Last summer, news that federal agents had seized a combined $5M from accounts owned by Mt. Gox roiled bitcoin markets. The warrants enabling the action cited improper filings when the company opened its bank accounts, including unlicensed operation of a money service business. Yet, written testimonies from federal regulators for the recent Senate hearings on digital currencies indicate the seizures were actually part of the much larger crackdown on online narcotics marketplace Silk Road – insight that presumably had to remain hidden at the time of the seizures due to the ongoing investigation.
Experienced market participants will recall that before and during bitcoin’s meteoric rise in popularity through April 2013, Mt. Gox dominated the exchange landscape with upwards of 70% of global trade volume. News broke the following month that the Department of Homeland Security had executed a seizure warrant for Mt. Gox’s US bank accounts based on the company’s failure to register as a money service business or appropriately indicate activity as an MSB on their bank applications.
Prevailing sentiment at the time leaned towards the notion that the government was actively cracking down on bitcoin companies, starting with the largest. Recent testimonies by federal agencies indicate that the account seizures were in fact related to the multi-year pursuit of Silk Road operators, rather than a crackdown on money transmission infractions for their own sake. In particular, the written statements not aired on television provide additional insight into the motives behind the seizures.
Notably, the statement by U.S. Immigration and Customs Enforcement (ICE) states,
“In May 2013, through an interagency taskforce led by ICE in Baltimore, Maryland, three U.S. bank accounts associated with what was then the world’s largest bitcoin exchanger, Japan-based Mt.Gox, which was moving approximately $60 million per month into a number of Internet-based hidden black markets operating on the Tor network, including Silk Road, were seized for violations of 18 U.S.C. § 1960, operating a money service business in the United States without a license. The bulk of the funds were associated with the illicit purchase of drugs, firearms, and child pornography.”
The testimony clearly draws a direct connection between Mt. Gox and Silk Road to the tune of tens of millions of dollars per month, yet still cites a violation of 18 U.S.C. § 1960 (money transmitting regulations) as the impetus for the actual account seizures. When a seemingly innocuous section from the testimony by the Department of Homeland Security is added to this, the underlying motive for the seizures become clearer. In particular, the DHS states,
“The USSS is responsible for the forensics and cyber analysis in this ongoing criminal investigation [of Silk Road] and, along with our interagency partners, will attempt to identify the site’s origin and the identity of the site administrator. As a result of this ongoing investigation, approximately $5.5 million has been seized by the USSS and ICE-HSI.”
The $5.5M seized ‘as a result of the ongoing investigation’ into Silk Road isn’t explicitly tied to Mt. Gox by the DHS statement, but when considered in conjunction with other data points it becomes clear that the two are almost certainly directly related.
In addition to being roughly the same amount as the Gox seizures, the statement is in a section describing work done by the Baltimore Field Office (same jurisdiction that issued the seizure warrant), was done in conjunction with the US Secret Service (the agency that pursued the Gox seizures, as listed in the warrant) and also lists the involvement of ICE (the agency that describes themselves as the leaders of the interagency task force behind the seizures in the first testimony cited above).
Looking backwards, it’s clear why the Silk Road connection couldn’t be noted in any court filings that would become public. If federal agents made known at the time that they were actively pursuing Silk Road it could interfere with their ongoing investigation. This also means that, at least in this case, it appears money transmission laws were enforced on Mt. Gox not simply for their own sake, but to gain insight and hinder the capital flow to Silk Road without exposing the larger goal of shutting down the international narcotics marketplace.