On April 14, 2016, a federal grand jury in New York indicted Anthony R. Murgio, the alleged operator of an unlicensed Florida based Bitcoin exchange, Coin.mx, and four alleged co-conspirators, charging them with nine counts of money laundering. See U.S. v. Murgio, No. 15-CR-769 (AJN) (S.D.N.Y. Apr. 21, 2016), Dkt. No. 87 (“Indictment”), ¶¶ 11-15. On September 19, 2016, U.S. District Judge for the Southern District of New York, Alison J. Nathan, denied a motion to dismiss the case against Mr. Murgio. U.S. v. Murgio, 15-cr-769 (AJN) (Sept. 19, 2016). Judge Nathan found that because Bitcoins are “funds,” the Government can prosecute Mr. Murgio for violation of U.S. anti-money laundering laws.
Judge Nathan’s Order addresses two of the eight counts in the Indictment against Mr. Murgio: 1) conspiracy to operate Coin.mx as an unlicensed money transmitting business; and 2) operating Coin.mx as an unlicensed money transmitting business. The Government alleges that Mr. Murgio and his co-conspirators attempted to shield the true nature of the Bitcoin exchange by operating it through several front companies, including one known as "Collectables Club." Mr. Murgio allegedly used that front company to convince financial institutions that Coin.mx was a members-only association of individuals interested in collectable items, such as stamps and sports memorabilia. Indictment, ¶5. This alleged scheme allowed Mr. Murgio and his co-defendants to bypass compliance with federal anti-money laundering regulations that apply to owners and operators of money transmitting businesses.
As the definition of “money transmitting” under the federal money transmitter licensing statute, 18 U.S.C. § 1960, includes the term “funds,” the question addressed by the Court on the motion to dismiss was whether Bitcoins are considered “funds.” The Court rejected Mr. Murgio’s arguments that Bitcoins do not qualify as funds under the statute, concluding that Coin.mx’s transmission of Bitcoins made it a money transmitting business under federal law.
Section 1960 does not specify what counts as “money” that is “transmitted,” but it does state that money “includes … funds.” Mr. Murgio, relying on guidance from the Department of Treasury’s Financial Crimes Enforcement Network, the Internal Revenue Service, and the Commodity Futures Trading Commission, argued that the Court should adopt a narrow definition of “funds” that is limited to currency. However, the Court found that this guidance, which arises in contexts that do not consider the appropriate reach of Section 1960, was not relevant.
Because Section 1960 does not define “funds,” the Court, relying on U.S. Supreme Court precedent, examined “its ordinary meaning.” Taniguchi v. Kan Pac. Saipan, Ltd., 132 S. Ct. 1997, 2002 (2012). Citing Webster’s Third New International Dictionary, the Court held that “funds,” for the purposes of Section 1960, means “pecuniary resources” that are generally accepted as a medium of exchange or a means of payment. The Court then rejected Mr. Murgio’s arguments and concluded that Bitcoins are “funds” under Section 1960, citing cases where other federal judges have reached that conclusion. See U.S. v. Budovsky, No. 13-CR-368 (DLC), 2015 WL 5602853, at* 14 (S.D.N.Y. Sept. 23, 2015) (relying on U.S. v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014), for the proposition that "LR," another virtual currency, "qualifies as 'funds' for purposes of § 1960"). In addition, the Court looked at the legislative intent of Section 1960 and determined that Congress enacted the statute to prevent innovative ways of transferring money illicitly: “Section 1960 was enacted to address the fact that ‘money launderers with illicit profits ha[d] found new avenues of entry into the financial system.’”
Mr. Murgio next argued that the Government failed to allege that Coin.mx had transmitted money and that the Government’s allegation that Coin.mx acted as a “seller” of bitcoins, was insufficient because sellers are not treated as money transmitter businesses under Section 1960. The Court rejected this argument and held that it was sufficient that the Indictment alleged approximate dates and locations of transactions where Coin.mx customers exchanged cash for Bitcoins and Coin.mx charged them a fee for that service. The Indictment further alleged that “between approximately October 2013 and July 2015, Coin.mx exchanged millions of dollars for Bitcoins on behalf of customers throughout the United States.”
Because Section 1960 requires money transmission businesses to comply with all applicable state laws, the Court also examined Florida’s money services registration law, as Coin.mx operated in Florida. Mr. Murgio highlighted the recent ruling in Florida v. Espinoza, where a Florida state court dismissed a criminal information that charged a defendant, who sold Bitcoins to an undercover officer, with operating an unlicensed money services business. Florida v. Espinoza, No. F14-293 at 2-3. The Espinoza court held that Bitcoins are not “payment instruments” under Florida law. Id. at 5. Here, the Court reasoned that since neither the Florida Supreme Court nor any appeals courts have weighed in on the Espinoza ruling, it was not bound by the decision. The Court also stated that the Espinoza court was incorrect in its ruling and questioned its reliance on an IRS decision in determining whether Bitcoins qualify as “payment instruments” under Florida law. Additionally, the Court noted that the Espinoza court did not discuss whether Bitcoins qualify as “monetary value.”
The Court’s decision here further muddles an already uncertain virtual currency legal landscape, as it contradicts the ruling of a Florida judge and is inconsistent with guidance from several federal agencies concerning the legal status of virtual currency. Indeed, Judge Nathan’s ruling readily demonstrates that the existing money transmission regulations are not well-suited to address virtual currency issues. While the U.S. House of Representatives recently passed a resolution acknowledging the need for virtual currency legislation, unless and until Congress acts to pass specific legislation concerning virtual currency, individuals and businesses transacting in virtual currency will continue to face substantial uncertainty concerning the regulations to which they may be subject.