In their simplest form, Bitcoin and other virtual currencies are digital representations of value that can be traded through an exchange and stored in digital wallets secured by 26-35 character long case sensitive account numbers that require a private key, similar to a password or pin to access. Virtual currency is not legal tender issued or guaranteed by any government. Rather, its value is determined by consensus within a community of users. Since these transactions are done on the internet and through exchanges using cash, wire transfers, or credit cards to a host of web-based businesses, the purchasers’ identities and source of funds are more difficult to uncover.
Starting in 2013, the Department of Justice (DOJ) announced its policy position to prosecute individuals for failing to register their Bitcoin-related businesses. The DOJ, and to date courts have agreed, that Bitcoin and other virtual currencies fall within the parameters of 18 U.S.C. § 1960, and money laundering statutes 18 U.S.C. § 1956 and 1957. § 1960 states in relevant part, “whoever knowingly conducts, controls, manages, supervises, direct, or owns all or part of an unlicensed money transaction business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.” Thus, using this language, Bitcoin business operators are now being prosecuted by the DOJ as unlicensed money transmitting businesses.
To establish criminal liability, the government must prove that a person or business (a) transferred on behalf of the public (b) funds (c) in violation of State or Federal licensing and registration requirements, or with knowledge that the funds were derived from a criminal offense. The standard merely requires the government to show that the person or entity failed to properly register with their state, usually the Division of Banking and Insurance, and/or with FinCEN (Financial Crimes Enforcement Network). 31 U.S.C. § 5330. The reason for the registration and reporting requirements are simple – without these, the government has no way to regulate and uncover alleged illegal transactions through the use of virtual currencies.
Increasingly, the government is bringing charges against relatively small family-run businesses that trade Bitcoin for their own investment, as well as for the public. In these scenarios, the person sets up a website offering the purchase of Bitcoin for a modest 4-5% commission. The individual may register their company as an LLC or corporation with their home state and properly declare the income on their tax returns. However, if they fail to register with their state banking commission and with FinCEN, they are subject to civil and criminal penalties. They may also be subject to liability for failing to comply with monetary reporting regulations, such as filing Currency Transaction Reports (CTRs) and IRS Form 8300 for currency transactions of $10,000 or more.
Lastly, operators of these businesses face exposure under the other prong of §1960, knowledge that the funds were derived from a criminal offense. To that end, knowing one’s customer, similar to bank requirements, comes into play. Knowing that a customer – or an undercover agent posing as a legitimate customer – has acquired funds through illicit means will subject an individual to criminal liability. The government, for example, has been using undercover investigations to ferret out Bitcoin businesses. An undercover may tell the person that the monies used to purchase the Bitcoin come from the sales of illegal items, such as internet sales of prescription drugs, stolen goods, or the like. Or the agent may simply have several transactions that when totaled exceed $10,000 and the proper reporting forms are not submitted. Each of these transgressions run afoul of the law.
While virtual currency is becoming more widely known and accepted – and certainly has legitimate uses – it is still developing and increasingly regulated. There are a number of ways for a person involved with a Bitcoin business to come under government scrutiny; the registration and intricate regulatory schemes involved in transfers of money and Bitcoin require sophisticated legal advice and caution.
Stahl Criminal Defense Lawyers aggressively defend individuals charged with complex federal and state crimes. Founder Robert G. Stahl is recognized as one of the top criminal defense attorneys in the NY/NJ area for his skills, knowledge and success. To contact the firm, call 908.301.9001 for the NJ office and 212.755.3300 for the NYC office, or email Mr. Stahl at firstname.lastname@example.org.