Florida Judge Terersa Pooler has ruled that the Federal Government cannot prosecute Michell Espinoza for attempting to make a deal with an undercover police officer to purchase fake credit cards online with Bitcoins.
Judge Pooler ruled that Espinoza did not "make a payment" since one must use money to make a payment and Bitcoins are not money (hat/tip REASON):
Pooler decided that in fact "the Defendant did not receive currency for the purpose of transmitting same to a third party" as per the money transmitter charge. He was not a middleman, like Western Union. Moreover, in Pooler's opinion, bitcoin does not "fall under the statutory definition of a 'payment instrument.'" Pooler calls on the IRS's own decision that bitcoin is property, not money.
Pooler's decision puts her at odds with the Financial Crime Enforcement Network (FinCEN), which has held that it has the legal authority to prosecute financial crimes where the suspects used Bitcoin. (I know it is shocking that a federal agency would interpret the law in a way that extends its powers):
When I wrote about that IRS decision that bitcoin was not money as far as it was concerned, but just property, back in 2014, a representative of U.S. Treasury Department's Financial Crime Enforcement Network (FinCEN), Steve Hudak, nonetheless said that (in paraphrase, not direct word for word quote from Hudak): Bitcoiners who think they've caught the feds in a contradiction--with the IRS saying Bitcoin's not a currency but FinCEN regulating exchanges as "money transmitting businesses"--are mistaken. FinCEN does not consider Bitcoin money either. But if you are in the business of turning anything into U.S. cash money and moving that cash around the nation or world, that makes you a regulatable money transmitter.
Judge Pooler seems to disagree, at least as it applies to people doing direct person-to-person bitcoin-for-money sales.
"The Florida Legislature may choose," Pooler wrote, "to adopt statutes regulating virtual currency in the future. At this time, however, attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole." As far as the money laundering charges go, Pooler does agree, sort of, with Hudak of FinCEN that the fact that one side of the transaction was actually money makes it potentially fall under the statute. But given that the statute under which Espinoza was charged requires a certain level of awareness of the illicit nature of the money for the "laundering" to apply, that the person receiving the money is intending to promote some illegal action, she ultimately decides that "This Court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning."
Read the whole Reason piece here.
Economics Professor Lawrence White, writing at the Foundation for Economic Education website, points out the benefits to Bitcoin users of this recent decision are that it frees them from the various federal reporting requirements and money laundering statues. Professor White also provides an interesting analysis of the Judge's decision:
Evaluating her arguments as a monetary economist, I find that some are insightful, while others are beside the point or confused. On the charge that Espinoza illegally operated an unlicensed money services business, she correctly noted that Bitcoin is not widely accepted in exchange for goods and thus “has a long way to go before it is the equivalent of money.” Accordingly, “attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole.”
However she also offered less compelling reasons for concluding that Bitcoin is not money, namely that it is not “backed by anything” and is “certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.” Federal Reserve notes are money without being backed by anything, and bank deposits are money despite being intangible. Gold bars are today not money (commonly accepted as a medium of exchange).
Judge Pooler further correctly noted that Espinoza did not receive currency for the purpose of transmitting it (or its value) to any third party on his customer’s behalf, as Western Union does. He received cash only as a seller of Bitcoin. Nor, she held, does Bitcoin fall into any of the categories under Florida’s statutory definition of a “payment instrument,” so Espinoza was not operating a money services business as defined by the statute.
Bitcoin is indeed not a payment instrument as defined by the statue because it is not a fixed sum of “monetary value” in dollars, unlike the categories of instruments that are listed by the statute. It is an asset with a floating dollar price, like a share of stock.
Here Judge Pooler accepted a key defense argument (basically, “the defendant was not transmitting money, but only selling a good for money”) that was rejected by Judge Collyer in U.S. v. E-Gold(2008). In the e-gold system, Smith could purchase and readily transfer to Jones claims to units of gold held at e-gold’s warehouse. Federal officials successfully busted e-gold for “transmitting money” without the proper licenses. Judge Collyer accepted the prosecution’s argument that selling gold to Smith, providing a vehicle for him to transfer it to Jones, and buying it back from Jones is tantamount to transmitting money from Smith to Jones.
Of course, the Espinoza case is different in that Espinoza did not provide a vehicle for transmitting Bitcoin to a third party, nor did he buy Bitcoin from any third party. No Mens Rea, No Money Laundering On the charge of money laundering, Judge Pooler found that there was no evidence that Espinoza acted with the intent to promote illicit activity or disguise its proceeds.
Further, Florida law is too vague to know whether it applies to Bitcoin transactions. Thus: “This court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”
I expect that FinCEN will now want to work with the State of Florida, and other states, to rewrite their statutory definitions of money services businesses and money laundering to reinforce their 2013 directive according to which Bitcoin exchanges must register as MSBs and so submit to “know your customer” and “file reports on your customer” rules. If even casual individual Bitcoin sellers like Espinoza must also register as MSBs, that will spell the end to legal local Bitcoin-for-cash trades.
Read the whole piece here. I believe Professor White is correct that these case will be used as a justification for imposing new regulations on Bitcoin and other digital currencies.
Of course, in a free society with a truly just legal system, people like Mr. Espinoza would be prosecuted for fraud, regardless of what was used to finance their schemes.
Something that is overlooked by most commentators (although Professor White hints at it), is why should government determine what is and what is not money? In as truly free-market economy, money is whatever individuals choose to use as a medium of exchange.
Whether the people choose to use gold, silver, bitcoin, cigarettes or (BOOOO) fiat currency is besides the point. The point is that the people, acting through a free-market, rather than politicians and bureaucrats get to decide what is, and is not, money.
Instead of imposing new regulations on digital currencies, Congress and state legislators should repeal all money laundering laws, along with laws that interfere with individuals ability to use "alternative" currencies.
Oh, and maybe we should also Audit, then End, the Fed.
Tags: Bitcoin, financial crimes, alternative currencies