Cops, red tape and a $25m bitcoin windfall

Stolen bitcoins are set to deliver a $25m windfall to Victoria’s coffers. How did it happen?

People generally curse slow government red tape, but in this case it will deliver millions of dollars for taxpayers.

That and sheer luck will see Victoria’s coffers rake in an estimated $25m by selling bitcoins worth just $500,000 when they were confiscated as the proceeds of crime. That’s due to the length of the sale’s approval process, and the wildly fluctuating price of bitcoins.

Victoria’s Department of Justice and Regulation is selling 24,518 bitcoins which are being auctioned over two days. Ernst & Young is conducting a 48-hour sealed bid auction for the bitcoins which began at 12.01 this morning.

In a statement on May 30, the accounting and auditing multinational said it would be the first bitcoin sale process of its kind in Australia, and the second instance globally following the US Marshals Service conducting a series of sales in the US during 2015.

That first US sale involved the trade of about 144,000 bitcoins sold in several lots in 2014 and 2015. US authorities seized the bitcoins from Ross William Ulbricht, who a year ago was sentenced to spend the remainder of his life in jail for his part in running a massive online drug marketplace worth hundreds of millions of dollars.

An explosive appeal by Ulbricht is underway, where his counsel is arguing that it was unaware of the actions of two federal agents who allegedly stole money from the Silk Road business. Prosecutors are arguing that the claims of theft, extortion and blackmail have no bearing on Ulbricht’s culpability in the case.

In Australia meanwhile, authorities have said little about the local sale of the 24,518 bitcoins from another case involving a now convicted Melbourne drug dealer. Evidence at the time, including computer printouts, suggested he traded through the Silk Road site.

But Victoria’s coffers are on the brink of a windfall as the price of bitcoins has soared in recent weeks.

In December 2012 when the bitcoins were seized, they trading at about $US13.70 making them collectively worth up to about $US336,000 ($451,000). By the time of the man’s sentencing in 2014, the price had climbed to between $US320-430 each, making them worth up to $US10.5m ($14m).

But a current spike in the value of bitcoins has them valued at $1024 each, making the bitcoins together collectively worth about $25.1 million.

So does it represent market savviness to hold onto the coins until now?

Inquiries suggest this is more luck than anything else. If the wheels of justice turn slowly, the wheels of retrieving confiscated funds turn even slower.

First, police have to wait for a conviction to submit an application for the bitcoins to be seized and argue the case the stash was obtained as a result of criminal activity. Once seized the Department of Justice and Regulation in Victoria organises its disposal.

As the Department Of Justice doesn’t sell the bitcoins directly, it is understood it goes through a regular tender process to find someone who can. That involves advertising, receiving and assessing applications from potential brokers. It can take an age.

A spokesperson for the Department of Justice and Regulation said Victoria Police seized the bitcoins in December 2012 but the process of selling them could not start until the accused person was convicted as charged.

Adding upcoming uncertainty to the market is the effect of halving the reward for mining bitcoins, a four-year event designed to control supply due around July 10.

Fortunately the end of this bureaucratic marathon has coincided with a spike in bitcoin values.

For its part, Ernst & Young says the sale will be conducted by a sealed bid. Each of the bidders who successfully registered by June 7 secretly nominate the price they are prepared to pay on each of 11 lots of 2,000 bitcoins and one lot of approximately 2,518 bitcoin. They can bid on one lot or multiple lots.

The auction is conducted secretly so that it does not affect the trading price of bitcoins in the interim.

Once the sale is finalised, the money goes into consolidated revenue for whatever the Victoria Government wants to use it for. In some cases a victim of crime can apply to get some of that money if they can show they were disadvantaged by actions associated with the crime the perpetrator was nabbed for.

It sometime is possible for the criminal to get some of the loot but, according to our inquiries, in this case that would be impossible.

Last month Ernst & Young partner Adam Nikitins said he expected interested parties would predominantly be from North America and Europe, and that given the increasing popularity of bitcoins, this would be a truly global sale.

“With each lot of bitcoin currently valued at more than $A1m, we are targeting sophisticated investors who can see the value of investing in a growing digital asset,” he said in a statement.

Mr Nikitins said he believed interest would come from digital asset investment managers, digital currency exchanges, and investment banks and hedge funds who were experienced in dealing with bitcoins.

“Interest in this technology continues to grow. The number of bitcoin transactions since 2012 has quadrupled and parties are seeing more opportunities and uses for the technology,” he said.