Two Florida Users of Localbitcoins.com Arrested for Money Laundering and Unlicensed Money Transmission – Virtual Currency Report u s anti money laundering laws

By laura T. Ewbank, carla L. Reyes and J. Dax hansen on february 11, 2014 posted in enforcement actions, litigation and decisions, regulatory and legislative developments

Two users of localbitcoins.Com, pascal reid and michell espinoza, were arrested last week in what appears to be the first case where bitcoin sellers have been prosecuted under state anti-money laundering and money transmission laws. These arrests illustrate that under some state money transmitter laws, the direct sale of bitcoin can constitute money transmission—and that selling bitcoin without a money transmitter license can result in criminal charges. Where a seller of bitcoin knows (or has reason to believe) that the transaction involves proceeds derived from or to be used in furtherance of illegal activity, this could separately result in charges under state anti-money laundering laws.U s anti money laundering laws

According to court documents obtained by business insider and available here, reid and espinoza were high-volume traders on www.Localbitcoins.Com, an online exchange based in finland that matches buyers and sellers of bitcoin so that transactions can be completed in person. Localbitcoins.Com is one of the few remaining exchanges where bitcoins can be bought and sold anonymously.

Working in conjunction with florida state law enforcement, the U.S. Secret service’s miami electronic crimes task force identified profiles for “michelhack” and “proy33” on localbitcoins.Com, reportedly belonging to espinoza and reid, respectively. Both profiles had posted offers to sell bitcoins for U.S. Currency. Per the charging documents, an undercover agent contacted espinoza to request a meeting in miami beach to set up an exchange. During the meeting, the agent made statements to espinoza that indicated he was involved in illicit criminal activity.U s anti money laundering laws espinoza sold about 0.4 bitcoins to the undercover agent for $500 (a $83.67 markup over market value). After completing a few additional small transactions, the agent asked espinoza to sell him $30,000 worth of bitcoins so that he could buy stolen credit card numbers. When espinoza agreed to the deal, he was arrested. Reid’s arrest resulted from a similar series of events.

Reid and espinoza were each charged with money laundering in violation of fla. Stat. 896.101, and operating as an unlicensed money services business, in violation of fla. Stat. 560.125.

While the charging documents indicate that florida is primarily concerned about preventing the use of bitcoin for laundering the proceeds of illegal activity, one key takeaway from this case is that florida law enforcement has determined that engaging in the business of direct sales of bitcoin in florida or to florida residents requires a florida money services business.U s anti money laundering laws

The conclusion reached by law enforcement is consistent with the language of the florida money services business act (“MSBA”). The MSBA requires a license to “engage in the business of a money services business.” fla. Stat. § 560.125. “money services business” includes (1) “payment instrument sellers,” (2) foreign currency exchangers, (3) check cashers, and (4) money transmitters. Id. At § 560.103(22). “payment instrument” is defined broadly as “a check, draft, warrant, money order, travelers check, electronic instrument, or other instrument, payment of money, or monetary value whether or not negotiable.” id. At § 560.103. An “electronic instrument” includes “a card, tangible object, or other form of electronic payment for … the exchange of monetary value, including … [a] means for storing information; that is prefunded; and for which the value is decremented upon each use.” id.U s anti money laundering laws at § 560.103(14). “monetary value” is defined as “a medium of exchange, whether or not redeemable in money.” id. At § 560.103(17). Bitcoin, as a means of storing information that must first be “prefunded” with legal tender and a medium of exchange that may or may not be redeemable in a specific amount of legal tender, likely falls within this definition of monetary value. Bitcoins therefore fit the florida definition of “payment instrument” because a bitcoin is an “electronic instrument.” as such, under florida law, sellers of bitcoin qualify as “payment instrument sellers” and must obtain a money services business license to conduct direct sales of bitcoin. Espinoza and reid allegedly ran afoul of this requirement by attempting to sell bitcoin without first obtaining necessary licenses.

While direct sellers of bitcoin are money services business under florida state law, other states may not reach the same conclusion—indeed, many state statutes do not define “payment instrument” as broadly as florida.U s anti money laundering laws in other words, whether direct bitcoin sales require licensure in any given state will depend upon the categories of activity regulated in each state and the statutory definitions of those activities.

On the federal level, the march 18, 2014 fincen virtual currency guidance makes clear that exchangers and administrators that sell bitcoin and other virtual currency are money transmitters if the transactions involve the receipt of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another person or location. However, two recent fincen administrative letter rulings imply that some “conversion” of virtual currency into legal tender, when not undertaken on behalf of others, may not rise to the level of federally regulated activity. While it therefore remains likely that a person or entity engaged in the business of directly selling bitcoin or other virtual currency as a service to consumers is a regulated federal money services business, it remains unclear whether all direct sellers of bitcoin will be determined to be money transmitters, especially if the sales are undertaken for the seller’s own account.U s anti money laundering laws

In short, parties interested in engaging in direct sale of bitcoins should tread carefully to ensure that they abide by all applicable laws and regulations in each jurisdiction where they plan to do business.