What will be the impact of the US Government bitcoin sell-off?

Thursday 01 May 2014

The US Government has been auctioning Silk Road bitcoins. Are they dumping so much that it's pushing down the price?

Bitcoin Auction

Perhaps the time has come to consider a future where large nation states can impact markets with their policies for holding and selling large amounts of confiscated crypto coins. Should the US have an official policy regarding crypto currencies?

According to a recent Coindesk article, Assistant US Attorney Randall Samborn revealed that the government has now sold USD $3 Million worth of the seized bitcoins already, just from one associated case. Depending on when they were sold, that would have been 6,000 - 7,000 bitcoins.

Cornelis Jan Slomp, an alleged drug trafficker on the infamous Silk Road marketplace, was arrested at the Miami International Airport last summer and charged with drug trafficking conspiracy. Assets were seized and last week prosecutors were seeking the forfeiture of more than USD $3 million in bitcoins, according to Bloomberg BusinessWeek. His attorney, Paul Petruzzi, confirmed last week his client's intent to plead guilty, and apparently that triggered the sale of these assets.

"He was charged with distributing worldwide approximately 104 kilograms of powder 3,4-methylenedioxy-N-methylamphetamine, also known as MDMA; 566,000 ecstasy pills containing MDMA; four kilograms of cocaine; three kilograms of Benzodiazepine; and substantial quantities of amphetamine, lysergic acid diethylamide (LSD), and marijuana, in addition to allowing substantial quantities of methamphetamine, ketamine, and Xanax to be distributed through his SuperTrips vendor account from March 2012 through August 2013."

- US Department of Justice-

Looking at the BTC price chart for the past week or so, one could guess that the government sold the bitcoins seized from Mr. Slomp last Thursday afternoon, April 24th. The price of bitcoin had just breached the USD $500 mark, and their sale may have been responsible for the one-day correction of more than ten percent. Perhaps that is why the Assistant US Attorney was not disclosing exactly when these thousands of bitcoins were sold.

Bitcoin Price Chart: dc-charts.com

Bitcoin Price Chart: dc-charts

 In fact the US Government has announced that it will liquidate the nearly 30,000 confiscated bitcoins from Silk Road vendors and the marketplace itself. When and how quickly they will be sold remains to be seen. There is considerable concern in the bitcoin community, since this amounts to roughly 1.5% of the entire market.

These concerns have led to considerable discussion on the bitcoin subreddit about possibly taking action to mitigate this planned dumping of tens of thousands of bitcoins into an already volatile market. Some are outraged and have called for effectively blacklisting the seized bitcoins. The wiser and more strategic thinkers have prevailed.

You can easily see the perilous chain of reasoning followed to its stifling, yet logical end. Plenty of folks pointed out that by this rationale large quantities of bitcoins stolen from exchanges should also merit blacklisting. This would reduce the incentives for theft, since all bitcoins are traceable through the blockchain.

But what about alleged theft by the owners, as in the case of Mt Gox? What about theft from various exchanges by unknown hackers, some of whom might be posing as victims to cover up employee malfeasance? Legitimate, obvious cases of theft as validated by convictions in national judicial proceedings are the most tempting group to target. One of the most compelling ideas is that of re-issuing replacement bitcoins in order to make restitution to victims of fraud and theft.

But who among us will decide which bitcoins are blacklisted? Wouldn't we be centralizing control over the currency in the same way that leads to corruption and political strife in the world of fiat currencies? The vast majority of those who voiced opinions in opposition to this blacklisting scheme prevailed. Bitcoin will remain for now a fairly decentralized currency, unencumbered by a central authority, and free from any capital controls people might want to impose upon it.

As citizens of our respective countries we must also wonder about how national policies should be crafted to be sensitive to the fragility of markets. If nation states confiscate large quantities of bitcoins, should they exercise restraint before dumping them onto the market? Should they feel obliged to divest their crypto-currency holdings in ways which have a less forceful impact on the markets?

The US government could set an example by implementing the following type of policy: each week the treasury department sells no more than 10% or the equivalent of USD $1M, whichever is higher, of any digital assets being held that have been earmarked for liquidation. This type of policy would allow a government to realize the proceeds from fortfeitures, and create the disincentives for illegal activity while minimizing the effect on crypto-currency markets.

Mike Ward

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