Print 22 comment(s) - last by purerice.. on Feb 13 at 1:32 AM

Florida residents are in some big trouble for their Bitcoin trading -- they better find a good lawyer.
Owners of are accused of violating local laws

New York and California are currently contemplating whether to require licenses for businesses and individuals who deal in Bitcoins. However, Florida has taken things a step further, becoming the first state to criminally charge individuals running an unlicensed Bitcoin "exchange".
I. Bitcoins -- a $10B USD (Mostly) Legit Business
Bitcoin is the world's most popular cryptocurrency.  Bitcoin's basis is the SHA-256d hash; you "own" Bitcoins via proof of work.
Introduced in 2008 by a programmer or group of programmers using the pseudonym Satoshi Nakamoto, the Bitcoin was the first of its kind, turning the science fiction fantasy of a decentralized, encryption-based global currency into reality.

Despite recent controversy over illegal uses of the Bitcoin, the cryptocurrency is the foundation of a generally credible and secure global digital payment network.  While other cryptocurrencies have since emerged, Bitcoin remains the most prominent with a market value of over $10B USD.  Blockchain estimates Bitcoin has roughly 1.2 million users, working out to an average wallet value of around $10,000 USD.  Given its wide user base and value Bitcoin is starting to see use as a legitimate, highly secure digital payment system.

Bitcoin transactions
Bitcoins have become big business.  [Image Source: Josh Romero, et al.]

U.S. regulators at both the federal and state level have been scrutinizing the various aspects of Bitcoin, including its role in marginalizing the U.S. dollar, allegations of it being used for money laundering and drugs, and taxation concerns.

Following Senate hearings, Bitcoin's backers received a nice boost when the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) announced a pair of recent rulings that clarified that the U.S. federal government would only lightly regulate the investment, requiring exchanges to file paperwork with the FinCEN and commit to standard practices to prevent money laundering and other kinds of criminal transactions.

II. Florida Becomes the First State to Lay on Charges

But the Florida case raises serious new questions for those involved in Bitcoin business.

The new charges follow a lengthy investigation and involve a series of active users of the site

Local Bitcoin

Unlike large money exchange sites, is more like the Craigslist of Bitcoin, and is believed by some to be one of the few remaining "anonymous" ways to buy Bitcoin.  Users would post requests for either Bitcoins or U.S. currency, and would arrange face-to-face meet-ups to carry out the trade.  While it is perhaps flawed to believe that real world meet-ups in today's digital age provide greater anonymity, that hasn't stopped the site from becoming a popular place to trade Bitcoins for U.S. cash and vice versa.
While the site itself could be in for some trouble, a team of state and federal law enforcement agencies has taken things in an interesting new direction, treating the site's users as money exchangers.  Local and state troopers with the Miami Beach Police Department (WBPD) and the Miami-Dade State Attorney's office acting as undercover agents, joined with federal officers from the U.S. Secret Service’s Miami Electronic Crimes Task Force (MECTF) in the sting operation, which ran over the past few months.

Bitcoin w/ USD
Three Florida men were charged in an alleged Bitcoin money launder scheme.
[Image Source: Bit-Square]

Brian Krebs describes the crimes investigated, stating:

[Florida has a] law against unlicensed money transmitters – which prohibits "currency or payment instruments exceeding $300 but less than $20,000 in any 12-month period" — and [an] anti-money laundering statutes, which prohibit[s] the trade or business in currency of more than $10,000.

In Florida, money exchanges must register with the Florida Office of Financial Regulation (FLOFR).

The sting lured three localbitcoins users into separate high-value transactions in the state.  Those charged include:
  • Michell Abner "Michelhack" Espinoza
    • Age: 30
    • Resident of Miami Beach, Flor.
    • U.S. citizen
    • Exchanged one bitcoin with a federal agent for $1,000 USD cash, a 17 percent markup at the time
    • According to account on site had 100 confirmed trades in the past six months involving more than 150 Bitcoins (>$110,000 USD at current market values).
  • Pascal "proy33" Reid
    • Age: 29
    • Resident of Miramar, Flor.
    • Canadian citizen
    • Met with officers to arrange a $30,000 USD transaction, but did not complete deal.
    • Was told by undercover officer that the coins purchased would be used to pay for credit cards stolen in the hack of Target Corp. (TGT) (a ficitious objective).
    • Had 403 Bitcoins (~$360,000 USD) in his wallet
  • A third undisclosed individual

It seems unlikely they had no idea that they might have been assisting in money laundering.  Specifically, they clearly had performed a large amount of transactions and had charged lucrative fees -- over a 15 percent premium over market values in some cases -- in exchange for not asking questions.

Miami, among other things, has been a popular locale for cocaine smugglers over the years, breeding a thriving money laundering trade.

Cocaine seized
Much of the nation's cocaine enters via Florida. [Image Source: AP]

Given that Mr. Reid did not complete the exchange in question, it's possible he could see a reduced sentence or even be found innocent if he gets a good lawyer.
But when examined, the fees for becoming a licensed exchange aren't really that high in Florida -- around $1,000 USD or less per year.  Given the money these men were making they were at the least very sloppy, and at worst were aware that if they went legit, they might lose many of their high profile clients.
III. Feds, State Law Enforcement No Longer Casting Blind Eye to Bitcoin
These actions follow in the footsteps of less punitive federal actions from last year.  In early-to-mid 2013 the FinCEN started cracking down on unregistered Bitcoin money exchanges, including those that were based overseas.  But most were let off without felony charges.
New York and California state regulators have been debating requiring state licenses for Bitcoin exchanges with offices in state.  Some in these states have also suggested that business associated with Bitcoin -- such makers of wallet apps -- should have to apply for some sort of formal "Bitcoin license" and pay fees to the state.
In May officials in California threatened felony charges against members of the Bitcoin Foundation, a trade group representing the encrypted payment system, if they were to hold their planned "Future of Payments" conference as planned.  The threat created some outcry and controversy, but ultimately did not lead to any charges.
Things ratcheted up earlier this month at the federal level with the FinCEN indicting Robert "BTCKing" Faiella, 52 -- a Bitcoin trader -- and Charlie "Yankee" Shrem, 24, chief executive officer and compliance officer at the Bitcoin exchange company with money laundering charges.

Charlie Shrem
Charlie Shrem is among two men facing federal money laundering charges for a bitcoin trading operation.  [Image Source: Reuters]

Given Mr. Shrem's background as a former young star of the financial industry executive space and his position as a VP of The Bitcoin Foundation, the arrest was considered very shocking. 
But federal agents painted a relatively convincing picture, revealing how they had monitored Mr. Shrem pretend to reject Mr. Faiella's advances on official email channels, while secretly instructing him on how to arrange illicit transactions associated with the underground marketplace Silk Road in parallel private communications.  The pictured painted was damning enough that Mr. Shrem was forced to resign from The Bitcoin Foundation, which does not condone illegal uses of the cryptocurrency.
So far, Florida is the first state to actually put forth a solid policy and charge Bitcoin entrepreneurs with a crime.  And while the trading described was certainly in essence digital money laundering, we haven't yet heard details indicating whether the traders were as brazen in their conversations about breaking the law as Mr. Shrem and his partner were.
In that regard the latest case could be viewed as the latest tightening of the thumbscrews on those who would abuse the growing money traffic route.

DEA arrest
Bitcoins are far from anonymous (2010 DEA arrest is pictured). [Image Source: AP]

Documents filed in the Florida case reiterate that those who think that real world activities associated with Bitcoin are magically more secure are foolish.  The federal indictment notes that law enforcement has actually come to appreciate how "highly traceable" Bitcoin is.  Indeed when a Bitcoin transaction occurs an announcement is sent out to all users, creating a digital trail of all transactions in the economy.  Law enforcement can use that information against you in court.
Regulation is far from the only concern on the minds of Bitcoin enthusiasts in recent months. The collapse of Mt. Gox -- formerly one of Bitcoin's largest exchanges -- highlighted the danger of digital bank runsVolatility from hacks that sold users coins at low prices, complaints of Bitcoin-mining malware, and unsavory sorts luring hapless Bitcoin enthusiasts into investment "Ponzi schemes" have been among the other recent problems Bitcoin has dealt with.
So far such worries have not been able to prevent the growth in adoption of the popular payment technology, but as Bitcoin continues to push further into the mainstream, they may start to take impact.  For now Bitcoin businesses must tread carefully in the promising field, lest they find their efforts -- earnest or otherwise -- earning them prison time as convicted felons.

Source: Krebs on Security

Comments     Threshold

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Illegal activity does not make bitcoins illegal
By amanojaku on 2/11/2014 12:57:23 PM , Rating: 2
These individuals knowingly engaged in transactions with criminals. Someone says they're going to use the currency to hide purchases of contraband; that's what's illegal. The bitcoins themselves are not illegal. Cash is used to hide illegal transactions, after all. In fact, Florida cannot rule that bitcoins are illegal because states do no regulate currency. Another thing to consider: people are buying and selling bitcoins. I don't know anyone who buys a dollar (loans are not considered a purchase under federal law); you trade a dollar for something of equal value. Depending on the parties involved, you may need to pay taxes on that trade (sales tax, income tax, etc..). Clearly, bitcoins are a commodity, and cannot be made illegal just because they exist.

By atechfan on 2/11/2014 1:03:33 PM , Rating: 1
Billions of dollars, and other currencies, are bought and sold every day. This is part of what determines exchange rates.

By amanojaku on 2/11/2014 1:28:58 PM , Rating: 2
No. Exchange rates are largely dependent upon GDP, employment rates, and the overall health of the country's economy. The major legal reason people buy and sell currencies is because their own currency is not accepted in another country. Many places across the globe will take US Dollars, but no US location will accept, say, the Japanese Yen. You'd have to keep up with the exchange rates of ~200 countries, which no retailer would do.

The other reason for buying local currency is that people sometimes charge more when they see foreign currency that's more valuable than their own. An item that sells for the equivalent of $0.50 USD using their own currency might be $5.00 when US dollars are exchanged. To us, $5 might be nothing, but we just got ripped off for $4.50 USD just because we used the wrong (or right for the recipient) currency.

By yomamafor1 on 2/13/2014 12:09:34 AM , Rating: 2
No. Exchange rates are largely dependent upon GDP, employment rates, and the overall health of the country's economy.

Uh... no, its not. Exchange rate is dependent upon the demand and supply of that currency, which in turn is dependent upon the demand of export / import. It is largely influenced by monetary policy as well as export / import.

If country A produces a goods that more people want, more country A's currency would be bought on the global market, driving the price up (while other countries' exchange rates fall).

On the other hand, exchange rate can be artificially pegged at a predetermined level, be it undervalued or overvalued. Countries can achieve this by purchase their own currency in exchange for foreign currency (overvalued), or they can purchase foreign currencies by selling their own currency (undervalued). The exchange rate itself has nothing to do with GDP, employment rates, and overall health of the economy. It is all about the demand / supply of the currency.

This is how China continues to undervalue its currency relative to the USD, even though their GDP and overall health of the economy are quite good.

By Reclaimer77 on 2/11/2014 2:20:36 PM , Rating: 2
Clearly, bitcoins are a commodity, and cannot be made illegal just because they exist.

Agree 100%. Bitcoin isn't a currency, but a commodity.

This would be like a State trying to make it illegal for me to trade my chainsaw to my neighbor for his lawn mower.

By tanjali on 2/11/2014 2:44:49 PM , Rating: 2
A currency (from Middle English: curraunt, "in circulation") in the most specific use of the word refers to money in any form when in actual use or circulation, as a medium of exchange.

Commodity is a marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services.

I am sad to see U.S. doing that from amazing country of opportunities and hope to, officially, full blown fascist state.

I just think U.S. is captured from some, not well-intentioned, foreign interests.

By yomamafor1 on 2/13/2014 12:13:15 AM , Rating: 2
Saying bitcoin is a commodity is really a stretch. A commodity is a marketable item produced to satisfy wants or needs. Oil is a commodity, because not only it can be bought and sold, it can also be used to produce something that's wanted and needed. Bitcoin, on the other hand, while is marketable, does not satisfy a want or need.

Bitcoin is more like an alternative investment vehicle, a financial instrument that was created in order to be speculated on.

By purerice on 2/13/2014 1:32:01 AM , Rating: 2
If it is neither a commodity nor a currency but still an investment vehicle then it is a security like stocks, bonds, warrants, options, or futures. Any of those securities traded on public exchanges are subject to securities law. It was just a matter of time for BC and other cryptocurrencies.

If people begin to use CCs instead of USDs, the US government may decide to ban transactions of CCs while not banning possession. That would de-legitimize BC instantly. It is hard to see the US government not regulating BC as somebody who bought 100 BCs for $500 on a foreign server a few years ago can now buy a $100,000 car by exchanging those "coins" in the US and pay $0 yet there is no paper trail for profit made on those coins that the government cannot dispute.

A government that finds a way to tax casino winnings but not casino losses is surely going to find a way to tax cryptocurrencies including Bitcoin.

Uhhh, is this a fact, opinion, or...?
By NellyFromMA on 2/11/2014 12:44:33 PM , Rating: 2
Despite recent controversy over illegal uses of the Bitcoin, the cryptocurrency is the foundation of a generally credible and secure global digital payment network.

Is this a fact? Is there a source to confirm this?

I've heard of way more illicit reasons to use bitcoins but VERY FEW legitimate reasons. Just curious if you are pushing the idea because you personally like it or if, in fact, there is some facts to back up your subtle claim.

RE: Uhhh, is this a fact, opinion, or...?
By tumult on 2/11/2014 3:30:14 PM , Rating: 1
You have "heard". Yeah, that's a good source.

In four years I have used BTC for nothing illicit. It is a great way to transfer money with friends, like cash only better. I have used it at restaurants, Gyft, Overstock, Tigerdirect, along with several other places around the web. I love BTC for online transactions, no risk of identity theft whatsoever.

You keep on with that Luddite view though, see how far that gets you. The idea that any technology in its infancy is useless just because it is not yet widespread is just plain unintelligent.

RE: Uhhh, is this a fact, opinion, or...?
By coburn_c on 2/11/2014 4:01:43 PM , Rating: 2
You Technophiles pander to this stuff without a seconds thought and then project your complexes onto rational skeptics. Just because it's technology doesn't mean it's the next fucking coming. In fact a large part of technology is praying on the mentally inferior.

RE: Uhhh, is this a fact, opinion, or...?
By tanjali on 2/11/2014 4:38:43 PM , Rating: 2
Well, it is all about control, isn't it?

RE: Uhhh, is this a fact, opinion, or...?
By coburn_c on 2/11/2014 4:47:30 PM , Rating: 2
True. I think a lot of the blind support for Bitcoin is from anarchistic sensibilities, but so was the gold bubble.

By Reclaimer77 on 2/11/2014 5:01:39 PM , Rating: 2
I don't know if I'm "blindly" supporting Bitcoin or not. But I also haven't heard many, if any, compelling arguments for why I should be AGAINST Bitcoin. Certainly none that would convince me this is something Government's need to ban or make laws against.

Maybe you have some, I would gladly entertain your thoughts.

By phxfreddy on 2/12/2014 6:34:50 PM , Rating: 2
So you think we need the nanny states permission to do anything? How about legalizing freedom?

Take a look at the photo. There is a single harmless looking guy being dragged along in handcuffs by 3 SWAT team members.

Does not make any lights go on in your head? It does in mine. The Federal and state governments are the evil ones here.

Good ole' Florida, where the priorities are
By superstition on 2/12/2014 10:07:41 AM , Rating: 2
The state couldn't manage to handle making legal voting ballots or doing recounts properly -- which were provided for by state law despite Katherine Harris' stonewalling -- but it's going to be sure to crack down on bitcoin!

By purerice on 2/13/2014 1:10:09 AM , Rating: 2
The recounts didn't go legally because the candidate demanding recounts demanded illegal recounts. Had said candidate requested a fair recount of all votes from all precincts instead of cherry picked chaddy votes from cherry picked precincts, the recount would have happened and he would likely have won. Then he would have been president for 2 terms instead of GWB and it would have been the Republicans in 2008 who would have been able to get any candidate elected and right now John McCain would be POTUS.

Thank you, Florida, thank you.

Honestly, BC was only going to avoid regulation as long as it stayed small. Even with Silk Road bitcoin would have avoided attention had the value remained in the $50 range. Yet you take any security, commodity, or currency, raise its value by 3000% in one year, give it thousands of articles in the press, connect it to a high tech smuggling organization that had evaded capture for a decade, then expect ZERO regulation to happen on it, you must be dreaming.

Lots of misstatements here
By Weaver123 on 2/11/2014 6:41:13 PM , Rating: 2
First an MSB license is not trivial nor under $1000. You must have audited finances and maintain a net worth of at least $100,000.00. You also must deposit into escrow or have a surety bond issued for a minimum of $50,000 (can cost upwards of $ 1,000.00) that must be kept in force for at least 4 years beyond the date the business ceases to exist. It's the license is only valid for a specific place of business you designate so unless you have a storefront you can only transact from your home which itself may be prohibited by home insurance policies and community deed restrictions. The obstacles to trading bitcoin in Florida are pretty much insurmountable by most every casual user - even someone with a few grand to spare and the time to devote to frequent trading. They are way too restrictive and fly in the face of recent FinCen regulations that recently stated that you are NOT an MSB if you buy and sell bitcoins for your personal account as an investment. nor are you an MSB if you sell cryptocurrency you mined for fiat. LBC became the craigslist of bitcoin and these two cases should be brought based solely on the idea that a crime had been committed and this money was the proceeds of that crime and was in the process of being laundered. Without that element, the individuals should perhaps not be facing any charges whatsoever.

By snyper256 on 2/11/2014 9:36:28 PM , Rating: 2
This is ridiculous. These people most likely don't even understand how Bitcoin works.

We need distributed exchanges and websites ASAP.

ah... Florida...
By superstition on 2/11/14, Rating: 0
RE: ah... Florida...
By villageidiotintern on 2/11/2014 12:26:37 PM , Rating: 1

RE: ah... Florida...
By MrBlastman on 2/11/14, Rating: 0
"If you mod me down, I will become more insightful than you can possibly imagine." -- Slashdot

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