According to Florida Judge Teresa Mary Pooler, Bitcoin is not money. Partly because Bitcoin is not, “tangible wealth and cannot be hidden under a mattress like cash and gold bars.” In Florida v. Espinoza, Judge Pooler continued to state, “they [Bitcoins] are not a commonly used means of exchange….Bitcoin is a decentralized system. It does not have any central authority, such as a central reserve, and Bitcoins are not backed by anything.” Consequently, the money laundering charges against Michell Espinoza were dismissed.
As the currency has gained popularity, law enforcement officials have struggled to figure out how it fits into illegal activities.
Espinoza’s case was closely watched, especially in financial and tech circles, because it is believed to be the first money laundering case against someone for dealing in Bitcoins. As the currency has gained popularity, law enforcement officials have struggled to figure out how it fits into illegal activities. Although most mainstream businesses still distrust Bitcoin, it is beginning to gain some acceptance. For example, in Miami, FL, where Espinoza took place, Vanity Cosmetic Surgery became the first of its kind to accept Bitcoin as a form of payment.
The prosecutors in the case argued Espinoza — who used the moniker MichellHack — illegally sold undercover investigators $1,500 in Bitcoins. Espinoza, 32, designs websites for businesses. The officers found him through a Bitcoin exchange site, LocalBitcoins.com, and told him they were going to use the currency to purchase stolen credit card numbers. The detectives met with Espinoza three times in person. Espinoza was arrested along with another man, Pascal Reid, who pleaded guilty to acting as an unlicensed money broker and was sentenced to probation. Under his unusual plea deal, Reid agreed to teach law enforcement about Bitcoin.
Essentially, Bitcoin is not real money.
During the trial, the defense presented Dr. Charles Evans, an associate economics professor from Barry University, to explain what Bitcoin is. Essentially, “Bitcoin is not really money,” said Professor Evans. He continued to explain that no central government or bank backs Bitcoin, like the United States does the dollar. “Basically, it’s poker chips that people are willing to buy from you,” said Professor Evans. He continued to state that Bitcoin use is increasing in places such as Africa, where the “banking system is broken.” He described how the market for Bitcoin can vary — one day, a Bitcoin was worth $473. The Professor likened Bitcoin worth to how collectors assign values to baseball cards or comic books. However, prosecutor Thomas Haggerty, tried to show that Bitcoins are fundamentally the same as cash, by pointing out that Bitcoins can now be used at some restaurants. “You don’t purchase a hamburger with a comic book,” Haggerty said. “You usually purchase it with cash, or in this case, a Bitcoin.” During his testimony, Professor Evans admitted he was paid $3,000 worth of Bitcoins for his appearance as a defense witness.
In her decision Judge Pooler stated,
“This Court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is the equivalent of money. Bitcoin may have some attributes in common with what we commonly refer to as money, but differ in many important aspects. While Bitcoin can be exchanged for items of value, they are not a commonly used means of exchange . . . Bitcoin is a decentralized system. It does not have any central authority, such as a central reserve, and Bitcoins are not backed by anything. They are certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.
The Florida Legislature may choose to adopt statutes regulating virtual currency in the future. At this time, however, attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole . . . This Court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”
Miami-Dade State Attorney Katherine Fernandez Rundle said the arrests of Mr. Espinoza and co-defendant, Pascal Reid, marked the first time a money-laundering case involving Bitcoins has been prosecuted in state court. “These cybercriminals are way ahead of the rest of us in terms of trying to figure out ways they can launder dirty money,” Ms. Rundle said. A spokesman for her office said prosecutors are reviewing the ruling and their appeals options.
Bitcoin is a decentralized virtual currency…
So what is Bitcoin? Bitcoin is a decentralized “virtual currency” with fluctuating value designed as a way to transact business, sometimes illegal, without the constraints or scrutiny attached to real money. In other words, transactions are made with no middlemen, meaning, no banks. There are no transaction fees and they can be used to buy merchandise anonymously. In addition, international payments are easy and inexpensive because Bitcoins are not tied to any country or subject to regulation. Some people just buy Bitcoins as an investment, hoping that they’ll go up in value. Marketplaces called “Bitcoin exchanges” allow people to buy or sell Bitcoins using different currencies. People can send Bitcoins to each other using mobile applications or their computers, similar to sending cash digitally. Users compete to “mine” Bitcoins using computers to solve complex math puzzles. This is how Bitcoins are created. Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The wallet is a kind of virtual bank account that allows users to send or receive bitcoins, pay for goods, or save their money. Unlike bank accounts, Bitcoin wallets are not insured by the Federal Deposit Insurance Company (“FDIC”). Though each Bitcoin transaction is recorded in a public log, only the wallet IDs of buyers and sellers are ever revealed. While that keeps Bitcoin users’ transactions private, it also lets them buy or sell anything without easily tracing it back to them. This is why it has become the currency of choice for people online buying drugs or involved in other illicit activities.
Country governments are slowly beginning to change their views of Bitcoin. In 2013, Germany recognized Bitcoin as “private money.” “We should have competition in the production of money. I have long been a proponent of Friedrich August von Hayek scheme to denationalize money. Bitcoins are a first step in this direction,” said Frank Schaeffler, a member of the German parliament’s Finance Committee, who has pushed for legal classification of Bitcoins. In 2015, the European Court of Justice ruled that Bitcoin should be treated like traditional currencies under tax law. In Skatteverket v. Hedqvist the court concluded that transactions involving the virtual currency qualify for the same consumption-levy exemption that Euros get when they exchange hands.
The Internal Revenue Service in 2014 declared that Bitcoin would be taxed as physical property.
Here in the United States, the Internal Revenue Service (“IRS”) in 2014 declared that Bitcoin would be taxed as physical property. Meaning, if you sell it and make a profit, it is taxable as if it were a house or a share of stock. In 2015, the Commodities and Futures Trading Commission (“CFTC”) defined virtual currencies as commodities, like gold and silver, for regulatory purposes. Some retailers, including Amazon, Target and Microsoft, accept bitcoins or work with financial services firms to convert the coins into cash. This growing acceptance has left lawmakers bewildered as to how to view Bitcoins. “Attempts to categorize Bitcoin into existing regulatory constructs have proven to be difficult,” wrote Professor Kevin V. Tu and Michael Meredith in the Washington Law Review.
Congress will have to make a clear decision on how to define Bitcoin if it wants to avoid rulings like Espinoza. Until then, as Anatoliy Knyazev, co-founder of investment company Exante, stated, “The courts and government agencies are going to argue, but for a Bitcoin user it is money and is treated as such. From the practical angle it’s very simple.”