Two Florida men charged with using the online Bitcoins in an alleged money-laundering scheme did nothing illegal because state law covers only currency issued by the U.S. or another country, their lawyers said.
Pascal Reid, 29, and Michell Abner Espinoza, 30, were charged Feb. 6 with laundering and engaging in an unlicensed money-servicing business in what one prosecutor said may be the first state charges over the use of Bitcoin.
Reid’s attorney, Ron Lowy, asking a Miami-Dade Circuit Court yesterday to reduce his client’s $450,000 bail bond to $25,000, argued that prosecutors are attempting to apply existing laws to Bitcoin even though “the language of the Florida statutes excludes and was never intended to cover Bitcoins.”
“No one ever anticipated there would be a non-government form of currency, but there is,” Lowy said after a court hearing.
Federal prosecutors are probing possible criminal violations tied to the shutdown this week of Tokyo-based Mt. Gox, once the world’s largest exchange for digital-currency transactions, two people familiar with the matter said Feb. 26. It follows a series of charges filed by U.S. prosecutors since last year related to the currency.
The Manhattan U.S. attorney’s office also requested information from the Bitcoin Foundation, an advocacy group, and companies that have done business with Mt. Gox, said a person briefed on the foundation’s contacts with prosecutors. The foundation and the companies aren’t targets, the person said. Japanese authorities are also probing Mt. Gox’s shutdown.
Steven J. Wisotsky, a law professor at Nova Southeastern University in Ft. Lauderdale, Florida, said Lowy’s strategy has “substantial merit.”
“Suppose instead of Bitcoin, which is intended to be a medium of exchange, suppose he had traded cigarettes for U.S. cash,” Wisotsky said in a phone interview. “You couldn’t say that was money laundering. This is uncharted territory. The court is going to be faced with questions that, to my knowledge, have not been resolved. Bitcoin is all so new.”
Both defendants, who are being held in Miami-Dade County jails, were scheduled to be arraigned yesterday. Their cases were delayed and a hearing to set Reid’s bond is scheduled for March 10, while Espinoza’s hearing is set for the next day.
The men are accused of selling Bitcoins to undercover officers, who told them they were using the currency to launder the proceeds of credit-card fraud.
Digital currency “is both a new area of the law and a new area of criminal activity,” Ed Griffith, spokesman for the Miami-Dade State Attorney’s Office, said yesterday in an e-mail. “As prosecutors, we relish the opportunity to help define the law regarding this potentially important field.”
A prosecutor said the cases may be the first time anyone has been prosecuted for Bitcoin activity under a state statute.
“The use of Bitcoins in the transactions is a new technological flourish to this very old crime,” Miami-Dade State Attorney Katherine Fernandez Rundle said after the men were arrested. The “arrests may be the first state prosecutions involving the use of Bitcoins in money laundering operations,” she said.
Espinoza’s attorney, Rene Palomino, said yesterday his client did nothing wrong.
“There is no money laundering scheme or anything of that nature,” he said. “I don’t think what happened here was even a crime. Bitcoins in and of themselves are not illegal. This was a regular business transaction.”
He said Espinoza is “a humble, simple man. He was just beginning his adult life.”
Lowy said Reid has been unfairly portrayed as a money launderer.
“He’s a poor schlep who was excited about Bitcoin,” Lowy said. “Now he’s being made a scapegoat so they can frighten the industry.”
Bitcoin, introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, has no central issuing authority and uses a public ledger to verify encrypted transactions. It has gained traction with merchants selling legitimate products while it also has been used to facilitate illegal transactions.
Federal prosecutors in New York have charged several people in connection with Bitcoin transactions since October. Ross William Ulbricht, known as the “Dread Pirate Roberts,” was arrested for allegedly operating the billion-dollar Silk Road website, where customers bought and sold illegal drugs with Bitcoins. He has pleaded not guilty and faces trial Nov. 3 in Manhattan.
In the Miami case, undercover police officers sought out “individuals engaged in high volume Bitcoin activity,” Rundle said after the two men were arrested.
In December and January, a Miami Beach police officer and a Secret Service agent bought $1,500 in Bitcoins from Espinoza and another $1,500 from Reid in separate transactions, according to arrest affidavits filed in the case. They told both men they were using the digital currency to buy stolen credit cards. The officers found the men on the Bitcoin exchange site LocalBitcoins, according to the filings.
In February, Reid sold the Secret Service agent $25,000 worth of Bitcoins, paying him a $5,000 commission, police said. The Miami Beach officer tried to purchase $30,000 in Bitcoins from Espinoza, but Espinoza backed out of the deal, fearing the cash might be counterfeit, according to the affidavits.
Although the defendants were paid in U.S. dollars for the Bitcoins, Lowy wrote in his motion that “Bitcoins may be exchanged for currency to the extent another private party is willing to buy them on an exchange or in peer-to-peer transactions. Additionally, Bitcoins do not represent a ‘fixed amount of money’ in the currency of any nation, as their value constantly fluctuates relative to government backed securities.”
Florida’s money laundering law defines monetary instruments as “coin or currency of the United States or of any other country, travelers’ checks, personal checks, bank checks, money orders, investment securities in bearer form or otherwise in such form that title thereto passes upon delivery, and negotiable instruments in bearer form or otherwise in such form that title thereto passes upon delivery.”
Brian Tannebaum, a Miami attorney and former president of the Florida Association of Criminal Defense Lawyers, called Lowy’s strategy brilliant.
“I think it’s such a new and novel form of currency, there’s a question of whether it really is a currency,” Tannebaum said in a phone interview. “And whether it even has value.”
The cases are State of Florida v. Espinoza, 14-002923; State of Florida v. Reid, 14-002935, Miami-Dade Circuit Court (Miami).
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