On May 28, 2019, a Nevada resident, Morgan Rockcoons, was sentenced in the U.S. District Court for the Southern District of California to 21 months in prison for wire fraud and unlicensed money transmission. In connection with the sentencing, Rockcoons will also be required to forfeit $80,600 in illicit proceeds.

In its implementation of the Bank Secrecy Act (BSA), the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) requires money services businesses, including money transmitters, to register with FinCEN, maintain anti-money laundering compliance programs, and file suspicious activity reports (SARs) and currency transaction reports (CTRs), among other anti-money laundering compliance requirements. In a 2013 Guidance, FinCEN clarified that convertible virtual currency exchangers are “money transmitters,” and thus money services businesses, under the BSA.

Rockcoons was initially indicted on November 8, 2017, for operating an unlicensed money transmission business. He had been advertising his bitcoin exchange services on the website LocalBitcoins.com. In 2015, he was identified by the Department of Homeland Security as the “the most prolific San Diego-based seller.” He continued to advertise his services through 2016, and as of October 2017 he appeared to have conducted more than 1,000 bitcoin trades for more than 644 people, profiting fees as high as 36% per transaction. Rockcoons was arrested on charges of unlicensed money transmission on February 9, 2018, but then released on bond pending a trial.

While on pretrial release, Rockcoons’ business model apparently shifted to fraud. He began promoting a real estate venture, “Bitcointopia,” which he described as a place in the Nevada desert where bitcoin would be “legal tender.” Rockcoons promoted the development on the Internet and social media, advertising 500- to 1000-acre parcels for .5 bitcoin per acre (or about $4,222 per acre in U.S. dollars). He did not own the land he claimed to be selling (federal authorities stated all he owned were two non-contiguous lots in the area, totaling less than 5 acres), and at least 10 individuals were apparently victimized by the fraud. Rockcoons was arrested again on October 29, 2018, and the government filed a superseding indictment incorporating the additional fraud charges on the same day.

The sentencing of Rockcoons follows recent activity relating to the regulation of virtual currency businesses by FinCEN. On April 18, 2019, FinCEN announced an enforcement action against peer-to-peer virtual currency exchanger Eric Powers. As we noted in our April 26, 2019 Client Alert, FinCEN’s enforcement action against Powers was its first such action against a peer-to-peer virtual currency exchanger for BSA violations. On May 9, 2019, FinCEN issued a Guidance concerning the application of the BSA to convertible virtual currency businesses. The same day, FinCEN also issued an Advisory to assist financial institutions in identifying and reporting suspicious activity associated with convertible virtual currencies. As we noted in our May 21 Client Alert, these developments confirm that FinCEN views certain convertible virtual currency activities as vulnerable to exploitation by criminals and other bad actors, and market participants should remain cognizant of these developments as they evaluate their risk profiles and BSA obligations.