SDNY Opinion re: Bitcoin

U.S. District Judge Alison Nathan of the Southern District of New York issued a decision yesterday finding that bitcoins are money under the plain meaning of Section 1960, the federal money transmission statute. In July 2015, Anthony Murgio and two others defendants were arrested and charged with operating an illegal bitcoin exchange – Murgio sought to dismiss two counts – operating, and conspiracy to operate, an unlicensed money transmitting business. He argued that virtual currency falls outside the definitional scope of the applicable statute. The court disagreed.

Section 1960 makes it a crime to knowingly conduct, control, manage, supervise, direct, or own all or part of an unlicensed money transmitting business. The statute defines money transmitting to include transferring funds, and lists three ways in which a “money transmitting business” can be deemed “unlicensed.” First, a money transmitting business is unlicensed if it is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony. Second, such a business is unlicensed if it fails to comply with federal money transmitting business registration requirements. And third, a money transmitting business is unlicensed if it involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity.

Section 1960 does not specify what constitutes “transferring funds.” This raises the question of whether bitcoins are deemed to be “funds” or money under the statute. The court concluded that they are. Relying on two prior decisions – Judge Rakoff’s decision in United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014) and Judge Forrest’s decision in United States v. Ulbricht, 31 F. Supp. 3d 540, 570 (S.D.N.Y. 2014) – and applying the “ordinary meaning” of the term “funds,” the court stated that:

bitcoins can be accepted as a payment for goods or services or bought directly from an
exchange with a bank account. They therefore functions as pecuniary resources and are
used as a medium of exchange and a means of payment.

Hence, the court held that bitcoins are “funds” under the statute.

While the publicity surrounding this decision may seem noteworthy, in reality the court’s decision is consistent with several other federal cases and will unlikely have a dramatic impact.

UPDATE: California Bill Has Been Withdrawn

Last week, California legislators introduced an amended AB 1326, which substantially changed California’s proposed bill addressing procedures and regulations of digital currency businesses. After a second reading in the California Senate, this bill has been re-referred to the Committee on Banking and Financial Institutions for additional comment. See California Legislative Status on AB-1326. Industry leaders, including this blog, expressed concerned last week that the proposed bill was being fast-tracked without a meaningful discussion of the substantial changes to the bill or the impacts the changes may have in practice on digital currency businesses. This week, the bill has been withdrawn from consideration for this legislative session. We will keep you posted on additional updates, but the most current information about this bill is that it will no longer be pursued this year.

Our original post can be found here.

California Legislature Fast-Tracks a Bill Creating Enrollment Procedure and Enforcement Authorization for Digital Currency Companies, Leaving Several Important Questions Unresolved

This week, at the tail-end of the legislative session, California legislators have introduced a bill (amended from a bill originally introduced in April 2015) that statutorily addresses the increasingly topical question of how to regulate the emerging crypto-currency market.

The amendment, introduced on August 8, 2016, is a vast departure from the earlier iterations of the proposed bill and addresses many questions about regulating this unique space. With the legislative session ending this month, however, the changes have many in the industry asking: Is this proposed bill ripe for lawmaker approval? While the attempt at specializing the Program towards this unique industry appears to have many advantages over other licensing systems, the bill as-written also introduces various ambiguities — especially regarding questions of the proposed bill’s scope, definitions, and how a statute will be applied in practice. Involvement of industry members in drafting such a bill could help alleviate those concerns. Moreover, several states have already attempted to address this space — with varying success. The ULC is currently engaged in drafting a uniform Virtual Currency Business Act, which aims to unify state systems and avoid a patchwork of conflicting state laws. By enacting this proposed bill, California would be going it alone with an approach that does not appear to be harmonized with the best (or the worst) state solutions out there to date.

What is now essentially a complete overhaul of the original bill, the current version changes what was originally a licensing structure to an enrollment program. To illustrate, the new enrollment program requires digital currency businesses in California to enroll and introduces various industry-specific definitions and enrollment requirements. The proposed bill also gives the DBO authority to regulate. Here is our Summary and Comparison – California Legislature Assembly Bill No. 1326 of the different aspects of the newly proposed bill, which also includes a side-by-side comparison of the new language with the earlier proposed bill.

Florida State Court Order In Espinoza Case Raises Questions About Classification of Bitcoin Under Florida Law

Despite much hype over the ruling by a Florida court that bitcoin is not money, the likeliest outcome of Monday’s decision will be legislative amendments to Florida’s money transmitter laws, rather than the sweeping impact envisioned by some.

Florida state Judge Teresa Pooler dismissed charges on Monday against a man accused of  money laundering and operating an unlicensed money services business.  Tellingly, the court held that it was “unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written.”

In early 2014, Michell Espinoza was caught in a sting operation while selling bitcoin in multiple face-to-face transactions with an undercover agent who claimed that he would use the bitcoin to purchase stolen credit card numbers.  Following the trail of convoluted statutory definitions within Florida’s money transmitter laws, the court ruled that Espinoza was not operating an unlicensed money services business—he was merely selling his property.

A “money services business” under Florida law is defined as any person “who acts as a payment instrument seller, foreign currency exchanger, check casher, or money transmitter.”[1]  The prosecutor first charged Espinoza with engaging in money transmission, but later changed it to selling a payment instrument.  “Money transmission” involves receiving “currency, monetary value, or payment instruments for the purpose of transmitting the same by any means.”  Integral to money transmission is the act of transmitting, which the court reasoned is akin to acting as a middleman.  Under the court’s analysis, selling one’s own property “does not meet the definition of ‘transmit.’”

Puzzling, however, is the court’s finding that Espinoza did not engage in the sale of a “payment instrument.”  Although Florida’s money transmitter law does not define “money,” many state laws define “money” as a medium of exchange issued by a government, leaving little doubt that Bitcoin is not “money” under state law.  Decentralized digital currencies, such as Bitcoin, typically fall within the definition of “monetary value,” which is almost universally defined as “medium of exchange, whether or not redeemable in currency.”[2]  Although “monetary value” is listed within Florida’s definition of “payment instrument,” [3] the court swept past that analysis, focusing instead on determining whether Bitcoin is “money.”  Rather than considering that Bitcoin could be monetary value, the judge concluded “‘[v]irtual currency’ is not currently included in the statutory definition of a ‘payment instrument;’ nor does Bitcoin fit into one of the defined categories listed.”

The court also dismissed charges of money laundering, finding that Espinoza lacked the requisite intent to promote the alleged illegal activity.[4]  Acknowledging the ambiguity in determining whether an act qualifies as “promoting,” the court found that merely “hearing the illicit manner in which the buyer intends to use what has been purchased” unquestionably falls short of promoting the illegal activity.

Although the publicity surrounding the arrest seemed noteworthy at the time, especially considering the “sting operation” that was jointly conducted by the Miami Police Department and the United States Secret Service, it is unlikely the court’s decision  will have a dramatic impact outside of Florida, as many state money transmission laws already capture Bitcoin under the definition of “monetary value.”

Order Granting Motion to Dismiss, Florida v. Espinoza (July 22, 2016)

[1] Fla. Stat. § 560.125(22).

[2] Fla. Stat. § 560.125 (21).

[3] Fla. Stat. § 560.125 (29) defines “Payment Instrument” to include “a check, draft, warrant, money order, travelers check, electronic instrument, or other instrument, payment of money or monetary value whether or not negotiable.”

[4] Fla. Stat. § 896.101(3)(c).

Bitcoin Week in Review – 07.11.16 – 07.15.16

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Bitcoin Investment Trust and SecondMarket, Inc. Settle Charges with SEC

Bitcoin Investment Trust (BIT) and SecondMarket, Inc. have settled charges that they violated Rules 101 and 102 of Regulation M of the Securities and Exchange Act of 1934 when they repurchased BIT shares during an ongoing distribution of the shares in 2014.  Regulation M is intended to prevent manipulative conduct by prohibiting interested parties from bidding for or purchasing securities during a distribution period.  SecondMarket and BIT have agreed to a cease-and-desist order against future violations of Rules 101 and 102 and SecondMarket has agreed to pay disgorgement of $51,650.11 in redemption, plus interest.  In accepting the settlement offer, the SEC considered the parties’ reliance on legal counsel in connection with the redemption program.  The cease-and-desist order is available here.
SEC Publishes Request for Comment on Bats BZX Exchange’s Proposed Rule Change in Connection with Winklevoss Bitcoin Trust

The SEC is soliciting comment in connection with a proposed rule change by Bats BZX Exchange, Inc.  Bats filed the proposed rule change with the SEC on June 30, 2016 to list and trade Winklevoss Bitcoin Shares issued by the Winklevoss Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares.  The SEC will approve or disapprove the request within 45 days’ of its request for comment, issued on July 8.  Bats states that the proposed rule change “will facilitate the listing and trading of an additional Commodity-Based Trust Share product that will enhance competition among market participants, to the benefit of investors and the marketplace.”  The request for comment is available here.

For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.

SEC Settles Charges With FinTech Companies in Unlawful Redemption of Bitcoin Investment Trust Shares During Distribution

The SEC announced yesterday a settlement with Bitcoin Investment Trust (BIT) and SecondMarket, Inc. (SecondMarket).  According to the Administrative Order, the SEC claims that BIT and SecondMarket redeemed BIT shares during an ongoing distribution and, therefore, violated Rules 101 and 102 of Regulation M. Continue Reading

Financial Stability Oversight Council Identifies Distributed Ledgers as Innovative, Yet Posing Certain Risks

The Financial Stability Oversight Council (FSOC) recently published its Annual Report, providing insight into its perspective on market developments and emerging threats. The FSOC, which includes representatives from the Treasury Department, the Federal Reserve, the Commodity Futures Trading Commission and the Securities and Exchange Commission, recognized that distributed ledger systems offer opportunities to lower transaction costs and improve efficiencies. However, the FSOC also acknowledged that certain risks are inherent, and therefore careful regulatory coordination is necessary.

Continue Reading

Recent Blockchain Legal Panel held in Seattle

On June 20, Dax Hansen and Carla Reyes from Perkins Coie LLP spoke at a Blockchain Legal Panel in Seattle. The panel, hosted by blockchain technology leaders and entrepreneurs, discussed the legal implications and concerns facing blockchain technologies. Topics included the regulatory climate, personal liability, and the Decentralized Autonomous Organization (DAO). View the discussion here.