Does Selling Bitcoins Violate Laws Against Money Laundering?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Aug 20, 2016

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BitcoinsBitcoins may be a substitute for money, but it is not the kind of money addressed by money laundering statutes, according to a Miami judge. The judge’s decision applies Florida law, but its logic may extend to similar money laundering statutes. As Bitcoin grows in popularity, questions about the legality of selling Bitcoins may arise in other jurisdictions, prompting lawmakers to decide whether the statutory definition of money should be broadened to include Bitcoins.

The Bitcoin Economy

Like currency, Bitcoin is a medium of exchange. For example, Bitcoins are often used as payment for goods or services. Bitcoin transactions are conducted without an intermediary using peer-to-peer technology. The absence of a central authority to verify transactions is one factor that distinguishes Bitcoin from an electronic payment service like Paypal.

To assure that the same user does not spend the same Bitcoin twice, Bitcoin transactions are recorded on a public ledger. The ledger is “public” in the sense that it is distributed across a large number of computers in the peer-to-peer network. The ledger is maintained by volunteers whose efforts are rewarded with Bitcoins.

Bitcoins are not printed on paper. No central bank, repository, or administrator controls the Bitcoin supply. No government defines Bitcoin as “legal tender.” For those reasons, Bitcoin is not “currency” in the traditional sense of the word.

The U.S. Treasury describes Bitcoin as a “virtual currency.” It has also been described as a “digital cryptocurrency” because Bitcoins are generated and transactions are verified by using cryptographic software protocols.

Bitcoins are stored in a user’s electronic “wallet.” Once Bitcoins are transferred, the transaction cannot be revoked.

Bitcoins can be turned into dollars (or other hard currencies) by selling them on a Bitcoin exchange. The exchanges operate in a manner that is similar to a stock exchange, as users offer to buy and sell Bitcoins in exchange for a particular currency.

Bitcoin and financial crimes

Some commentators have dubbed Bitcoin the “Wild West of Finance.” Bitcoins were notoriously used as the payment of preference by purchasers at the former Silk Road “dark net” website, a black market version of eBay that offered illicit drugs for sale, among other criminal services.

Since Bitcoins do not pass through a bank, some Bitcoin users are attracted by the anonymity that Bitcoin transactions offer. That anonymity may account for the decision of a Secret Service agent and a DEA agent to steal Bitcoins (collectively valued at more than one million dollars) during an undercover investigation of Silk Road.

Bitcoin supporters argue that Bitcoin provides a “democratic” means of exchange, one that is more trustworthy than the banking industry. Consumers who are unhappy with bank charges and government bailouts of financial institutions have turned to Bitcoin as an alternative means of engaging in financial transactions.

Unfortunately, the unregulated nature of Bitcoin also appeals to people who want to commit crimes. In some cases, accepting Bitcoins in lieu of dollars for services rendered may be a way to evade the payment of income taxes. Bitcoins have allegedly been used for other criminal purposes, such as funding terrorist activities.

The Espinoza Prosecution

To the frustration of law enforcement, some perceived Bitcoin crimes may not be crimes at all. Money laundering charges in Miami-Dade County, filed under Florida law, were dismissed for exactly that reason.

Miami Beach Police Detective Ricardo Arias, working with the Secret Service (one of several federal agencies that investigates allegations of money laundering), placed a request to buy Bitcoins on an internet exchange. He made contact with Michell Espinoza, who advertised a willingness to sell Bitcoins for cash in a face-to-face transaction. While meeting in a public place, Espinoza would accept the cash and then transfer Bitcoins to the purchaser’s Bitcoin wallet using a smartphone.

Using an undercover identity, Arias met Espinoza and agreed to purchase approximately .40 Bitcoins for $500. Arias made clear that he wanted his identity to be kept confidential. He told Espinoza that he needed the Bitcoins because the people with whom he was doing business did not accept cash.

During a second meeting, Arias purchased one Bitcoin for $1,000. Arias told Espinoza he was using Bitcoins to purchase stolen credit card numbers from Russians. Arias then asked Espinoza if he would be willing to accept stolen credit card numbers in exchange for Bitcoins during their next transaction. Espinoza said he would think about it.

A third transaction was conducted entirely by text. Arias electronically transferred $500 to Espinoza’s bank account, and Espinoza transferred a fraction of a Bitcoin to Arias’ wallet.

Arias contacted Espinoza about a fourth transaction, purportedly for $30,000 worth of Bitcoins. Arias again mentioned stolen credit card numbers but no suggestion was made that Espinoza would accept them as payment. Arias showed Espinoza $30,000 in cash but Espinoza recognized that the bills were counterfeit and refused to accept them. Arias then arrested Espinoza.

Charges Dismissed

Espinoza was charged under Florida law with two counts of money laundering and one count of unlawfully operating a money services business as a “money transmitter.” Florida law defines a money transmitter as an entity that charges a fee to transmit money. Western Union is an example of a money transmitter. The court dismissed that charge because Espinoza did not transmit money (or Bitcoins) to a third party. Moreover, Espinoza did not charge Arias a fee. Instead, Espinoza made money by selling the Bitcoins for more than he paid for them, as would a currency trader.

The prosecution later amended the charge to allege that Espinoza operated a money services business as a “payment instrument seller.” Checks and money orders are examples of payment instruments. Because Florida law does not define Bitcoins as a payment instrument, the court dismissed that charge.

The court also dismissed the money laundering charges. The court began its analysis by pointing out that money laundering statutes punish people for disguising the proceeds of illicit activity (like drug dealing) as legitimate income. Money laundering may be used to avoid bank transaction reporting requirements or to provide a source of taxable income so that people who own significant assets acquired with illegally obtained wealth can pretend to have acquired their property honestly.

Since Arias did not provide illegally acquired funds to Espinoza, the transaction did not fit within the common understanding of money laundering. The prosecution nevertheless argued that the transaction violated Florida law because it is illegal in Florida to conduct a financial transaction with proceeds that were derived from, or will be used to conduct, an illegal activity, if the person who conducts the transaction intends to promote the illegal activity, to disguise the illicit proceeds, or to avoid currency reporting requirements.

Under Florida law, it does not matter that no illegal activity was or would be conducted, provided that a law enforcement officer claims that the proceeds were derived from or will be used to conduct an illegal activity. That provision of the law permits the police to target money launderers with undercover sting operations. The prosecution argued that Espinosa violated the law because Arias claimed the Bitcoins would be used to facilitate credit card fraud. According to the prosecution, the transaction thus promoted an illegal activity.

The court disagreed. Florida’s money laundering law applies to financial transactions, which the statute defines as a transaction involving one or more monetary instruments. “Monetary instruments” are defined as currency, personal checks, bank checks, money orders, bearer bonds, and negotiable instruments. Bitcoins do not fall within any of those definitions.

The prosecution argued, however, that only one party to the transaction (in this case, Arias) is required to use a monetary instrument, so exchanging Bitcoins for cash is a financial transaction. Accepting that interpretation of the statute as reasonable, the court still found no evidence that Espinoza committed a crime. Arias did not tell Espinoza that he was using the proceeds of a crime to purchase the Bitcoins. Nor could the court conclude that Espinoza “promoted” credit card fraud. “Promote” means “encourage” or “incite.” Espinoza did nothing to encourage Arias’ purported plan to use Bitcoins to commit a crime. The mere sale of property, the court held, does not promote the illegal use of that property.

If law enforcement agents choose to target Bitcoin sellers under similar laws in the future, they might have more success by representing that they are purchasing the Bitcoins with the proceeds of criminal activity. Honest Bitcoin sellers who understand the law will refuse to sell Bitcoins to anyone who makes that representation. In fact, intelligent Bitcoin sellers will probably realize they are dealing with a law enforcement officer, since criminals do not tell strangers that they acquired their money by committing a crime. Unless an appellate court decides differently, however, Florida law does not prohibit Bitcoin sellers from doing business with individuals who claim they will use Bitcoins to commit a crime.

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