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How the Feds Can Take Even Legally Earned Bitcoins

If you are paid in cash for mowing the lawn of a notorious drug dealer, the money is yours to keep even if the dealer obtained it illegally. But if the dealer pays you in Bitcoins, the government may seize them from you someday when you least expect it.

This is Bitcoin’s nemo dat quod non habet problem, that being Latin for an old principle of English common law: “No one gives what he does not have.” If the drug lord didn’t legitimately own the Bitcoins in question because he got them via crime, then he can’t legitimately give them to you. You must give them up even if you’re not at fault. The same principle is at play when certain unwitting art buyers are forced to surrender works that were seized by the Nazis in World War II.

Alex Daley, a Microsoft (MSFT) veteran and chief technology strategist at Casey Research, covered nemo dat in a wide-ranging recent essay, which attacked a boosterish piece by Bitcoin investor Marc Andreessen that appeared in the New York Times last month. “What’s to stop the government from attempting to seize all those ill-gotten coins, even multiple stages down the line?” Daley wrote. This is a good thing if your main concern is cracking down on crime, but not so good if you want Bitcoin to be a reliable means of payment.

Daley doesn’t really believe the feds will go after innocent gardeners. But he does think the FBI will seize Bitcoins directly involved in crime, which could quickly add up to a big share of the digital currency. “The FBI already owns 5 to 10 percent of them, which are now out of circulation,” Daley said in an interview. (He spoke today on Bloomberg Surveillance with Tom Keene and me—here’s an unofficial transcript—and I called him up afterward for more information.)

Bitcoins, like bearer bonds, belong to whoever has possession. But the government can still trace them—and will if theft and fraud become big enough problems, according to Daley. Even Bitcoins that have been run through a tumbler to erase their identity have been successfully traced in a computer science experiment, he says.

There is a legal niche for a technology like Bitcoin, but Daley says he’s not sure that Bitcoin itself will end up filling it. “Bitcoin has gotten too popular, too fast,” he says. “It has exposed its warts, scaring a lot of people.” Zerocoin, a competitor to Bitcoin, is more anonymous so likely to be more popular with criminals. But Daley sees limits there, too: “Zerocoin isn’t going to be the thing to knock it out. It will be driven out by something legitimate.”

For another look at nemo dat, read this blog post from the Law Office of R.J. Cronk. And don’t forget Ashlee Vance and Brad Stone’s cover story in Bloomberg Businessweek on the Bitcoin-mining arms race.

Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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