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The Faketoshi BTC 550K Saga - Where Do We Go From Here? (UPDATED)

The Faketoshi BTC 550K Saga - Where Do We Go From Here? (UPDATED) 101
Craig Wright. Source: a video screenshot, Youtybe, CoinGeek

On August 26th, there was a ruling in the case of Craig Wright, a controversial Australian computer scientist and supporter of Bitcoin SV (BSV), also known as 'Faketoshi', which only prompted a number of additional questions. Now that the transcript is out, the Cryptoverse may have an answer to some of them. (Updated on August 28: updates throughout the entire text.)

The ruling

As reported, this hearing held in Florida two days ago was just a part of a much larger and ongoing case to decide the custody of the accumulated Wright-Kleiman fortune, with Ira Kleiman, brother of David Kleiman, now-deceased business partner of Wright, suing Wright for the BTC holdings Wright allegedly stole after his partner’s death.

What we get from the transcript is that the judge rejected Wright's testimony, but has also found that he committed perjury and falsified documents. The presiding judge, Bruce Reinhart, stated: "I completely reject Dr. Wright’s testimony about the alleged Tulip Trust, the alleged encrypted file, and his alleged inability to identify his bitcoin holdings," adding, "Dr. Wright’s story not only was not supported by other evidence in the record, it defies common sense and real-life experience."

Also, it's confirmed that, according to the ruling, David Kleiman owned 50% of the Bitcoin tokens the pair mined together (reportedly around BTC 1.1 million (USD 11 billion) in total).

The judge proceeds to explain that while there was no direct evidence that Wright was responsible for alterations or falsification of documents, there is also no evidence that anybody else but Wright had a motive to falsify them. Therefore, the judge concluded that:

"To this day, Dr. Wright has not complied with the Court’s orders compelling discovery on May 14 and June 14. Rather, as described above, the evidence establishes that he has engaged in a willful and bad faith pattern of obstructive behavior, including submitting incomplete or deceptive pleadings, filing a false declaration, knowingly producing a fraudulent trust document, and giving perjurious testimony at the evidentiary hearing", as well as "obstructed a judicial proceeding".

The findings are presented in the document as:

  • Due to Wright's noncompliance in regards to the previous hearings, as a sanction, Rule 37 was enacted, which "authorizes the Court to award attorney’s fees against a party and/or the party’s counsel as a sanction for certain discovery-related conduct," given that "there is clear and convincing evidence that Dr. Wright’s non-compliance with the Court’s Orders is willful and in bad faith, that Plaintiffs have been prejudiced, and (particularly given the extended pattern of non-compliance and its egregiousness) a lesser sanction is not adequate to punish or to ensure future compliance with the Court’s Orders."
  • The evidence in the record does not rise to the level of proof beyond a reasonable doubt necessary for a criminal contempt, and as the sanctions under Rule 37 are sufficient, the judge does not certify facts for civil contempt proceedings.
  • An award of attorney’s fees is warranted against Wright, but not against his counsel.
  • It is established that Wright and David Kleiman entered into a 50/50 partnership to develop Bitcoin intellectual property and to mine Bitcoin
  • Any Bitcoin-related intellectual property developed by Wright prior to Kleiman’s death was property of that partnership
  • All bitcoin mined by Wright before Kleiman’s death was property of the partnership when mined
  • Ira Kleiman presently retains an ownership interest in the bitcoin of that partnership and any assets traceable to them.

However, attorney Bill Smith tweeted that “whatever happened at the csw [Craig Wright] hearing today - it doesn't really matter until the actual federal judge reduces it to an Order,” given that it appears that a magistrate judge held the hearing, whose “main role is to try and help settle cases” and “assist the federal judge and clear his/her docket.” The federal judges “see the worst of humanity and thus aren't easily fooled by someone like csw,” Smith says.

It will also be interesting to see how this particular judgement will affect other ongoing proceedings involving Wright, though it may be possible that this will have a lesser impact than the Order by a federal judge.

Does Wright have the coins?

As previously mentioned, many people believe that Wright does not actually own any BTC and that he implied in the interview with Modern Consensus that he might transfer the BTC from the “Tulip Trust” allegedly holding BTC that Wright and Kleiman mined between 2009 and 2011.

The judge, however, stressed the point that the Court "is not required to decide, and does not decide, how much bitcoin, if any, Dr. Wright controls today", but that "for purposes of this proceeding, the Court accepts Dr. Wright’s representation that he controlled (directly or indirectly) some bitcoin on December 31, 2013, and that he continues to control some today."

Wright claimed during the hearing that after drug dealers and human traffickers started using Bitcoin, in his effort to disassociate himself completely from the coin, he partnered with Kleiman for that purpose, put control over the BTC he mined in 2009-2010 into an encrypted file, and put that file into a blind trust (the Tulip Trust), after which the encryption key was divided into multiple key slices. A controlling number of the key slices were given to Kleiman, who distributed them to other people, and Wright doesn't have access to a sufficient number of the key slices to decrypt the file. "Therefore, he cannot produce a list of his bitcoin holdings."

The judge said that Wright "has a substantial stake in the outcome of the case," given that he stands to lose billions of dollars. "That gives him a powerful motive not to identify his bitcoin", and he can transfer the BTC without Kleiman's knowledge, as long as he keeps the relevant addresses secret. He also has "many reasons not to tell the truth," given that he "might want to prevent the Plaintiffs (or others) from finding his Bitcoin trove."

On the question if he has the money to pay Kleiman, Wright told Modern Consensus: “If the court makes an order, I will comply with the order. And the court has made an order. It’s that simple,” adding “I own a lot of BTC. Dave should have owned 320,000 and I should have had 800,000 and now it’s 50/50. At the end of the day, that’s not a good thing for BTC.”

The interviewer asked Wright if this affects the so-called “Satoshi Blocks” of unmoved bitcoins in the blockchain, and if this means that the blocks that haven’t moved since 2009 will now get transferred, to which Wright replied “Not at least, just under half. Because they’ll have to come out of partnership. I spent more money on the project than Dave, so I will rule on that and effectively Ira will get maybe 480,000 BTC.” He added that this does not include BTC, BCH, and BSV and other BTC forks, because, “according to the judge it’s only from before Dave died, so only BTC. Sorry BTC.”

What if Kleiman does receive the coins?

While we don't know yet what Kleiman would do with BTC 500,000 he theoretically might get, what is more sure is that he will need to pay taxes. While some speculate it might be USD 2 billion, others claim that more realistically it would be around USD 3 million - USD 20 million.

“I’m not worried about Craig transferring Bitcoin to Kleiman because I don’t think he has any to transfer,” Ryan Selkis, chief executive officer at crypto researcher Messari Inc., told Bloomberg. “It’s a sideshow, not a real story.”

Meanwhile, attorney Smith speculates that Kleiman may be able recover his attorney fees and it may be possible for Kleiman to get the federal judge to reduce his judgment to a USD monetary amount.

“Kleiman surely knows he is not getting any Bitcoin,” says Smith, “but he maybe able to get a judgment for the USD value + his attorney fees,” and if that happens, “he will have a judgment for ALOT of money hung around faketoshis neck forever. Whatever he has, whatever he earns...it's kleimans...and the lack of actual Bitcoin is irrelevant.” Smith concludes with: “Get your popcorn ready. Fraud doesn't pay folks.”

What did the judge say exactly about Wright being Satoshi?

He did not say he is Satoshi, he did not say he isn't. Judge Reihnart clearly stated at the very beginning of the ruling that "the Court is not required to decide, and does not decide, whether Defendant Dr. Craig Wright is Satoshi Nakamoto, the inventor of the Bitcoin cybercurrency."

The judge also made a point that Wright's demeanour during his testimony, Dr. Wright’s "did not impress me as someone who was
telling the truth," adding that "when it was favorable to him, Dr. Wright appeared to have an excellent memory and a scrupulous attention to detail. Otherwise, Dr. Wright was belligerent and evasive."

However, Ed Pownall, Wright's spokesman told Bloomberg that since it's acknowledged that Wright has the coins, that proves he's Satoshi, "otherwise, he couldn't have them in the first place."

Wright did say in the interview with Modern Consensus though that “The judge won’t rule on whether I’m Satoshi. But the partnership is. So when Dave Kleiman passed, the partnership transferred to Ira.”

While the Cryptoverse rejects this idea, others are still discussing alternative theories, jokingly and otherwise. Wright said that he’s not going to complain for getting to keep billions in USD, adding “And I’m the only surviving member of Satoshi? The judge ruled it was a partnership. I’m the asshole Satoshi. And Dave was the nice one.” Discussions continue.

Devin Freedman, the lawyer representing the Kleiman estate, was not available for immediate comment.

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