When the U.S. Justice Department went after Ross “Dread Pirate Roberts” Ulbrich in 2015 for his … [+]
The FBI, Homeland Security and the Internal Revenue Service are investigating hundreds of bitcoin transactions that funded Syria-based terrorist organizations posing as charity groups associated with al-Qaeda. A civil action was filed August 14. And in an intriguing move by the United States, the named defendants are not people or companies. The defendants are 155 bitcoin accounts.
Though the case is dubbed United States of America v. 155 Virtual Currency Assets, Uncle Sam has no plans to take piles of cryptocurrency to court. Rather, he aims to seize these assets in rem. As more and more cryptocurrency suits are filed, these types of cases will likely become all too familiar. Despite the seemingly high-stakes backstory of this case, in rem is a fairly common way to deal with asset forfeiture cases, and it could prove important to know as other alleged frauds involving cryptocurrency increasingly face their day in court.
In rem, in Latin, means “against a thing”—and it conveys just that in legal terms: jurisdiction over a piece of property, according to Cornell’s Legal Information Institute. That’s in contrast to personal jurisdiction, or the power of the court to enforce a judgement against a person it has jurisdiction over, according to Maureen Howard, a law professor at the University of Washington. Property jurisdiction (“in personam”) relies on the location of the object at stake, established by only “minimum contact,” with the place, she says. It’s legally allowed in this case because although the accounts aren’t necessarily owned by Americans, they’re connected to federal crimes of terrorism against the United States.
There are two key reasons a prosecutor might file an in rem civil action against cryptocurrency accounts, according to George Rutherglen, a law professor at the University of Virginia. Both have strong implications for bitcoin and other cryptocurrencies. “In the usual in rem case, a prosecutor seizes goods used in, or profits from, a criminal enterprise, and then, if successful, has them transferred to the government,” Rutherglen says. First, a civil action requires a lighter burden of proof—only a preponderance of the evidence of the misdeeds in question, he says. That’s a much easier standard to prove than is required in criminal cases.
Since cryptocurrencies don’t necessarily require proof of identity to purchase, this lower threshold could prove important. Secondly, the government is likely to file a civil action because doing so allows it to seize the thing in question, depriving its current possessors of any power to dispose of or profit from it, according to Rutherglen. This could prove challenging, since bitcoin is often billed as a method of preserving wealth under regimes with histories of seizing private property. But many governments, including that of the United States, have other leverage tools.
“Seizure of an intangible asset, like a checking account, is accomplished by sending a court order to someone in control of the account, whether it is the individual who owns the account or the institution that controls disbursement from the account,” Rutherglen says.
He adds: “If they don’t comply, they risk liability based on their other operations.”
Prosecutors have applied in rem jurisdiction to civil suits involving moon rock, a red Lamborghini, dinosaur bones and shark meat. It’s also sometimes used in divorce cases, Howard says, because the law treats a marriage—like bitcoin—as an object. So when a spouse moves across the country and leaves you behind, the divorce case can be tried in the new state—think the plot of Marriage Story, where Scarlett Johansson’s character moves from New York City to Los Angeles after separating with her husband, and then has her divorce case tried in California.
The wreckage of the Titanic has even been subject to in rem jurisdiction: In 1993, the parent company of salvage wreckage firm Titanic Ventures filed an in rem civil action to become sole owner of the ship and artifacts contained. The court then issued a warrant to arrest the shipwreck, and bestowed ownership to the parent company on the condition that the artifacts would be displayed in a museum rather than sold.
Yet, civil asset forfeiture cases have long sparked controversy because they allow authorities to preemptively seize assets from a defendant before a judgment is entered, according to Andrew Hinkes, a lawyer at the firm Carlton Fields who specializes in digital currency. The American Civil Liberties Union has even published an objective to reform police abuse of civil forfeiture. “Civil forfeiture allows police to seize — and then keep or sell — any property they allege is involved in a crime,” The ACLU’s website states. “Owners need not ever be arrested or convicted of a crime for their cash, cars, or even real estate to be taken away permanently by the government.”
And that’s for objects that physically exist.
Cryptocurrencies like bitcoin present a special case because they’re intangible, unlike material assets such as stacks of cash or shark meat. Though people talk about holding, selling, trading bitcoins—that doesn’t happen, at least not physically. Wyoming is the only state that specifically defines the property rights of cryptocurrency; some states such as California maintain broad statutory definitions of property that could include digital assets.
In rem seizure of cryptocurrency has become fairly routine, but not without its critics. Some cryptocurrency in rem cases, like a July action against two accounts used in a bitcoin ponzi scheme called Banana Fund, aim to return the roughly $6.5 million seized bitcoin to the scheme’s victims. But in others, the bitcoins can be auctioned off by court marshals. When the U.S. Justice Department went after Ross “Dread Pirate Roberts” Ulbrich in 2015 for his role running the massive Silk Road black market, “any and all assets” of the exchange were listed as co-defendants, in rem. The current value of all bitcoin auctioned off by US marshals now exceeds $2 billion, according to a tracker maintained by off-the-grid bitcoin engineer Jameson Lopp.
“The extent of controversy is in some respects in the eye of the beholder,” Hinkes says. “Cryptocurrency continues to be a topic of interest to many because of its novelty and complexity.”
Don’t be surprised if you see the United States appearing to prosecute cryptocurrency accounts (or infamous shipwrecks, for that matter). While the bitcoins in question did nothing wrong, the people who held them might have.