Court Addresses Bitcoin, Other Novel Online Technology IssuesAugust 19, 2014 | | |
Online technology, as this column frequently has noted, presents numerous challenges to attorneys during litigation, while managing their firms and marketing their services, and in trying to keep up with the newest legal developments and rulings. A recent decision in a case of first impression by Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York highlights how online technology also presents challenges in criminal law enforcement.
The ruling in the case, United States v. Ulbricht,addresses novel legal issues as they relate to the Internet and a criminal defendant’s role in purported conspiracies, and the application of federal criminal law for the first time to the alleged online conduct that formed the basis for the government’s charges. It appears to be the first New York case to directly address Bitcoin currency – a form of virtual payment that recently has been in the news and, with other virtual currencies, is the subject of a recent advisory by the U.S. Consumer Financial Protection Bureau.
The Silk Road Case
The government alleged that Ross Ulbricht engaged in conspiracies to enable narcotics trafficking, computer hacking, and money laundering by designing, launching, and administering a website called Silk Road as an online marketplace for illicit goods and services. It characterized Silk Road as “the most sophisticated and extensive criminal marketplace on the Internet,” asserting that it operated using software and a network that enabled users to access and use the site anonymously including by paying for all purchases using Bitcoin.
According to the government, Silk Road functioned as designed, with tens of thousands of buyers and sellers allegedly entering into transactions using the site, violating numerous criminal laws. Over time, thousands of kilograms of heroin and cocaine and malicious computer codes allegedly were bought and sold using Bitcoin. The government alleged that Silk Road, in essence, was designed to operate like a criminal eBay: a seller would electronically post a good or service for sale; a buyer would electronically purchase the item using Bitcoin; the seller then would ship or otherwise provide to the buyer the purchased item; the buyer would provide feedback; and the site operator (i.e., Ulbricht) would receive a portion of the seller’s revenue as a commission.
Several months ago, a Southern District grand jury returned a four count indictment against Ulbricht in connection with the design and operation of the Silk Road website.
Count One charged that, from in or about January 2011 up to and including October 2013, Ulbricht engaged in a narcotics trafficking conspiracy in that he “designed [Silk Road] to enable users across the world to buy and sell illegal drugs and other illicit goods and services anonymously and outside the reach of law enforcement.” It was alleged that Ulbricht “controlled all aspects of Silk Road, with the assistance of various paid employees whom he managed and supervised” and that as “part and object of the conspiracy” Ulbricht and others “would and did deliver, distribute, and dispense controlled substances by means of the Internet” and “did aid and abet such activity” in violation of the law. He allegedly “reaped commissions worth tens of millions of dollars, generated from the illicit sales conducted through the site.”
Count Two alleged that Ulbricht’s conduct amounted, over time, to his position as a “kingpin” in a continuing criminal enterprise by engaging in a “continuing series of violations” in concert “with at least five other persons with respect to whom Ulbricht occupied a position of organizer, a supervisory position, and a position of management, and from which . . . Ulbricht obtained substantial income and resources.”
Count Three charged Ulbricht with a computer hacking conspiracy by alleging that Ulbricht designed Silk Road as “a platform for the purchase and sale of malicious software designed for computer hacking, such as password stealers, keyloggers, and remote access tools.” While in operation, the indictment alleged, the Silk Road website “regularly offered hundreds of listings for such products.” According to the indictment, the object of this alleged conspiracy was to “intentionally access computers without authorization, and thereby [to] obtain information from protected computers, for purposes of commercial advantage and financial gain.”
Finally, Count Four charged Ulbricht with a money laundering conspiracy and alleged that Ulbricht “designed Silk Road to include a Bitcoin-based payment system that served to facilitate the illegal commerce conducted on the site, including by concealing the identities and locations of the users transmitting and receiving funds through the site.”
Ulbricht moved to dismiss, essentially arguing that his alleged conduct could not serve as the basis of a criminal conspiracy.
The Court’s Decision
The court denied Ulbricht’s motion to dismiss in its entirety. In so doing, the court identified areas of established criminal law that required analysis as to their application in the context of the technology at issue. First, it found that the alleged design and operation of the Silk Road website could result in a legally cognizable conspiracy in that the alleged sale and purchase of unlawful narcotics and software on Silk Road could, as a matter of law, constitute circumstantial evidence of an agreement to engage in unlawful conduct. Significantly, the court rejected Ulbricht’s contention that his conduct was merely as a facilitator, just like eBay, Amazon, or similar websites. The court explained that the indictment did not allege that Ulbricht was criminally liable simply because he was alleged to have launched a website that was – unknown to and unplanned by him – used for illicit transactions. Rather, the indictment alleged that “Silk Road was specifically and intentionally designed for the purpose of facilitating unlawful transactions.” This contention, in the court’s view, separated Ulbricht’s alleged conduct from the mass of others whose websites may be used – without their planning or expectation – for unlawful purposes.
The Court concluded that administrators of eBay-type sites, who intend for buyers and sellers to engage in lawful transactions “are unlikely to have the necessary intent to be conspirators,” whereas the design and operation of Silk Road could be evidence of Ulbricht’s “intent to join” the illegal conspiracies.
The court next addressed when and how agreements between Ulbricht and his alleged coconspirators could arise online. The court applied basic contract principles of offer and acceptance. It explained that, as alleged in the indictment, Ulbricht first “offered” to work with others to traffic illegal narcotics and malicious computer hacking, and to launder money by creating and launching a website specifically designed and intended for such unlawful purposes. The court added that, as alleged in the indictment, Ulbricht’s “continued operation of the site” evinced an enduring intent to be bound with those who “accepted” his offer and utilized the site for its intended purpose. The court likened the allegations to posting a sign on a worldwide bulletin board that said: “I have created an anonymous, untraceable way to traffic narcotics, unlawfully access computers, and launder money. You can use the platform as much as you would like, provided you pay me a percentage of your profits and adhere to my other terms of service.” According to the court, each time someone allegedly “signed up” and agreed to Ulbricht’s standing offer, it was possible that, as a matter of law, he or she might have become a coconspirator.
One of the technological differences between this case and others involving alleged conspiracies is that, according to the charges, the alleged conspiracy here was conducted through what were primarily automated, pre-programmed processes. In other words, the government did not allege that this was a situation in which Ulbricht approved or had a hand in each individual transaction that allegedly occurred on Silk Road during the nearly three-year period covered by the indictment. Instead, the government alleged, he wrote (or had others write) certain code that automated the transactions. The court found that, as a legal matter, this automation did not preclude the formation of a conspiratorial agreement. Indeed, the court declared, “whether an agreement occurs electronically or otherwise is of no particular legal relevance.”
The court reasoned that although automation might enable a particular transaction to take place, it was the individuals behind the transaction who took the necessary affirmative steps to utilize that automation. The court declared that it was “quite clear” that if there were an automated telephone line that offered others the opportunity to gather together to engage in narcotics trafficking by pressing “1,” that “would surely be powerful evidence of the button-pusher’s agreement to enter the conspiracy.” The court pointed out that automation was effected through a human design; here, Ulbricht was alleged to have been the designer of Silk Road, and as a matter of law, the court ruled, that was sufficient.
Nevertheless, the court acknowledged that there was a difference between Silk Road and a brick-and-mortar entity. The court said that although “mere buyers and sellers” of small quantities of narcotics might not legally be coconspirators if the transactions occurred in the brick-and-mortar world, they “might become conspirators due to the interposition of a website or website administrator.” Pointing out that the level of involvement in any transaction by the website would be relevant, the court explained that “[a]cceptance of the terms of service, the payment of commissions, placing Bitcoins in escrow, and other intervening steps involved in the transactions that allegedly occurred on Silk Road could, in this regard, perhaps constitute evidence that Silk Road users entered into an unlawful conspiracy with Ulbricht.”
The court rejected other arguments raised by Ulbricht, including that he was an online provider entitled to immunity under the Communications Decency Act of 1996. In particular, Ulbrecht argued that the law indicated congressional support “for a free-wheeling [I]nternet, including one in which providers or users of interactive computer services can operate without fear of civil liability for the content posted by others.” The court simply ruled that this argument did not preclude the criminal charges brought against him.
Finally, the court addressed on the issue of first impression as to whether the requisite statutory elements in Count Four, which charged Ulbricht with participation in a money laundering conspiracy in violation of 18 U.S.C. § 1956(h) were present when payment was made by Bitcoins. The court rejected Ulbricht’s argument that the use of Bitcoins to make payments on Silk Road could not constitute the “financial transaction” needed for this charge. As the court explained, Bitcoins were alleged to be the medium of exchange – just as dollars or Euros could be – in financial transactions relating to the unlawful activities of narcotics trafficking and computer hacking. The court pointed out that the only value for Bitcoin was in its ability to pay for things, and it decided that the money laundering statute was broad enough to encompass use of Bitcoins in financial transactions.
The court’s decision in Ulbricht refused the defendant’s request to dismiss the charges. It remains to be seen whether the government will be able to prove its case and, if so, to withstand an appeal. Nevertheless, the application of traditional criminal law to evolving online activities such as those allegedly engaged in by Ulbricht and Silk Road presents prosecutors with new hurdles to overcome, and defense lawyers with new issues to contemplate.
 See, e.g., Shari Claire Lewis, “Accessing Email Evidence on Company Computers,” NYLJ, Dec. 17, 2013; Shari Claire Lewis, “The Role of the Internet in the Conduct of Litigation,” NYLJ, Oct. 15, 2013; Shari Claire Lewis, “Courts Confront the Question of Service by Facebook,” NYLJ, Dec. 18, 2012.
 See, e.g., Shari Claire Lewis,”Ethical Issues Arise in Lawyer’s Use of Social Media,” NYLJ, Oct. 16, 2012; Shari Claire Lewis, “ABA Approves Changes to Technology-Related Ethics,” NYLJ, Aug. 14, 2012; Shari Claire Lewis, “‘Deal of the Day’ Marketing Approved for New York Lawyers – With Caveats,” NYLJ, Apr. 17, 2012.
 No. 14-cr-68 (KBF) (S.D.N.Y. July 9, 2014).
 The Consumer Financial Protection Bureau’s August 2014 consumer advisory can be found at http://www.consumerfinance.gov/f/201408_cfpb_consumer-advisory_virtual-currencies.pdf.
 47 U.S.C. § 230.
Reprinted with permission from the August 19, 2014 issue of the New York Law Journal. All rights reserved.