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Bitcoins are the new black. Created and held electronically by users, this new form of virtual currency has gained popularity across the web, but not necessarily the globe. Created as a type of “money” to be exchanged for products and services via the Internet across the globe, they’ve given users more freedom in internet transactions. But with more freedom comes more responsibility—criminal responsibility included. Though Bitcoin is not recognized as legal tender in the United States, agencies have taken steps to regulate the movement of Bitcoin in efforts to prevent illicit activities and transactions involving Bitcoin.
Bitcoin is a form of peer-to-peer private digital currency created and held electronically. Since it is peer-to-peer, there are no third-party intermediaries that impose transaction fees. The lack of transaction fees make Bitcoin appealing to many. Transactions are encrypted which means no personal information is revealed. This anonymity has led to the use of Bitcoins to buy illegal drugs online or for other illicit activities. Bitcoins are recorded on a shared public ledger called a block chain. And although each transaction is publicly recorded, no personal information is revealed because it is encrypted.
In July 2015, Anthony Murgio and Yuri Lebedev faced criminal charges in connection of their operation of a Bitcoin exchange site called Coin.mx. In November 2015, Murgio pleaded not guilty to the following charges:
A statement released by the FBI accused Murgio of failing to meet registration and reporting requirements in violation of federal anti-money laundering laws and regulations and knowingly exchanging cash for Bitcoins with people Murgio and his co-conspirators believed to be engaging in criminal activity, enabling those criminals to receive proceeds of their crimes.
Coin.mx is a bitcoin exchange site owned by Gery Shalon, the mastermind of the JP Morgan Hack of 2014. Shalon faces hacking charges as part of a global operation involving illegal Internet casinos, a payment-processing service for criminals and an unlicensed exchange for bitcoin. Coin.mx allegedly allowed criminals to cash in Bitcoins paid by victims whose computers the criminals infected with malware.
To be clear, the exchange of bitcoins for cash in itself is not illegal. The criminal charges come in when Bitcoins are exchanged in conjunction with unlawful activity. Because Bitcoins are not recognized as legal tender, they are not regulated directly. However, anti-money laundering statutes and regulations as well as regulations regarding money transmitting businesses govern—and in effect, regulate—the exchange of Bitcoins for cash. Several government agencies have established regulations governing money service businesses, which encompasses businesses dealing in virtual currencies such as Bitcoin.
The BSA regulations require all financial institutions to assist the government in its efforts to detect and prevent money laundering by keeping records and filing reports of suspicious activity. The Bank Secrecy Act of 1970 requires financial institutions to detect and prevent money laundering. The Act specifically requires the institutions to keep records and file reports of suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
Further, the USA Patriot Act of 2001 amended provisions of the Bank Secrecy Act to impose enhanced due diligence requirements on financial institutions. The Patriot Act cites concerns international money laundering and financing of terrorism to reinforce the Patriot Act.
The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) released an official guidance providing that companies operating as bitcoin exchanges and payment processors may be considered as money service businesses, thus subject to their regulations.
In September of 2015, the Commodity Futures Trading Commission issued an order establishing virtual currencies such as bitcoins are commodities subject to regulation by the CFTC.
The IRS also issued a notice in March 2014 providing guidance on the application of tax principles to transactions involving bitcoins. It explained that Bitcoin was a convertible virtual currency meaning it can be traded between users and could be exchanged for other real or virtual currencies. The notice provided that because of the nature of bitcoin in economic transactions has tax consequences that may result in tax liability.
To sum it up, Murgio’s charges are derived from the illegal nature of the transactions of Bitcoin. First, Coin.mx is a money service business as defined by FinCEN, thus it is subject to federal laws and regulations requiring it to apply for a license. Coin.mx was allegedly unlicensed. Secondly, because it was a money service business it was required to keep certain records and file reports to detect and deter money laundering. Coin.mx allegedly did not file any reports. Lastly, because Murgio is the operator of the site, he is presumed to have knowledge of the transactions and should have known the criminal nature of the transactions.