Bitcoin owners and exchange operators are coming face-to-face with prosecutors focused on money laundering crimes, leading to novel legal arguments about whether the virtual currency is money, or sufficiently “money-like” to support charges of money laundering and other financial crimes. This comes in contrast to a determination by the IRS, for one, stating that virtual currency such as Bitcoin is treated as property for federal tax purposes, and by FinCEN and FATF, that it does not have all the attributes of real currency and does not have legal tender status. Within this context, FinCEN’s Director Jennifer Shasky Calvery recently told Coindesk that the agency is focused on the bad actors, and not the new technology itself.
As reported last month in Digital Commerce & Payments, a New York Federal District Court concluded in Faiella et al. v. United States, that Bitcoin is “money,” denying a defendant’s motion to dismiss a money laundering charge. The defendant was charged with unlawfully operating an unlicensed money transmitting business, but unsuccessfully tried to dismiss the charge because Bitcoin is not “money.” The court said Bitcoin “clearly qualifies as ‘money’,” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.”
Another case in a Federal District Court in Texas, involves a defendant, Trendon Shavers, who argued that he didn’t violate federal securities laws because his Bitcoin investors didn’t invest in “securities”, that his transactions were all denominated in Bitcoin, and that real money did not exchange hands. The SEC took the position that the Bitcoin investments were both investment contracts and notes, and therefore, securities. Although relevant securities law says a security involves an investment of money, the court said Bitcoin could be “used as money,” “used to purchase goods or services,” and “used to pay for individual living expenses.” It can also be exchanged for money. The court’s conclusion: “Bitcoin is a currency or form of money.”
Down in Miami, Florida, Bitcoin sellers Pascal Reid and Michel Espinoza were charged in February with money laundering after selling Bitcoin to undercover police officers to whom they admitted using Bitcoin to buy stolen credit card numbers. Defense counsel said his client couldn’t have been money laundering because Bitcoin isn’t money, but a Miami-Dade Circuit Court judge said Florida can prosecute “trade-based money laundering.” Rather than argue whether Bitcoin is money, the judge looked to the currency paid to buy the Bitcoin – and said that’s what was being laundered. The case against the founder of Silk Road, Ross Ulbricht, is reaching similar conclusions.
The race to define Bitcoin continues, but early indications point to a predictable conclusion: Bitcoin’s controversial status isn’t going to help its owners or traders avoid prosecution for financial crimes.