Skip to main content

The July 13 Bitcoinica Investigation and Sound Justice

Op-ed - The July 13 Bitcoinica Investigation and Sound Justice

On July 26, AurumXChange, MtGox and BitInstant posted a thread on the Bitcointalk forums with new evidence relating to the theft that had taken place on July 13, in which an unknown individual gained access to Bitcoinica’s MtGox account and was able to withdraw the maximum 40,000 BTC and $40,000 USD. According to AurumXChange, the hacker proceeded to transfer the $40,000 USD through their service into Liberty Reserve. However, soon after the incident, AurumXChange found a request by Zhou Tong to exchange $40,000 USD on Liberty Reserve for an equivalent (minus fees) deposit into his bank account in Singapore. Zhou Tong had never dealt with AurumXChange before as an exchange customer. Furthermore, the email address used by the hacker was the same as the one used to open a MtGox account, which is beyond doubt linked to Zhou Tong and Bitcoinica.

This evidence looks rather damning to Zhou Tong’s case, but he has put forward an alternate story: that he was framed. As he describes it, the email account was an insecure one with a heavily reused password that he only used to make accounts with websites to which he had no interest in giving up his private information, and the $40,000 USD exchange was an unrelated transaction that he was making for a friend. Furthermore, he has even found a suspect, the Chinese multimillionaire Chen Jianhai, that he claims has admitted to the crime when Zhou pointed out to him that it was a matter of an international scale with many highly intelligent netizens around the world investigating. Jianhai is a former business associate of Zhou’s, and used Zhou’s identity because he felt that “it would be impossible to discover the hacker” and “it would be much easier to deny if the suspect account is an insider because you (Zhou Tong) can always distract people from investigating”.

Regardless of who is guilty and who is being framed, however, there is another matter at stake: what happened to due process? Any concept of separation of powers appears to be thrown overboard and the investigator, prosecutor, judge, jury and executioner are one and the same. Zhou Tong himself did not know that he was a suspect before the public posting was made, and the situation has quickly devolved into what is essentially a public self-proclaimed judicial process where Zhou is forced to scramble to present his own side of the case in a race which he cannot win. As some have pointed out, people have killed for less than $200,000, and it is important to treat matters involving such large sums of money with the same level of prudence as they are afforded in the rest of the world.

What this ultimately boils down to is that the Bitcoin community needs to have a serious conversation about the way that it handles the judicial process. So far, everyone involved has been very unwilling to make any overtures to established police authorities, presumably wishing instead to establish an alternate extralegal “lex mercatoria” to handle Bitcoin-related cases in an ad-hoc fashion. There are, of course, legitimate reasons to do so. One of the major ideological reasons why people participate in Bitcoin is the desire to avoid the stifling bureaucracy of existing governmental justice systems, and so far, Bitcoin has never been tested against them. If the US, Chinese, Australian or Singaporean courts are forced to make their first landmark “Bitcoin ruling”, there is no telling what that ruling will be. They may decide that bitcoins are simply worthless virtual tokens, and stealing them is simply part of the game. Alternatively, they may decide that Bitcoin exchanges are a form of illegal money laundering, leading to the majority of such exchanges being forced to shut down and relegating Bitcoin to the realm of small islands of circular commerce and illegal weapons and drugs.

On the other hand, there are reasons to believe that legal attention would actually be good for Bitcoin. Many businesses are holding back from accepting it due to legal uncertainty, and having a solid judicial confirmation that bitcoins do have value and are a valid and legally protected means of conducting exchange would arguably be a great boon to Bitcoin’s perceived legitimacy. Some have claimed that “there are no Bitcoin police” as an argument against Bitcoin, and a legal prosecution for a Bitcoin theft would greatly help alleviate these fears.

However, if the Bitcoin community does reach a general consensus that, even if for only a short time, an informally self-regulated Bitcoin is the way to go, then everyone in the Bitcoin community who is in a position to be an administrator of justice should take their job far more seriously than they do now. Many thousands of bitcoins have been lost in the community’s slow process of re-learning the progress that the outside world has made in the field of security, and it would be a great tragedy if even greater losses are suffered because we are being equally slow in re-learning the need for sound justice. On the other hand, if we handle the Bitcoinica case fairly and professionally, whether independently or in a spirit of mutual cooperation with the relevant legal authorities when the time comes, and reach an equitable resolution based on principles of justice and restoration, and not vigilantism and vengeance, it would be a great opportunity to prove that the lex mercatoria can work after all.

Correction: The July 13 Bitcoinica Investigation and Sound Justice

In a comment in the above titled article posted on July 18th it was misstated that both MtGox and AurumXChange have broken their own privacy agreements regarding information they released on the forums suggesting Bitcoinica’s founder Zhou Tong is connected to funds stolen in a hack of their exchange accounts. In the absense of a court ruling on the matter, a statement of such by the article’s author cannot yet be made in the manner it originally was worded, which may have been erroneously perceived as a statement of fact instead of the opinions of the author as is the case. Innocence for all parties will be assumed until a court of law decides otherwise based on factual evidence, including any connection between the theft and Zhou Tong. Bitcoin Magazine apologizes for the miswording on this matter and do not purport ourselves as a judge or jury on any legal matters that affect the community regardless of how passioniate our authors may be.