Florida Becomes First State to Sue Unlicensed Bitcoin Traders
February 11, 2014 8:25 AM
Florida residents are in some big trouble for their Bitcoin trading -- they better find a good lawyer.
Owners of localbitcoins.com 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
individuals running an unlicensed Bitcoin "exchange".
I. Bitcoins -- a $10B USD (Mostly) Legit Business
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.
wide user base and value
Bitcoin is starting to see use as
a legitimate, highly secure digital payment system
Bitcoins have become big business. [Image Source: Josh Romero, et al.]
at both the federal
and state level
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
Following Senate hearings, Bitcoin's backers received a nice boost when the
U.S. Department of the Treasury
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
Unlike large money exchange sites, localbitcoins.com 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
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
Miami Electronic Crimes Task Force
(MECTF) in the sting operation, which ran over the past few months.
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
The sting lured three localbitcoins users into separate high-value transactions in the state. Those charged include:
Michell Abner "Michelhack" Espinoza
Resident of Miami Beach, Flor.
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
Resident of Miramar, Flor.
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.
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.
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 BitInstant.com with money laundering charges.
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.
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 runs
Volatility from hacks
that sold users coins at low prices, complaints of
, 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.
Krebs on Security
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