Ross Ulbricht, who stands accused of running the Silk Road black market under the name "Dread Pirate Roberts," says that new federal bitcoin laws make the charges against him invalid. In a filing over the weekend, Ulbricht's lawyers defended him against charges of hacking, narcotics trafficking, operating a criminal conspiracy, and money laundering. The first three charges, his lawyers argue, are "unconstitutionally broad" and can't be applied to the normal operation of a website, even one whose business is illegal goods. And the last charge, they say, makes no sense if there isn't actual money involved — a possibility implied by a recent IRS decision.

Ulbricht's defense against the first three charges largely amounts to an abdication of responsibility over what users did on the site: any actual drug trafficking would have been done by users of Silk Road, not the site's operator. Using the comparison of a landlord whose tenants operate a crack den, or a search engine that allows users to find illegal content, they argue that only civil penalties should apply, not the criminal ones federal prosecutors are seeking. "At worst, Mr. Ulbricht allegedly acted as a conduit or facilitator for those engaging in illegal activity," not as a drug "kingpin." And a hacking conspiracy charge, they say, is based only on the sale of malicious software through the site, not anything Ulbricht himself did.

Recent IRS guidelines tax bitcoin as property

The fourth charge, however, is based on interpreting what bitcoin itself is. Or, more precisely, it's based on the most recent legal interpretation of what bitcoin is: property, not currency. In late March, the IRS finally issued rules on virtual currency, saying that it should be taxed as an investment rather than money. "In some environments, virtual currency operates like 'real' currency," said a notice, "but it does not have legal tender status in any jurisdiction." Picking this up, Ulbricht's lawyers say it's the latest in a series of government statements that treat bitcoin as something other than a currency. It doesn't, therefore, fit the exact definition of "funds" or "monetary instruments" used in laws against money laundering.

Silk Road has always occupied an outsized role in discussion of bitcoin, and Ulbricht's arrest marked one of the currency's biggest brushes with the law. As it proceeds, governments are still working through how to classify bitcoin, especially after the recent bankruptcy of prominent bitcoin exchange Mt. Gox. Friends and family of Ulbricht, meanwhile, have mounted a defense unrelated to the vagaries of virtual currency laws: that the drug kingpin described in the charges couldn't be the man they know.