In the wake of the Silk Road bust, the US government has transferred a cache of Bitcoins to a government-controlled Bitcoin address. How long until they are stolen by a savvy employee?

Managing Bitcoins isn’t the most difficult task in the world, but it does take some technical capabilities. Unique to Bitcoins is the need to balance the risk that they will be stolen vs. the risk that they will be lost.

Be too jealous of your private keys, perhaps making only one copy on a piece of paper, and you’ve reduced the likelihood of being robbed, yet put yourself in a dubious position to accidentally lose access to your valuable stash.

Be too paranoid about losing your keys, making copies in multiple places on multiple media, sending them to your uncle and little sister, and you’ll rest easy that you’ll always have access to your coins. Unfortunately, somebody else could as well.

When I described this phenomenon to a friend, he seemed to understand this principle very well. Bitcoins are like cash. If you lose a paper wallet of which there was only one copy, then it’s gone forever.

But there is an additional subtle implication to the private key access mechanism that was lost on him. Unlike cash, I can’t just hand over a paper wallet to somebody to transfer the value; at least the recipient shouldn’t accept it without promptly transferring the coins to a new wallet of his choosing. This is because simply showing a paper wallet to somebody endangers the coins it shelters. If you’ve ever funded a paper wallet that has been in a room with a surveillance camera, you may want to relocate those coins.

This problem is universal to all Bitcoin holders, whether they are private individuals or government employees. So now that we have been informed that (allegedly) the US government is in possession of former Silk Road-controlled Bitcoin, many of us are curious about how they plan to protect them.

One of the challenges that is unique to an organization as opposed to an individual, however, is that of trust. Not only must you store your coins with the proper balance of retrievability and security, but you must also trust the employee to whom you have given this responsibility to neither lose nor compromise the private keys in addition to not stealing them.

If those who are in control of the coins are smart, they will employ an m-of-n private key split, choosing a select group of highly trusted technical people. But if they are careless, they might end up in the embarrassing position of having to admit at some point that the coins are gone. This is a particularly intractable problem since the people most qualified to steward a small Bitcoin fortune – those who understand it on a deep level – would also be those most likely to be tempted by its value.

What do you think? Is the Silk Road Bitcoin haul safe in the hands of the US government, or will it slip away into the ether?

 

Edit: The original source for Bitcoins being seized was this BBC article: “The FBI seized the virtual currency by getting hold of encryption keys for the bitcoins, according to Jerry Brito, George Mason University’s technology policy director.

The keys were made available through seized computer equipment, Mr Brito said in a blog post.”

However, the post cited by the BBC, does not in fact claim that the keys were compromised, only that the feds had the authority to seize them.

Advertisements

2 comments on “In the wake of the Silk Road bust, the US government has transferred a cache of Bitcoins to a government-controlled Bitcoin address. How long until they are stolen by a savvy employee?

  1. Mocha Jones says:

    I predict that you are wrong and the coins will be sold successfully without being stolen by a government employee.

    • chralash says:

      Well, if I am wrong, then I predict that all the coins will be sold to a single bidder who plans to use the bitcoins to bring financial services to people in third world countries.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s