Silk Road Shows The Flaws Of The Laws (Update)

For those criminal defense lawyers whose attitude toward pre-trial motions is to make sure they change all the names before submitting their pro forma papers, take the time out of your empty life to read the memorandum in support filed by Josh Dratel on behalf of his client, Ross Ulbricht.

Ulbricht was the man behind Silk Road, alleged to be

an “underground website” allegedly “designed to enable users across the world to buy and sell illegal drugs and other illicit goods and services anonymously and outside the reach of law enforcement.”

It’s terribly evil, because all the reports about it when the crypto-challenged learned of its existence from the media following Ulbricht’s arrest said so.  A kinder description would be the eBay for those with mad computer skilz outside the control of government.

What was sold on it was whatever anybody wanted to sell.  Not having been an aficionado of Silk Road, I have no clue what was sold there, but if someone wanted to sell narcotics in a marketplace, this would be an excellent place to do so.

Payment was made with the Tinkerbell of currency, Bitcoin, which has the virtue of being non-existent except to those whose faith in crypto-currency was greater than the desire to hear the sound of coins jingling in the pockets of their Levis.

What the motions reveal, perhaps more so than any case that’s come before it, is the inadequacy of existing law to understand, define or stay apace with technology.  Like the Weev case, it raises issues of “unauthorized access” under the Computer Fraud and Abuse Act, the 1984 congressional brainstorm that was brought about in response to the cool movie, War Games. Unlike the Weev case, there has been no rush of support for Ulbricht, either from the crypto crowd or academia, despite deep-seated personality flaws that made Weev an unpleasant dinner guest for polite company.

Josh’s papers raise the hoary problems that stem from the confluence of absurdly inadequate law applied to conduct unimaginable at the time it was enacted.

The House Judiciary Committee, in recommending enactment of 18 U.S.C. §1030, explained that the newfound ability of “hackers” to use personal computers to circumvent “identification code/password system[s]” had enabled a “recent flurry of electronic trespassing incidents.” 1984 U.S.C.C.A.N. at 3696 (describing the hacker threat by reference to the film WAR GAMES (1983), “show[ing] a realistic representation of the … access capabilities of the personal computer”). Targeting this conduct, the Committee added, “the conduct prohibited is analogous to that of ‘breaking and entering’ rather than using a computer (similar to the use of a gun) in committing the offense.” 1984 U.S.C.C.A.N. at 3706.

Read that paragraph in a Dr. Evil voice, “ha-ack-ers,” and it’s great for a chuckle.  Unfortunately, it’s not merely unfunny, but the law as it exists today, based on notions that were laughably unsophisticated when it was enacted.  And in case you missed it, that was in 1984, a mere 30 years ago. Not much has changed since then, right?

Then there’s trying to shoehorn Ulbricht into some transferred intent that would hold him culpable for the conduct of those who set up shop in his marketplace, whether they were selling drugs or anything else that offends the government.  A fascinating argument stems from the policy behind 47 U.S.C. §230:

In order to qualify for §230’s immunity, one need merely demonstrate that he provides or uses an interactive computer service, and that the information contained thereon was provided by a third-party for use on the Internet or other interactive computer service.

While §230’s immunity is civil, and doesn’t preclude application of any criminal law to conduct, the indictment of Ulbricht relies on the same theory of transferred intent that §230 exists to prevent.  And so it’s clear, the government’s theory of culpability is as inexplicably distant from criminal law as §230, except the former represents nothing more than a prosecutor’s effort to leap the gap while the latter reflects Congress’ deliberate decision to protect the host for the poor table manners of his guests.

As Josh properly notes, an old concept of statutory construction, the Rule of Lenity, has proven to transcend the ages by rearing its beloved head on behalf of the defendant.  For those of you who blinked in crim law class, the Rule provides that ambiguity in a law is construed in favor of the defendant.  When it comes to ambiguity, there is nothing less clear than how laws constructed for the physical world apply to the virtual world.  Unless you’re just a huge fan of analogies and like to squint a lot.

And then there is the Bitcoin problem, which may or may not be a problem for very long given its existence depends entirely upon the willingness of hipsters to believe in a Supreme Being made of shiny metal.

As noted by the Congressional Research Service (hereinafter “CRS”) in its cogent history and explanation of Bitcoin, Bitcoin is a decentralized, pseudonymous, digital crypto-currency – it is not backed by any nation or central bank, it can be used without the user revealing to the other party his or her identity, it exists in the virtual and not corporeal world, and is based on a cryptographic formula that is designed to facilitate a public record of all Bitcoin transactions and thereby thwart duplication and fraud.

This raises a troubling question: Can one launder something that doesn’t exist? If it doesn’t exist, how can it get dirty?  Or more seriously, if it doesn’t exist, how do you prove it in court?  As Josh argues, there can be no proper count against Ulbricht for laundering something that isn’t currency, a “monetary instrument” as the law defines it.  The IRS says it’s just nonsense, and it lacks any of the indicia of what the government recognizes to be currency. But then, that was before they had a defendant to prosecute.

[T]he IRS confirmed that virtual currency “does not have legal tender status in any jurisdiction.” Also, in a “Frequently Asked Questions” section of the Notice, the IRS announced its policy position that (1) “virtual currency is treated as property.” and (2) “virtual currency is not treated as currency . . .”  The IRS would not, however, adopt a position as to what type of property Bitcoin constituted, stating only that “[t]he character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.”

As a means of exchange, the Bitcoin may well exist to the extent that someone is willing to give something to another person and accept Bitcoin in return, just as Atticus Finch took a chicken for his efforts, but that doesn’t make it currency.

Should it be?  Beats me.  That’s for Congress to decide, but it better be damn sure it wants to open that Pandora’s box before letting prosecutors rush ahead in their righteous zeal to get the evil Ulbricht and consider all the ramifications of the United States of America embracing Bitcoins as the coin of the digital realm.

If they do, perhaps Ulbricht goes down, but then they’ve just ended the hegemony of the almighty dollar in favor of an international currency beyond the government’s control, and fundamentally altered the relative economy forever.  Is Ulbricht worth that?  Are they ready to blindly dive into crypto-currency? I mean, there isn’t even a movie about it yet, so how can Congress be sure?

Most importantly, the motions on behalf of Ulbricht are a stark reminder of two critical things for all criminal defense lawyers. The first is the inadequacy of the laws created for corporeal crime as applied to allegations of wrongdoing in a digital world, and the second is the importance of thinking long and hard, crafting imaginative and challenging motions, to stop the simplistic use of dubiously applicable laws to conduct to which they just don’t really apply.

It will be very interesting to see how Judge Katherine B. Forrest deals with these motions.  Will the government play the dumb card, as they did in Weev, claiming “he had to do all of these things I don’t even understand”?  Will Judge Forrest reject the idea that ignorance is a good enough basis to uphold an indictment?

And for those who think sitting on the sidelines in Ulbricht is a popcorn opportunity, this is still the birth of the future of law as applied to our digital future.  Watch it as a spectator at your peril.

Update:  As it turns out, Lee Pacchia did a Mimesis video with NYLS prawf Houman Shadab a day ago explaining the impact of the IRS position on Bitcoins.

13 comments on “Silk Road Shows The Flaws Of The Laws (Update)

  1. Nathaniel

    You have a minor typo in your last paragraph: “as they did in Weev, claiming ‘t even understand’?”

  2. Patrick Maupin

    Although Weev is not a sympathetic figure, AFAIK he never tried to contract with a hitman. If they really have Ulbricht on this charge, why do they need to contort all those other laws?

    FWIW, the IRS finally did get around to defining bitcoins as property, in IR-2014-36 released on March. 25, 2014. (There will probably be lawsuits about the requirement for miners to declare income once it’s mined, which is completely unlike how real miners are treated, but overall, it’s not a bad start.)

    The FBI is probably happy to see this ruling. As we all know, whether Ulbricht is guilty or not, those bitcoins he had are all, individually and collectively, as guilty as sin, and if the IRS says those are property, they can be forfeited just like any other property. At today’s somewhat depressed prices, those 29,655 bitcoins are worth around $13.5 million, although if the FBI is stupid enough to sell them all at once, they could p;robably manage to get a lot less for them, thinly traded markets being what they are.

    1. SHG Post author

      The hitman is a different issue/charge, and the new IRS definition is in the memo, which is where the quote in the post comes from. Come on, do some legwork before commenting.

  3. Patrick Maupin

    > The hitman is a different issue/charge

    Sure. But do they _really_ need to put him away for 30 gazillion years, or would a couple of lifetimes suffice?

    > and the new IRS definition is in the memo, which is where the quote in the post comes from.

    Thought I recognized it, but then I got confused by “it lacks any of the indicia of what the government recognizes to be currency. But then, that was before they had a defendant to prosecute.” since the IRS memo came out well after they had a defendant to prosecute…

    > Come on, do some legwork before commenting.

    That’s my problem. I just sit on my fat ass and don’t move my legs enough.

    1. SHG Post author

      It’s either gazillions or life plus cancer. What about the children? They must send a message. Did I cover this adequately?

      As for IRS, it recognizes it to be property, but not currency, a crucial distinction for the purpose of identifying whether it can be the subject of a money laundering charge.

      As for your fat ass, never underestimate the benefits of legwork. It may not have helped mine, but I’m just big boned.

  4. John Barleycorn

    ~~~…. this is still the birth of the future of law as applied to our digital future. Watch it as a spectator at your peril.~~~~

    Keep going there esteemed host. Keep going there.

    I have my money on the government rolling with the “if all you have is a hammer” approach and if their credibility is flanked by their own hypocrisy or “unforeseen” exposure as a result, more yielding around the margins and codifying new interpretations and stratified definitions into law that they can happily and without consequences selectively enforce when it suits their sensibilities or the “national interest” as big technology gladly keep playing along for now.

    If anything worthwhile can come out of the purist of Ulbricht I hope it comes one day through the hands of a very angry populace that will only be compromising on the how not the if of decentralizing everything from commerce to democracy.

    It might sound a bit farfetched but I don’t think DC will even flinch to start regulating technology and its use/s like the manufacturing of the automobiles and travel in general when they have enough cover and tools at their disposal to make it possible.

    Different classifications of licenses for use, capability limits, required “safety” features, tax stamps for usage, etc.etc…Driving is a privilege after all. Your right to travel may not be in question yet but I hope you enjoy the walk.

    You should really have a license for SJ anyway…

    P.S. Stop picking on Tinker Bell and learn how to spell her name right.

  5. Nicholas Weaver

    IANAL, but I am someone who’s well versed in how Silk Road operated.

    The problem with the “I’m just a listing service” defense is that the Silk Road site was not just a listing service, it was also a payment processor, escrow service, and dispute resolution service. It isn’t like craiglist, or even eBay, but a combination of eBay, pay pal, and escrow: SR was an active participant in all transactions.

    Thus saying “its like CDA 230 etc” analogies don’t hold: SR was holding the money, moving payments, obscuring payments, setting disputes, and otherwise acting to hold, organize, and regulate the marketplace.

    Similarly, the FinCEN guidance doesn’t really help the case: Its clear that FinCEN believes that those who do a substantial amount of Bitcoin operations (in their case its $BTC, but the same guidance would no doubt apply to “mixing services” which only exist to obscure the origin and recipient of transactions), and the Shavers case as well both really hurt the “Bitcoin isn’t money so its not money laundering” argument: Bitcoin is payment.

    OTOH, the “hacking” conspiracy charge does irk me with its bogosity…

    This is a good and valiant attempt, but IMO in the best case will only result in an amended complaint which, in much greater detail, spells out how Silk Road is not a listing service but an active participant in the transactions.

    Where the real fireworks are going to be is on the motion to suppress the Silk Road server: the FBI still hasn’t revealed how this was discovered, its not the kind of thing they can parallel-construct away, and all their evidence which ties Ulbricht to being the active Dread Pirate Roberts is derived from the discovery of the Silk Road server(s).

    1. SHG Post author

      Silk Road site was not just a listing service, it was also a payment processor, escrow service, and dispute resolution service. It isn’t like craiglist, or even eBay, but a combination of eBay, pay pal, and escrow: SR was an active participant in all transactions.

      Not knowing exactly what Silk Road did, I defer to your description. That said, the performance of ministerial tasks doesn’t necessarily make SR an “active participant” any more than moderating comments or deleting offensive words makes voids 230 protection for a website owner. If the rationale applies, and where the line should be drawn, is an open question. But don’t be in too much of a rush to call SR an active participant, as the ramifications could be devastating for the net.

      As to the finCEN question, there are numerous legal definitions at stake here, and while there is a fuzzy interconnection between them, each definition matters. For example, pork bellies are a commodity, traded on an exchange and regulated. But they are not currency, and if you tried to pay for some beef jerky at the corner store with a pork belly, they would likely think you odd. It’s important not to fudge the various definitions in general, and critical when it comes to criminal prosecution where notice is a constitutional requisite.

      As for the “real fireworks,” yes, there are some big issues still to be resolved, but there is neither benefit nor reason to create such a prioritize list of the relative importance of the many issues involved in this case. They are all “real fireworks.”

      1. Nicholas Weaver

        “Fireworks” is a bad term, sorry. But it is the motion that will matter the most for the case, and have the most chance of success for the defense in actually impacting the case.

        EVERYTHING in the FBI evidence vault that says “Ulbricht IS DPR” (rather than Ubricht might have founded Silk Road) derives directly from the knowledge obtained by capturing the SR server, and there is no other way to have obtained that evidence outside the capturing of the Silk Road server.

        Unlike everything else in the NY complaint (which as someone familiar in the area, actually reads as a very justified document, there is actually very little ‘trust me’ from an expert in the field’s viewpoint), it is treated as a fait accompli miracle… The FBI may (MAY) have gotten this information legitimately, but it is quite possible that it involved deploying and then monitoring a large number of Tor relays or other similar, highly intrusive monitoring, which would have involved a massive amount of (admittedly encrypted and even metadata-protected) network traffic.

        Yet if it was a snitch, you’d have expected to see something of “thanks to a CI” in identifying the server, or some similar such language.

        And SR itself was an active participant: The SR operation handled disputes between buyers and sellers, specifically escrowed ALL transactions by default (which was the biggest innovation: you only needed to trust SR, not the seller or buyer), and other behavior that makes SR not a passive conduit for information but an active party in the transactions. Thus there is actually very little bad precedent for the net in calling a spade a spade in the Silk Road case: the silk road site was an active and knowledgeable party to the drug transactions.

        Finally, the civil forfeiture case is also interesting.

        Ulbricht in that case has admitted he has an interest in the Dread Pirate Roberts Bitcoins siezed from his computer. Since Bitcoin is actually traceable, and there are numerous test purchases made by law enforcement, it will be quite reasonable for an expert to prove that those Bitcoins siezed from Ulbricht’s computer were directly derived from Silk Road’s profits. Why his lawyer allowed this to happen I don’t know (or it might have been done without the consent of his lawyer).

        1. SHG Post author

          Your first comment was clear. Longer and more emphatic normative explanation isn’t necessarily more persuasive.

          As for the other issues in the case, this is a post about the defense motions, not every conceivable aspect of the case. We try to stick with the topic of the post in the comments here.

  6. Gritsforbreakfast

    “Can one launder something that doesn’t exist? If it doesn’t exist, how can it get dirty? Or more seriously, if it doesn’t exist, how do you prove it in court?”

    The IRS said Bitcoins are a commodity. Money laundering happens via commodities all the time. If it weren’t for your anti-link policy I’d point out numerous examples, from perfume to crates of tomatoes. Laundering via Bitcoin is no different.

    1. SHG Post author

      No. We have these things called “laws,” and they use these things called “words,” and these words have these things called “definitions.” Even though these are all things with which you are completely unfamiliar, they are nonetheless important to lawyers, judges and criminal prosecutions.

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