May 7, 2014 · 2 minutes

The Securities and Exchange Commission has warned investors against buying into Bitcoin because the cryptocurrency is unregulated, unsafe, and nigh-untraceable in case of fraud or theft. (It also advises that the Internal Revenue Service considers Bitcoin property for taxes.) The agency also warns investors about deals that seem "too good to be true" and would be suspect even if they weren't conducted with a currency outside of the government's control.

The warning couldn't come at a better time. Bitcoin has been incredibly volatile over the last year, with abrupt swings between fantastic growth and debilitating losses. The (formerly) largest exchange is now accused of losing and mismanaging almost $500 million in bitcoins. Once characterized as a tool made specifically for keyboard anarchists and people looking to buy illicit goods from the dark Web, the currency is now racked with fraud and fear.

But the SEC might have warned investors about another risk associated with Bitcoin: the government's ability to seize hundreds of thousands of bitcoins and liquidate them before convicting their owners of a single crime. That's exactly what happened after the government shut down the infamous Silk Road marketplace, which was used to sell everything from drugs to firearms, and seized millions of dollars worth of bitcoins from the marketplace's customers.

This means that the government can sell bitcoins without convicting anyone of a crime. (Those affected by the Silk Road shutdown have been accused of a variety of crimes, but have not yet been found guilty or even brought to trial.) And because these deals are often made with scant disclosures, it's unclear how much the government can make from seizing someone's bitcoins.

Pando's Michael Carney explained the problems with this practice in April:

In the most basic terms, the government must hold seized property until such a time as the accused is either convicted and thus loses any legal right to the property, or acquitted and thus entitled to its return. In most cases, this would mean holding non-cash assets like cars in storage until such a time as the case is resolved one way or another. But, under certain circumstances, the government may liquidate these assets and eventually accomplish the same asset return with cash rather than the original items of value.

Assuming that the asset value is determined at the time of return, rather than at the time of seizure or liquidation, it’s entirely possible that the government could ultimately owe Slomps a sum far greater than the cash it received upon exchanging his bitcoins. Perhaps the SEC should worry less about warning investors about Bitcoin's instability and instead warn them about the government's willingness to seize and sell bitcoins without so much as a single "guilty" verdict.

[illustration by Brad Jonas for Pando]