered coins.

Exactlty. Bank accounts are also ledgers, and this is how money gets it's protection. Both systems are primarily account based. Cash can be recovered, if it can be traced and hasn't been deposited in a bank.

Each time you transmit bitcoin from a wallet, it selects from among the inputs which you have previously received. A given outgoing transaction may or may not include a specific input. If the input is larger than the outgoing sum, a fraction is transmitted back to your address. It is only after a series of transactions has occurred that amounts are actually co-mingled, and the proportion from any given source is always traceable.

This is only somewhat true. Each bitcoin transaction is essentially a list of the payments that provided the spender with the bitcoins they are currently spending. Thus, the system is not a pure ledger.

For instance if I receive 5 bitcoins in transaction 1, 1 bitoin in transaction 2 and 10 bitcoins in transaction 3 and later spend 6 bitcoins the block-chain will specify whether my expenditure used the bitcoins I received in transaction 1 and 2 or those in transaction 3. Thus, it isn't a pure ledger system.

However, transactions can have multiple outputs (that's how one spends only part of a large payment you received...you send what you want to spend to the other party and send the change to yourself) and multiple inputs. Thus every time multiple small payments are merged into a large transaction and later split up again there is no fact about which of the resulting bitcoins came from which of the original payments.

Practically speaking this probably means that traditional bitcoin wallets probably quickly eliminate the ability to track bitcoins back after a small number of transactions.

Ironically, however, attempts to increase the privacy of bitcoin transactions try to avoid merging multiple payments as much as possible. This kind of behavior might make bitcoins traceable even after they pass through a great many hands.

In recent memory was a 194,933 BTC (~$147 million at the time) transfer through Bitstamp in late 2013.

Then there was this 550,000 BTC transfer in late 2011 – I remember when this happened, people in the IRC channels were divided over whether it was Russians or the CIA. . Prevailing price was about $2/BTC, so that was a little more than a million. In retrospect it was probably Mt. Gox creatively embezzling funds.

Only a few weeks ago the largest Bitcoin bet (1,000 BTC) resolved – Romanian Bitcoin baron, last minute savior of OpenBSD, self-styled “young Lenin,” and SEC troll Mircea Popescu lost his proposition that “proposition that Bitcoin would outperform Warren Buffett's Berkshire Hathaway class A stock.”

Not exactly the kinds of large private transactions that might convince a skeptic that Bitcoin will be a big deal…

As far as “making a legal case for reclamation” goes, in technical terms, the only legitimate (ie actual) claim to “bitcoins” is ownership of the private key that controls them. So for “legal cases for reclamation” to be successfully carried out, courts might find themselves rubber hosing more true believers for those strings of digits than they’d want to. Seems like a mess to me. The Tony Sopranos of the world would probably know how to muddy the claim history with things like CoinJoin and stealth addresses anyway.

I think it makes more sense to legally treat bitcoins like cash.

A claim on the bitcoins you posses would be a private tort and need not be settled by returning the actual bitcoins. The plantiff could presumably be awarded equal value from other assets you possess and in either case you could presumably be jailed for contempt if you failed to do as the court orders.

It's not a new claim, but if Bitcoin manages to reduce the transaction costs in the remittances market significantly, that alone would be a big deal.

Theoretically Bitcoin would be great for this use case but the demographic profile of those sending and receiving remittances does not match up with the core user base of Bitcoin.

Your typical Pakistani migrant worker in Dubai will not be sending Bitcoin to his mother in the rural outskirts of Peshawar any time soon.

We might get there and companies like M-Pesa are proving that mobile payments can work in the developing world. I'm just skeptical that Bitcoin is going to be the winner in this particular market.

Bitpesa is a company that provides a service of using bitcoin to fund M-Pesa accounts. M-Pesa doesn't solve the problem of international transfers, but it is connected to the bitcoin network via an intermediary. As these services multiply the network effect will make them increasingly more useful.

It won't. Check out the $ -> bitcoin -> RS (or NGN or MXN) losses sometime. It's far far worse than western union fees.

"To the contrary, anyone who acquires cash starts off with a clean slate as far as previous claims are concerned. It is assumed, basically, that previous claims on cash are untraceable throughout the system."

She is only talking about the UCC. cash definitely carries claims under myriad other rules- bankruptcy, fraud, unjust enrichment, family law, successor tax liability, and wonderful law enforcement seizures. Ask early Ponzi investors about claims on cash.

Is bitcoin superior in fighting off those claims?

But transactions from fraudulent conveyances generally are different from arms length transactions where one party receives something of value.

If the ledger entries in bitcoin are viewed as property, much like tickets to an event; then even if exchanged for something of value they could have the same legal status as a stolen bicycle exchanged for cash.

It may be difficult to trace illegally obtained bitcoins to a real address; however large honest transactors would likely not be using the TOR network, and if their IP address could be associated with transactions that could be traced back to a ransonware or other fraud, victims could use subpoenas to identify all addresses from that holder that could be traced to fraud.

"anyone who acquires cash starts off with a clean slate as far as previous claims are concerned" I am not sure this claim is accurate for sizable sums. Cash payments may be clawed back when deemed a fraudulent conveyance. And sizable sums of cash are moved through a ledger system as well with accounting and wire records.

If I understand your comment and the FT article correctly, the distinction I would draw is where the claim lives. The scenario considered by FT is that a particular bitcoin is effectively corrupted forever as it is individually traceable from public data.

In contrast, a fraudulent conveyance claim (if successful) would entitle you to claw something back from the debtor or the entity which received the distribution. If a bank benefits from a fraudulent conveyance, other creditors can't then attempt to recover from, for example, that bank's florist on the theory they can trace their funds through the bank. Does that seem right?

Yes exactly. The claim doesn't follow the currency. Whereas any holder of a stolen good is liable to lose it to the true owner in replevin, no matter how remote from the thief.

You've certainly got a good claim under the UCC. Good luck collecting on that judgement.

I find bitcoin to be a terrible idea as a currency, but I have trouble understanding how those claims can keep moving.

Bitcoins are not individual units" We have wallets, and we have an amount in a wallet. A transaction could be for 0.000001 bc, if we wanted it to: they are not units tracked individually.

So if I have, say, 5000 BC. and I steal 200 BC from someone (by stealing their private key, for instance), and then spend all my money in 54 transactions of 50 BC teach, who actually got the stolen 200 BC?

If we claimed that any wallet that had stolen bc now transmits stolen bc, then the problem is that sooner rather than later, everyone's wallets are marked as stolen, by everyone else. A steals from B, and pays C, who pays B. Now B has some of his stolen money back? It doesn't make any sense.

If I have $5000 in my checking account, and embezzle $500 from my employer, and then spend $5500 on drugs and hookers, wasting the rest, it's pretty much the same problem.

You're simply restating the problem the FT writer identified. In fact, she and/or Tyler suggest that the existing inventory of Bitcoins may already be "over-claimed" in the blog post you theoretically just read.

Bitcoins may be a libertarian's wet dream, but like so many grand ideas of libertarians, somebody else will have to clean the sheets when it's all finished.

The ownership trail of BC sounds like that of real estate, with a system of well-documented titles filed with government officials. When will a "title insurance" entity emerge to ensure the BC ledger is reliable enough for everyday use?

The BC ledger is very reliable. The problem (as I understand it) is not so much that transactions are illegitimately added to the register, it's that hackers will break into someone's machine and spend their bitcoins using a legitimate (from the ledger's perspective) mechanism.
So then the owners say they didn't really authorize that transaction, but it's impossible to distinguish from the ledger itself.

Theoretically it is possible to corrupt the bitcoin ledger with illegitimate transactions, but I don't believe that has ever happened.

Creative lawyering and an interesting idea, but probably not of much practical significance. Take this with a grain of salt since I haven't read Mr. Fogg's analysis, but:

1. First, there are a host of defenses, exceptions and exemptions that could be raised if anyone tries to assert lien rights. E.g., UCC 9-317, 9-336 and 9-408.
2. Second, this is dependent as noted on bitcoin being treated as "general intangibles," a specific category under UCC Article 9. Other possible categories with different rules include "accounts," "instruments," and "investment property." I don't think there have been any court decision on this classification.
3. Third, if bitcoin is considered "money" under the UCC, there can be no lien rights unless the lien creditor is actually in possession. UCC 9-312(b)(3). Under UCC 1-201(24), "money" is a medium of exchange recognized by any government foreign or domestic. Thus if any government on earth designates bitcoin as a medium of exchange, the theory blows up.
4. Lien rights are typically perfected by a public filing. Anyone about to receive a really large amount of bitcoin could check the public record (can be done online) and acquire at least a significant comfort level if the payor is not listed.

Monero user not affected.

... by much of anything, really. If Monero ever gains widespread adoption or the legacy legal system becomes a problem for bitcoin, they'll just fork to "borrow" ring signatures.

No they cannot, please get educated. And who need Bitcoin when its big dady Monero is here?

Source explaining the impossibility of this database migration? I just googled it and nothing obvious came up. Pretty sure everyone who already uses bitcoin would prefer a fork to switching currencies, because they don't want to lose massive amounts of money and create a moral hazard.

That is just not accurate, large part if not most of the Monero community are Bitcoiners and are still in Bitcoin, they just value their financial privacy and know a game changer when they see one.

It appears inaccurate to you because you're looking at the Monero community, not the much larger bitcoin community. All altcoins are by definition game changers, the question is why abandon the old ledger. Existing Monero users wouldn't lose money, and a moral hazard isn't a problem when you could gain so much money.

If it's possible to prove reserves in Monero, it's possible to fork bitcoin to use ring signatures, period.

It sounds like you don't want people to explore better cryptocurrencies and free themselves of the real enemies of freedom that are capable of spying and wreaking-havoc in a transparent blockchain like Bitcoin has. No one is saying to anyone to buy Monero here, btw the database you are claiming already "exists", it's called Altcoin exchanges, and you can transfer your BTC for XMR any time, in fact had you did that the first time someone mentioned Monero here, you would be up at least 30% on your BTC.

Quite the contrary! I appreciate your work testing out ring signatures, as these will benefit bitcoin users if/when the tyrants actually support these liens. If you've been researching every alternative cryptocurrency you see mentioned, investing in the useful ones, and selling now for 30% profit, you completely deserve to be paid for that.

I also agree with your use of quotes around "exists", since I'm not too keen to abandon the 21m ledger in favor of an eternal pursuit for the next better cryptocurrency. Better to let guys like you make the profits right now and adopt your code if it becomes necessary. Good luck!

I'm not selling as I'm for long term, also and I'm not a Monero developer, just a random enthusiast, I have Bitcoin and Monero and both coins have their place, this is not cheap talk, we need a transparent blockchain for government and an opaque for private individuals, it's not possible to fork Bitcoin to use ring signatures, it will never be 100% fungible, forcing Bitcoin to mainstream was a terrible idea, this article and coinbase is showing us that.

The fork would just check the old bitcoin ledger for a balance, and treat it exactly like proven reserves on Monero. The only reason this hasn't been done is because fungibility isn't a major problem yet.

There is no technical feature that can't be implemented on any chain. If Monero needed more transparency, they could add that too.

The U.S. Marshalls Service has auctioned off around 130,000 BTC (30K last summer, 50K last December, 50K earlier this month). These had been seized in relation to Silk Road black market investigations – so maybe a lot of "angry Tony Soprano" risk!

Still, the buyers wiring tens-of-millions to the US Treasury seem pretty confident they'll have safe title. The US Marshalls don't appear to have pooled the funds in any "custodial or broker/dealer agent account" – the legal workaround proposed by Fogg. They seem to have self-managed the balances "on the blockchain", retaining their own private keys, until transfer to the buyers.

Is there a history of people filing claims against property bought via auction from the government?

Under the UCC (and BTW, the phrase "UCC Code" is extremely grating) and the security agreements written under it, a security interest will usually be in "XYZ collateral and the proceeds thereof". There are lots of instances where a UCC lien is still effective against the collateral, but going after the proceeds is more attractive than trying to sue a bona fide purchaser for value of the collateral, particularly when the identity of the BFP may be difficult to discern.

However, a security interest becomes unperfected (i.e., lien expires) on proceeds in most cases after only 21 days. UCC 9-315

WOW just what I was searching for. Came here by searching for Get Flowers Online

This entire "thinking" George K Fogg is alleged to have been doing is rank nonsense. To proceed on any sort of "reclamation" one has to show title. There's no title to be shown in Bitcoin. It'd be mildly concerning that Perkins Cole maintains in employment people lacking a sophomore's understanding of legal matter, but then again this "Perkins Coie" you reference may have altogether different problems.

Re Andrea's rather inept comment : the bet in question moved ~5k BTC, and I would wish to hear the reasoning through which reasonable people's attempts to deal sanely with the trollish behaviour of the various USG agencies got turned on its head in your head.

Comments for this post are closed