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Arrests And Prosecutions Reveal Big Vagaries In Bitcoin Selling Regulations

Last Updated March 4, 2021 4:48 PM
Lester Coleman
Last Updated March 4, 2021 4:48 PM

U.S. laws governing bitcoin trading are vague and sometimes lead to complicated law enforcement actions, according to an article in Fast Company  magazine. Anti-money laundering laws require exchanges to verify customers’ identities, but what constitutes an exchange can sometimes be unclear.

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A Louisiana chiropractor who used his credit card merchant accounts to sell hundreds of thousands of dollars’ worth of bitcoin pled guilty last month to operating an unlicensed money servicing business.

The chiropractor advertised “bitcoin services” on LocalBitcoins.com, a marketplace where bitcoin users buy and sell the currency, according to the indictment. The chiropractor and his son allegedly accepted more than $3.5 million in money orders, prepaid cards and cash in exchange for bitcoin that they bought on bitcoin exchanges.

Prosecutors agreed to drop a money laundering charge connected to an alleged $14,000 cash-for-bitcoin trade drug informant, along with wire fraud charges connected to the credit card transactions.

The case underscores vagaries involved in regulating virtual currency trading. Virtual currency transactions are subject to local and federal anti-money laundering laws that require sellers to verify customers’ identities the way banks do.

FinCEN Application Unclear

U.S. law requires money service businesses such money transmitters and check cashing services to register with the U.S. Treasury Department Financial Crimes Enforcement Network (FinCEN) and to obtain state licenses, but experts say FinCEN rules’ application to bitcoin trades are sometimes not clear.

Marco Santori, a partner at Pillsbury Winthrop Shaw Pittman who leads the law firm’s blockchain technology and digital currency team, said the application of federal law is “very fuzzy.” He said it depends on a “facts and circumstance” test, which in actuality is how effective a narrative one can create about what they are doing in the area of cryptocurrency buying and selling. “Unfortunately, it often comes down to how good of a lawyer you have,” he said.

Some states allow money transmitters to operate without a license, while others specifically regulate cryptocurrencies.

Websites like LocalBitcoins, Gliph and Craigslist are not covered under FinCEN rules since they are technically not centralized bitcoin exchanges.

FinCEN Addresses Cryptocurrency

FinCEN in 2013 stated that virtual currency users are not money servicing businesses, but that currency exchangers are. The agency said a user is someone who obtains virtual currency to purchase goods or services while an exchanger engages in exchanging virtual currency for “real currency,” funds or other virtual currency.

Martin Mushkin, a corporate finance lawyer, said selling, buying or mining bitcoin for one’s own use or investment does not fall under the definition of a money services business any more than trading stock through a broker puts one in the securities business.

The question gets more complicated when users trade bitcoin beyond the confines of licensed exchanges. People who advertise on classified websites can sell bitcoin at a higher price or buy it at a lower price than they can at formal exchanges. Bitcoin users will pay a premium for a transaction that is more anonymous than trading at an online exchange.

Comparison To Firearm Sales

The legal situation draws comparisons to firearm sales, in which gun dealers need federal licenses and must do customer background checks, but individual sales are not regulated; people can sell guns on a regular basis without having to have a full-time business.

A 2014 U.S. Department of Homeland Security report noted that law enforcement officials are concerned about face-to-face cryptocurrency exchanges since they have been used as money laundering platforms. The transactions require no personally identifiable information to be provided, making the transactions anonymous. A person can convert anything of value into bitcoin by bartering or purchasing.

The department has investigated bitcoin exchange cases. The government has charged operators of unlicensed exchanges with laundering proceeds of drugs and other illegal activity.

The government has charged Anthony R. Murgio, an alleged operator of Coin.mx, an alleged unlicensed exchange, in connection with claims that the exchange sold bitcoin to ransomware attack victims who wanted to use the currency to pay blackmailers to unlock their personal data. Murgio pleaded not guilty.

The government shut down Liberty Reserve in 2013, claiming the unlicensed exchange used digital currency to launder proceeds from identity theft, credit card tracking, Ponzi schemes and hacking. A court sentenced one of the site’s founders this month to a 20-year prison sentence and sentenced his ex-partner to 10 years for agreeing to cooperate in his ex partner’s prosecution.

Questions Arise In Colorado Case

Burt Wagner, a Colorado engineer, claimed he bought and sold bitcoins through the infamous Mt. Gox exchange and advertised bitcoin for sale on LocalBitcoins when in 2014 federal agents arrested him in connection with an unlicensed digital currency exchange business. The indictment alleged Wagner handled funds known to be derived from a criminal offense and intended to support unlawful activity. The government dropped the charges in 2015.

Wagner claimed he never intentionally conducted any shady deals, but he ended up paying thousands of dollars in legal fees.

Government prosecutors declined to comment on Wagner’s cases, and many documents remain sealed.

A court filing in the Wagner case noted that the indictment followed a 15-month investigation involving conventional and online undercover activities. The filing noted that the investigation involved individuals engaged in digital currency transactions and/or the sale of controlled substances using “Deep Web” black marketplaces.

Also read: Swift Institute: Problems and progress regulating cryptocurrencies

How Aggressive Is Enforcement?

Most individuals charged in connection with unlicensed bitcoin exchanges have been connected to other illegal activity, according to Santori. He said he has not seen significant enforcement against individuals just trading bitcoin in an unregistered manner.

Many cases have resulted in guilty pleas, with defendants arranging deals with prosecutors to avoid more serious charges, Santori added. Hence, a serious challenge faces prosecutors’ interpretation of what determines a bitcoin-related money services business, or to the FinCEN guidelines distinguishing between individual traders and exchanges.

Images from Shutterstock and the Federal Register.