With the news that Silk Road, the underground internet marketplace that accepts Bitcoins as currency, was shut down and the $28 million of Bitcoins belonging to the owner/operator Ross Ulbricht seized, it poses important questions to the cryptocurrency community.
How do you deal without outright theft by government?
Were the Bitcoins actually seized, or was the only the owner imprisoned? What then?
Without the key to the owners wallet, the $28 million in Bitcoins might be considered "seized", but only because the person in control of them is now physically controlled by the government employees that imprisoned him. With the key, government employees could presumably redeem the Bitcoins for US dollars and then spend them.
It is known by fellow Bitcoiners what enters and leaves Ross Ulbricht's wallet and when. So, the Bitcoin community has an option to either recognize the theft of these Bitcoins and redeem their value to the government employees that seized them, or they can do something that I feel is morally just: they can consider them dead bitcoins.
Ideally, once the ill-gotten Bitcoins are seized, the total population of existing bitcoins would be reduced. Then, however many Bitcoins were stolen would be created anew and set aside in another wallet for anyone that suffers the misfortune of being robbed by government employees (or anyone else for that matter). However, this model assumes some kind of central authority that can create and destroy Bitcoins at will, and this doesn't currently exist (and really shouldn't, since it defeats the advantage of the currency being decentralized).
Ultimately, the power to punish or reward theft comes down to the individuals in the exchanges and marketplaces that convert Bitcoins to products and currency. Since a stolen wallet is uniquely identified, vendors that accept Bitcoin have the ability to identify and "kill" stolen wallets. This would give rest of the community great incentive to check if a wallet is blackballed by the marketplaces and be careful not to accept transactions from frozen accounts. Accounts that accept stolen Bitcoins could have the choice to return them to the thief, turn them in to a wallet earmarked for the rightful owner, or be blackballed from the exchanges themselves. Until the stolen wallet is confirmed to be back under the control of the rightful owner again, it would remain on the blackballed list, and careful users would not accept the coins from the thief. A simple checker program could be issued and updated by the exchanges to help people avoid accepting "dirty" Bitcoins.
The gatekeepers that redeem Bitcoins into the real world are human, and unlike the transactions within the system that are fully computerized, it is their morality that controls how Bitcoins interact with the real world. Ultimately, it is the users of Bitcoin that can choose to accept or reject government theft, and their collective action will determine if seizure is an effective means of controlling the currency or not. If the Bitcoin community recognizes government theft as legitimate, it is to the detriment of the Bitcoins that they hold. They would be well-advised to band together, and reject the theft of Ross Ulbricht's wallet.