Crime  •  News  •  Regulation

4 Court Cases Helping Shape the US Stance on Bitcoin

(@tanayamacheel) | Published on September 28, 2014 at 14:09 BST

US flag and gavel

While the bitcoin economy is currently backed by $284m in venture capital and has a growing band of high-profile supporters, it still operates in a regulatory grey area in its largest market.

Unsurprisingly, just how the US will and should choose to regulate the digital currency is the subject of a continuing debate throughout all sectors of the ecosystem.

But, while the media focuses largely on policymakers like those currently making waves in New York, the country's courts may yet prove to have a deciding influence on the legal future of bitcoin.

Earlier this month Trendon Shavers made headlines when he was fined $40m for defrauding investors in a bitcoin Ponzi scheme. The case, brought by the Securities and Exchange Commission (SEC) in July 2013, created a broad first precedent for bitcoin when the judge ruled that bitcoin is a currency and a form of money.

Other cases could also have far reaching ramifications for the world of cryptocurrency. Below are the top court cases and rulings to date that are helping shape the US view on bitcoin.

SEC vs Trendon Shavers

Shavers, the operator of the Bitcoin Savings and Trust (BTCST), came under fire in the case against the SEC for soliciting illicit investments in bitcoin-related opportunities from a number of lenders. In total, he fraudulently accumulated 700,000 BTC in funds, an amount worth about $64m at the time of the arrest.

The ruling defied the March 2013 FinCEN guidance declaration that bitcoin is not considered a currency under the Bank Secrecy Act as it is not legal tender.

In a court document, Texas magistrate judge Amos L Mazzant said:

“It is clear that bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. […] it can also be exchanged for conventional currencies, such as the US dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”

The case also provided insight into how bitcoin-denominated damages may be assessed in the future, with the judge using the average daily price of bitcoin at the time the scheme was uncovered.

US vs Faiella

In August, US District Judge Jed Rakoff ruled that bitcoin is money during a case which sought to assess whether Charlie Shrem, CEO of defunct bitcoin exchange BitInstant, allegedly acted with Robert Faiella to supply bitcoins to Silk Road users.

The two were charged with two counts of operating an unlicensed money transmitting business, one count of money laundering conspiracy and one count of willful failure to file a suspicious activity report.

Rakoff rejected Faiella’s reasoning that bitcoins are not money and that his money transmission charges should therefore be cleared, saying:

“Money in ordinary parlance means ‘something generally accepted as a medium of exchange, a measure of value, or a means of payment’. Bitcoin clearly qualifies as ‘money’.”

Both defendants plead guilty to the charges, ultimately agreeing to pay nearly $1m in fines.

State of Florida vs Espinoza

Last month, the Bitcoin Foundation filed an amicus brief in the case of Florida resident Pascal Reid, seeking to dismiss a money transmission charge.

In February, Reid and Michell Abner Espinoza were arrested in sting operations in which they engaged in fake transactions with undercover agents through online marketplace and converted $30,000 of cash into bitcoin.

They were charged under Florida’s anti-money laundering law, which prohibits exchanges and business transactions over $10,000, and the unlicensed money transmission law, which permits currency or payment instruments to a maximum of $20,000 in a 12-month period.

The foundation believes that since the money transmission law applies specifically to corporations and entities qualified to do business in the state, Reid should be cleared of the charges. Further, as Florida is as yet undecided on how to regulate bitcoin, the state should not apply an “ambiguous criminal statute”.

The amicus brief allows the Bitcoin Foundation to help ensure a case outcome that sets favorable precedent for the broader bitcoin community, and does not mean that the organisation supports Reid directly.

Both defendants have filed to have the money laundering charges dismissed, invoking the Internal Revenue Service (IRS) guidance that bitcoin is not money.

US vs Ross William Ulbricht

The Ross Ulbricht camp made a similar appeal in late March, citing flaws in the legal definition of money laundering.

Ulbricht is accused of heading the now-defunct online black market Silk Road. In February he was indicted on charges of computer hacking, drug trafficking, money laundering and engaging in a criminal enterprise.

Judge Katherine Forrest rejected the argument that bitcoin is not money, saying:

“Bitcoins carry value – that is their purpose and function – and act as a medium of exchange. Bitcoins may be exchanged for legal tender, be it US dollars, euros, or some other currency. Accordingly, [the defense’s] argument fails.”

Challenging the grounds that bitcoin doesn’t fall under the definition of legal money, she later wrote:

“There is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, then converted back to cash, that would constitute a money laundering transaction. One can launder money using bitcoin.”

Ulbricht faces a series of new charges filed against him on 21st August, including narcotics trafficking, conspiracy to traffic fraudulent identification documents and distribution of narcotics by means of the Internet.

Ulbricht has pleaded not guilty on all charges. His trial is set for 3rd November.

US Court image via Shutterstock

Charlie ShremLawLocalBitcoins.comRoss UlbrichtSEC

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