Is bitcoin money? Not according to a Florida judge who threw out criminal charges against a defendant accused of money laundering and acting as an unlicensed money services business in violation of state law.
Working in conjunction with the U.S. Secret Service’s Miami Electronic Crimes Task Force, a member of the Miami Beach Police Department launched an investigation into the purchase and sale of Bitcoin in South Florida.
A special agent and the state detective spent some time on the Internet and decided to contact Michell Espinoza, or, as he was known online, “Michelhack.” Espinoza advertised that his contact hours were anytime and his preferred meeting places were Internet cafes or coffee stores. Based on his username and advertisement (which stated, “You will need to bring your wallet and your smartphone or the address the Bitcoin will be deposited to…”), the task force determined he might be engaged in unlawful activity.
With the detective acting in an undercover capacity, the task force initiated a Bitcoin trade with Espinoza. At the meeting, Espinoza agreed to sell 0.40322580 Bitcoin to the detective for $500. He also explained how the Bitcoin market worked and how he profited from the enterprise. Espinoza—who had no previous history of criminal activity—said he purchased the Bitcoin at 10 percent under market value and sold the Bitcoin at 5 percent above market value, netting him a profit of $83.67 on the sale.
At a second meeting, the detective spent $1,000 on Bitcoin and told Espinoza he planned to spend it on stolen credit card numbers obtained by Russians. The detective also asked Espinoza if he would be willing to accept stolen credit card numbers as a trade for Bitcoin, to which Espinoza replied he “would think about it.”
After a third purchase of another $500 worth of Bitcoin, the detective offered $30,000 and again discussed the illicit credit card operation. Espinoza was then arrested and charged with one count of unlawfully engaging in business as a money services business and two counts of money laundering. The prosecutor later added a charge of unlawfully operating as a “payment instrument seller.”
Espinoza moved to dismiss the charges, arguing that Bitcoin did not meet any of the statutory definitions of the counts he was charged under. The court agreed.
First tackling the question of whether Espinoza was engaging in the business of a money service business, Miami-Dade County Judge Teresa Pooler looked to the language of the statute to determine whether he was a money transmitter and payment instrument seller. Florida defines a “money services business” as a person “who acts as a payment instrument seller, foreign currency exchanger, check casher, or money transmitter,” while a “payment instrument” is defined as “a check, draft, warrant, money order, travelers check, electronic instrument, or other instrument, payment of money, or monetary value whether or not negotiable.”
The judge concluded that “[D]efendant’s sale of Bitcoin does not fall under the plain meaning of [the money transmitter statute].” Espinoza did not receive currency for the purpose of transmitting it to a third party as he did not act as a middleman. Instead, he acted as a seller. “The defendant purchases Bitcoin low and sells them high, the equivalent of a day trader in the stock market, presumably intending to make a profit,” the court said.
Further, Espinoza did not fall under the definition of “payment instrument seller” because Bitcoin does not fall under the statutory definition of “payment instrument.” Judge Pooler said, “The federal government, for example, has decided to treat virtual currency as property for federal tax purposes. ‘Virtual Currency’ is not currently included in the statutory definition of a ‘payment instrument’; nor does Bitcoin fit into one of the defined categories listed.”
Espinoza also failed to meet the statutory requirements for a money transmitter because he did not charge a fee for the transaction. “The Defendant solely made a profit,” the court said—$83.67 on the $500 transaction, for example. “The Defendant was not selling the Bitcoin for an employer. The Defendant was selling his personal property. The difference in the price he purchased the Bitcoin for and what he sold it for is the difference between cost and expenses, the widely accepted definition of profit.”
Considering virtual currency generally, the court noted that Bitcoin has some attributes in common with money (it can be exchanged for items of value and is accepted by some merchants and service providers) but differs in many respects. “This Court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is the equivalent of money,” Judge Pooler wrote.
Turning to the second charge, Judge Pooler explained that under state law, money laundering is “commonly understood to be the method by which proceeds from illicit activity (‘dirty money’) becomes legitimized.” This means, she added, that the money must be dirty to begin with.
Although the detective represented that he was planning to trade the Bitcoin for stolen credit card numbers, he did not represent that the cash he used to purchase the Bitcoin was the proceeds of an illegal transaction, the court noted. The statute also requires that the defendant undertake the transaction with the intent to promote the carrying on of the illegal activity, but the judge found the term “promote” to be “troublingly vague.”
“Is it criminal activity for a person merely to sell their property to another, when the buyer describes a nefarious reason for wanting the property?” the court asked. “Does ‘promoting’ require that there be more of an affirmative act or does the mere act of selling constitute promoting? Has a seller crossed into the realm of ‘promoting’ by virtue of simply hearing the illicit manner in which the buyer intends to use what’s been purchased?”
“There is unquestionably no evidence that the Defendant did anything wrong, other than sell his Bitcoin to an investigator who wanted to make a case,” Judge Pooler concluded. “This Court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”
To read the order in Florida v. Espinoza, click here.
Why it matters
The true impact of this case remains to be seen. While the order is well reasoned and well written, and its precedential value may extend well beyond Florida, the judge’s ruling in Florida itself could be limited. The court is only one of 11 circuit courts in Florida, the decision was handed down in the middle of a criminal proceeding, and the decision may not be binding on the regulator that is charged with interpreting the statute and determining whether a license is required to engage in the activity. However, as the judge recognized, the statute itself is infirm. As she said, “The Florida Legislature may choose to adopt statutes regulating virtual currency in the future. At this time, however, attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole.”
It also should be noted that had this case been prosecuted under federal law, the results for Mr. Espinoza could have been quite different. Federal law requires persons engaged in the sale or exchange of virtual currencies to be registered as money services businesses—which Mr. Espinoza did not appear to be. Also, federal prosecutors do not need to rely on a state regulatory interpretation of its statute and could have reached a different conclusion on whether a money transmitter license was required under the state law. Thus, while the judge in the Espinoza case identified a number of problems with the Florida statutes and determined that the defendant had not violated the licensing statute, a federal judge could have reached a different conclusion. Likewise, the federal money laundering criminal statute (18 USC 1960) is not as limited in scope as the Florida statute and may have provided greater latitude to a federal prosecutor.