How much stolen bitcoin must a wallet have to be legally recoverable?

Question

TLDR: Under what circumstances could one successfully sue to gain control of stolen bitcoin? If it depends on what proportion of an addresses unspent output consists of your stolen bitcoin then what may the limit be?

I previously asked here about cryptocurrency and theft, and the answer was that bitcoin, unlike money, is not a negotiable instrument and therefore remains the property of the original owner when a thief sells it to a third party.

I asked about managing this issue on bitcoin stackexchange, and the answer said:

Regarding the question of ownership of stolen coins, that's really only applicable if your withdrawal is being funded from a UTXO that comes directly from a deposit of the stolen bitcoin. If the exchange previously combined that coin with other "clean" coins into one large UTXO (example transaction), then no one specifically can be pinpointed as having received the stolen bitcoin.

For an example of what this looks like, we can see this answer, that talks about the not stolen but famous pizza bitcoins:

There is no currently unredeemed output which contains 100% pure pizza coins. All the pizza coins have been diluted somewhat with other coins. The purest remaining are these 100 BTC which are 90.7276% pure pizza coin, and just 11 transactions separated from the pizza transaction.

And as an aside, he mentions stolen bitcoin:

Edit: I just found these 100% pure allinvain coins - undiluted after 24 hops from when 25k BTC was stolen from his computer.

Edit 2: I don't mean to imply that the allinvain coins haven't been thoroughly looted. They have touched 755,796 different addresses since being stolen and are currently sitting in 109,235 different addresses, including 8 from my own personal wallet. The exact same 8 as have pizza coins in them, it turns out.

Can we accurately legally say what is the situation regards claiming these "bitcoin"?

An example situation would be if Alice had some bitcoin in a wallet, and her computer was hacked and the bitcoin transferred to Anonymous Bobs wallet. He then created a transaction that contained X% of Alice's stolen bitcoin and 100-X% of legally acquired bitcoin and transferred that to Honest Charlie who publishes their wallet address. Is there a value of X that would allow Alice to successfully claim the coins from Charlie? 100%, 99%, 90%, 50%, 1%? Or any other property that would determine if such a case could succeed?

Answer 1

There is no simple answer. Whether stolen bitcoin can be recovered with a court order will depend on the facts, the jurisdiction, and the legal basis for the claim. There is a significant difference between tracing by a civil litigant, and asset forfeiture to the state. I’ll talk about tracing, because it’s based on common law principles that apply in many countries, rather than statutes which are unique to each jurisdiction.

The first hurdle in establishing a civil claim against the recipient of stolen bitcoin is the need to show that cryptocurrency is property. It has been suggested that cryptocurrencies might not be property because they are merely information, or because they are not classifiable either as things in possession or things in action. However, the LawTech Delivery Panel published a legal statement on cryptoassets and smart contracts (November 2019) which analysed these arguments and concluded that “cryptoassets are to be treated in principle as property.” This analysis was adopted by the High Court of Justice in England for the purpose of making disclosure and freezing orders against Bitfinex in respect of an account holding ransomware proceeds: AA v Persons Unknown [2019] EWHC 3556 (Comm).

The next issue is the application of the nemo dat rule, which is the subject of your previous question. According to this honours thesis published by the University of Otago, until the courts recognise cryptocurrency as “money,” the nemo dat rule will have the effect that “the legal title to stolen cryptocurrency will likely always rest with the original owner” and “an innocent third party having received stolen cryptocurrency will always be liable to a claim from the original owner.” However, the LawTech Delivery Panel legal statement analysed the problem differently and concluded that an on-chain cryptocurrency transaction creates a new asset rather than transferring an existing asset:

Although one can describe and conceptualise the process as a transfer … it is not really analogous to the delivery of a tangible object or the assignment of a legal right, where the same thing passes, unchanged, from one person to another. Instead, the transferor typically brings into existence a new cryptoasset, with a new pair of data parameters: a new or modified public parameter and a new private key.

According to this analysis, the recovery of stolen bitcoin would involve applying the equitable principles used to trace assets wrongfully transferred into a mixed fund. Such a claim cannot be made against a bona fide purchaser for value without notice. On the other hand, stolen assets can be traced into the hands of a third party who knowingly receives them. Thus, whether the receiver of stolen bitcoin is liable to return them to the original owner is likely to turn more on the receiver’s state of mind than the percentage of stolen bitcoin received.