Dormant whales forced to surface, 3.8 million Bitcoin "legal claim" case takes a turn

Original｜Odaily Planet Daily (@OdailyChina)

Author｜Golem (@web3_golem)

Remember the lawsuit in June this year, widely discussed across the internet, regarding the "legal claim" of Bitcoin addresses belonging to Satoshi Nakamoto?

A plaintiff under the pseudonym Noah Doe attempted to legally confirm ownership of approximately 3.799 million Bitcoins (worth about $239.3 billion) associated with 39,069 dormant Bitcoin addresses, including 21,744 addresses belonging to Satoshi Nakamoto, totaling about 1.09 million Bitcoins (worth about $68.6 billion), under New York's lost property law. This absurd lawsuit is noteworthy not only for its unprecedented scale but also because its ruling could impact the protection of digital asset holders' ownership under US law. (Related reading: Satoshi Nakamoto taken to court? $83.7 billion worth of BTC to be 'legally claimed')

Fortunately, the case has been stayed, with the next hearing scheduled for September 8. However, the case has not stalled since June; developments have been quite "interesting." More importantly, the progress of the Clarity bill in the Senate will play a crucial role in the case's outcome.

Case Developments: Large amounts of dormant Bitcoin moved, address owners forced to emerge

Under New York law, if the defendant address owners do not appear 30 days after the claimant files an affidavit of service, a default judgment could occur, granting Noah Doe ownership of the 39,069 dormant Bitcoins. However, on June 4, Judge Kathy J. King issued a stay order, halting all further proceedings, and scheduled an oral argument on July 14 to discuss whether the lost property law applies to blockchain assets.

Over $2.1 billion in dormant Bitcoin moved

Meanwhile, as the case gained traction on social media, Bitcoin whales who rarely follow online news learned that someone was targeting their addresses and began transferring their Bitcoins.

On June 2, the first transfer occurred from a defendant Bitcoin address. This address, dormant since March 2011, moved 35.55 Bitcoins, worth about $2.2 million. Then on June 6, address number 37923 among the defendants transferred 47.26 Bitcoins, worth nearly $3 million. On June 19, address number 1504, dormant since 2012, transferred 199.216 Bitcoins.

According to Galaxy Research, since the lawsuit was filed, 52 defendant addresses have moved a total of 34,335 Bitcoins (approximately $2.163 billion) on-chain. Among them, 29 addresses transferred 12,302 Bitcoins after being served with the subpoena.

Seeing this, the plaintiff's attorney, David D. Lin, filed a motion on June 18 to lift the stay, eager to expedite proceedings for fear that the assets in the defendant Bitcoin addresses would be completely depleted.

Owner of Defendant Bitcoin Address #33 Appears in Court

Before the court made a decision, however, unexpectedly, a defendant who had previously been reluctant to come forward voluntarily submitted a request to appear.

On June 30, the owner of Bitcoin address number 33 among the defendants filed a notice of appearance and a motion to dismiss with the New York Supreme Court, becoming the first actual owner to object to the Noah Doe lawsuit. The documents submitted by Defendant #33 not only refuted the theory of Bitcoin address ownership but also attacked the foundational structure of the lawsuit.

First, he argued that a Bitcoin address is not a natural person or legal entity and thus cannot be subject to the court's jurisdiction as a defendant; the true holder is a "natural person protected by the Constitution who has the right to own property." Second, according to Section 7-B of the Personal Property Law, publicly visible on-chain addresses cannot be "found." This provision was designed for tangible items with actual locations in police custody. Noah Doe's interaction with the algorithm governing the Bitcoin public ledger does not equate to finding property.

Furthermore, "Defendant #33" pointed out that the case is very unfavorable to the defendants because the plaintiff can remain anonymous, while the defendants are required to reveal their identities to appear in court. Publicly holding a large amount of Bitcoin could pose serious personal safety threats to the holders.

Case Stays After Hearing, Focus on September 8 Hearing

Seeing the unfavorable trend, on July 7, plaintiff Noah Doe voluntarily dropped the lawsuit against 44 addresses that had become active. These addresses held approximately 21,443 Bitcoins when the case was filed, later transferring over 46,000 Bitcoins worth over $2.9 billion. This also means that only 39,025 addresses remain among the defendants.

Among these 44 removed addresses, the one holding the most Bitcoin was number 106, which held about 2,100 Bitcoins at the start of the case but transferred over 20,000 Bitcoins through multiple transactions between March and July.

Following the July 14 hearing, the court issued multiple "Orders to Show Cause" on July 16, scheduling the next hearing for September 8. Simultaneously, the court again fully stayed the case proceedings, prohibiting the plaintiff from pursuing any default judgment applications.

Key Provisions of the Latest CLARITY Bill Draft

Since the case was filed in March, the actual debate has long moved beyond whether Satoshi Nakamoto's Bitcoin addresses can be legally claimed. It also touches upon how US law understands digital property and whether ownership is proven through encrypted private keys or by holding physical assets or accounts with designated intermediaries.

The US Chamber of Digital Commerce has even expressed concerns extending beyond the crypto market. If courts consider prolonged inactivity as an abandonment of ownership, holders of other tokenized assets or real-world assets based on blockchain could also face uncertainty. The question is whether 'quiet title' can be protected in the absence of activity.

In the US, which prides itself on the "inviolability of private property," if this case is not handled properly, it could have a significant negative impact on the country's future crypto economy.

Essentially, Noah Doe was able to file this lawsuit by exploiting a loophole in US law. Therefore, fundamentally preventing such incidents requires the law to keep pace with the times and provide clear legal grounds for court decisions.

The latest version of the CLARITY bill draft, released on July 22, addresses this need.

Section 20216 of the latest CLARITY draft defines self-custodied digital assets as digital assets where the owner retains exclusive control over the private keys required for authorized transactions. It also stipulates that digital assets lawfully held through self-custody shall not be deemed abandoned, unclaimed, or subject to forfeiture, escheatment, adverse possession, finder's ownership, or any similar property claims solely based on inactivity, dormancy, or the owner's failure to demonstrate continuing interest. Furthermore, this provision supersedes any state or local political subdivision law or regulation.

Based on the latest provisions of the CLARITY Act, the lawsuit filed by Noah Doe would be directly invalidated, as the entire premise of his lawsuit relies on the dormancy of these Bitcoin addresses equating to abandonment or unclaimed status. Noah Doe would directly lose the case.

However, the provision also states that courts must distinguish between two types of digital assets: one is cryptocurrencies directly controlled by individuals via private keys, and the other is cryptocurrencies held on exchanges or with custodians. The new CLARITY Act protects the first type of digital assets, while state unclaimed property rules continue to apply to the second type.

In short, this means that if a user deposits digital assets with an exchange or custodian, and if the deposit address becomes inactive for a long period or the exchange/custodian ceases operations, a finder could claim these addresses and assets through lost property laws.

From this perspective, for those wishing to hold a digital asset long-term, from a US legal standpoint, the best approach remains transferring it to a personal wallet where one controls the private keys.

In conclusion, if the new version of the CLARITY Act is ultimately passed, future judgments in such lawsuits will have a legal basis, meaning the US would formally establish the legal ownership rights of holders of dormant address assets. However, the issue is that due to disagreements between the two parties over ethical clauses, the CLARITY Act currently seems to be facing difficulties progressing through the Senate (Related reading: So close to the finish line, what exactly is holding up the Clarity bill?)

And if the CLARITY Act cannot pass before the congressional summer recess, the final judgment in this case remains highly uncertain...