Bitcoin isn’t issued by the government nor can it be deposited in a bank. So should it be subject to the same federal banking rules as traditional paper and coin currency?
It is a question that federal authorities have been grappling with ever since digital currency took off a decade ago, one that will now be heard in a San Diego courtroom with the indictment of Morgan Rockcoons.
The 30-year-old was the target of an undercover sting that depicted him as being a prolific Bitcoin trader who exchanged Bitcoin for a butane hash oil manufacturer without complying with anti-money laundering banking rules. He is charged with operating an unlicensed money transmitting business and money laundering.
The case has re-energized the debate over how the virtual currency marketplace is regulated and whether such criminal prosecutions can stand up in court. Most cases have, but judges in a few prosecutions have taken provocative positions that Bitcoin is not currency, suggesting the issue is far from being case-closed.
“Despite the recent surge in attention, Bitcoin remains new and novel,” said Brian Klein, a Los Angeles attorney who has become an expert in cryptocurrency law and has clients around the country. “Bitcoin has captured the imagination of a lot of people. It’s an exciting field to be involved in. There’s still a lot of new legal ground to be plowed.”
A Bitcoin prosecution has not yet been tested in the U.S. 9th Circuit Court of Appeals. Could the Rockcoons case break any new legal ground?
On his Twitter account, an outspoken Rockcoons characterizes the case as “the insane Federal Government hell bent on banning Bitcoin use” and has put himself in the role of Bitcoin defender.
“This case will basically make Bitcoin use a crime, something I will NOT allow as CEO of Bitcoin inc,” Rockcoons told the Union-Tribune in a Twitter message when asked about the case. “It’s my fiduciary responsibility to protect all Bitcoin users, Bitcoin developers and Bitcoin companies using the Bitcoin network world wide, so I will fight these made up bogus charges all the way to the Supreme Court if I must.”
Bitcoins are the most popular kind of digital currency, defined succinctly by the website Lifewire as “electricity converted into long strings of code that have money value.” You can’t hold Bitcoin like a dollar bill, but the long code has value and is kept in a virtual “wallet” to be held onto as an investment or to be used to buy goods. Some major retailers accept Bitcoin but it hasn’t caught on as pioneers had hoped.
Its anonymity also makes it the currency of choice for the dark web, which hosts a massive underground marketplace for everything from child porn to drugs to identity theft to murder for hire.
The law surrounding how Bitcoin can be exchanged is found in guidance from the Financial Crimes Enforcement Network, the arm of the U.S. Treasury Department that works to combat money laundering with regulations.
In 2013, FinCEN announced that virtual currency was no different than standard currency when it comes to following the Bank Secrecy Act. The guidance requires people in the business of exchanging Bitcoin for traditional or other type of currency to register with FinCEN and follow other anti-money laundering measures as banks do, including knowing the identity of the customer and reporting any transactions over $10,000. Many states also require money transmittal businesses to be licensed.
It is a general intent crime, meaning it’s a felony for someone to run an unlicensed Bitcoin business whether or not there is knowledge of the licensing requirement.
The law, as the DOJ interprets it, “provides almost unfettered prosecutorial discretion, making it a relatively easy criminal charge to bring and secure a conviction,” Klein, the Bitcoin attorney, points out in an essay on CoinCenter.org, a nonprofit research and advocacy group. “And because the courts so far have appeared to line up behind the DOJ’s interpretation, it can be a very difficult charge to defend.”
The prosecution of Charlie Shrem was the first of its kind, and made Bitcoin enthusiasts nervous. The young Bitcoin entrepreneur had started an exchange business that allowed users to buy Bitcoins and make purchases with Bitcoin for a fee, giving temporary credit to customers to make the deals go faster. In 2014 he was charged with operating an unlicensed money transmitting business, as well as conspiring to launder money to help customers of Silk Road — the massive criminal online marketplace — make purchases with Bitcoin.
He pleaded guilty to aiding and abetting unlicensed money transmission and was sentenced to two years in prison.
Others have followed in his footsteps.
In 2016, a Miami-Dade judge ruled that Bitcoin is…