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In State of Florida v. Espinoza , a trial court in Miami recently dismissed all charges against an individual Bitcoin exchanger, who was arrested in a sting operation after agreeing to sell bitcoins to an undercover detective who purported to need them to buy stolen credit cards.
The Espinoza decision is the first judicial opinion dismissing charges against a virtual currency exchanger and is worth a careful read. In significant respects, the decision is at odds with prevailing case law from other virtual currency-related prosecutions. At the end of the day, however, the decision appears to be the product of a unique set of facts, involving an individual engaged in sporadic, small-volume Bitcoin transactions, and does not reflect the overall regulatory trends facing virtual currency businesses.
F ac tu a l Background. Michell Espinoza was arrested on February 6, , following an investigation by an undercover detective from the Miami Beach Police Department the UC. At the meeting, Espinoza agreed to sell the UC. U n li cense d Operation of Money Services Business. Third, Judge Pooler found that, in any event, Espinoza had not engaged in money transmitting or selling payment instruments as a business — another element of the offense.
Instead, Espinoza made a profit simply by selling bitcoins for a higher price than he had paid for them. In light of all these considerations, Judge Pooler dismissed the money transmitting charge against the defendant.
As to the money laundering charge against Espinoza, Judge Pooler found that the alleged conduct did not involve the requisite criminal intent. In other respects, however, the E spinoza decision explores less settled territory. In such a transaction, there is only one party involved, who is both buying and receiving the bitcoins; the bitcoins are not sent to a separate recipient.
FinCEN takes the view that selling virtual currency as part of an exchange operation nonetheless constitutes money transmitting, in that it involves transmission of money from one location to another — that is, transmission from the location where the money is held prior to the transaction e. Other cases applying money transmitting laws have held that the issue turns simply on whether the defendant acted for profit, and have pointed to the charging of a fee merely as evidence of a for-profit operation, rather than a legal requirement in and of itself.
His activity was thus arguably more akin to the sale of personal property through a classified ad, as opposed to the operation of a continuous business enterprise.
Lastly, the dismissal of the money laundering charge in Espinoza raises the issue of what criminal liability a Bitcoin exchange business may bear from processing transactions for customers whom it knows are engaged in illegal activity.
However, virtual currency businesses should be aware that such knowledge does provide a sufficient basis for other criminal charges. In rebuffing the prosecution of a Bitcoin exchanger, the E spinoza decision underscores the uncertainty that still surrounds the legal treatment of virtual currency and the hesitation courts may have toward applying money transmitting laws and AML laws to this novel context.
However, the decision does not reflect general legal trends so much as the unique factual background of the case. Indeed, what seemed to concern Judge Pooler the most was the targeting of Espinoza, a small-time, casual seller of bitcoins, for a sting operation, despite there being no prior indication that he was involved in criminal activity.
Whether the E spinoza ruling stands as a legal precedent will be decided in the pending appeal of the case. But regardless, the case may serve as an admonition to law enforcement, in its efforts to patrol the virtual currency space, to be more discriminating in its choice of investigative targets. Faiella , 39 F. The FinCEN March Guidance also takes the position that a person is a money transmitter if the person accepts Bitcoin from one person and transmits it to another person — even if the acceptance and transfer are not part of the same transaction — if the conduct is part of an exchange operation as opposed to selling other goods or services.
Mazza-Alaluf , F.