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Fla. bitcoin case tests money laundering limits

Published April 11, 2014 1:29 pm

This is an archived article that was published on sltrib.com in 2014, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

Miami Beach, Fla. • Two police officers burst through a hotel room door with guns drawn, yelling "Police! Get Down!" just after an alleged money laundering transaction went down. But instead of briefcases stuffed with a drug dealer's cash, this exchange involved an undercover officer with supposedly stolen credit cards and the virtual currency bitcoin.

The February arrests of Pascal Reid and Michell Espinoza marked the first time any state has brought money laundering charges involving bitcoins, according to Miami-Dade State Attorney Katherine Fernandez Rundle. And it's likely to be a closely-watched test of whether criminal law can adapt to new digital forms of payment.

"These cybercriminals are way ahead of the rest of us in terms of trying to figure out ways they can launder dirty money," Rundle said.

Investigators trolled through an online directory of bitcoin traders to find the 29-year-old Reid and 30-year-old Espinoza, setting up separate meetings with each of the men at restaurants and coffee shops. They were arrested at the same Miami Beach hotel on the same day, at different times.

Defense attorneys said the men have no previous criminal records and were simply enthusiasts of the payment format that allows people to convert cash into digital money for online transactions.

Still, undercover officers with the U.S. Secret Service and Miami Beach police told both clearly that they wanted to buy bitcoins with cash supposedly generated by the hacking of Target Corp. customer information. The undercover officers said during the secretly videotaped meetings that they planned to use the bitcoins to acquire still more stolen credit cards.

Attorneys for Reid and Espinoza, both of whom have pleaded not guilty, say they will challenge the very legal foundations of the cases, which are being prosecuted separately. The arrest affidavits for both Reid and Espinoza refer to bitcoins as "electronic currency with no central authority."

"My client has never dealt in the area of stolen credit cards," said Espinoza's attorney, Rene Palomino Jr. "My client was simply selling a piece of personal property, which is what a bitcoin is. It has not been recognized as currency yet in the United States."

The Internal Revenue Service issued guidance last month concluding that bitcoins can only be taxed as property and are not legal tender. Federal law enforcement agencies are watching whether bitcoins are used increasingly in criminal activity, such as the now-defunct Silk Road illegal drug marketplace.

"The idea that illicit actors might exploit the vulnerabilities of virtual currency to launder money is not merely theoretical," said Jennifer Shasky Calvery, director of Treasury's Financial Crimes Enforcement Network, in a recent Florida speech to bankers.

Still, bitcoins have been gaining popularity among mainstream businesses. Overstock.com recently became the first major retailer to accept digital money and the NBA's Sacramento Kings in January announced the team would accept bitcoins, another first. They are increasingly used in restaurants, coffee shops and elsewhere.

Bitcoin users exchange cash for digital money using online exchanges, then store it in a computer program that serves as a wallet. The program can transfer payments directly to merchants or individuals around the world, eliminating transaction fees and the need for bank or credit card information.

The Latin House Grill in Coral Gables is one of the first South Florida restaurants to accept bitcoins and has been hosting meetings to educate people.

"This technology can't go away. It's completely disrupted a lot of existing technology that's archaic, that hasn't evolved," said patron Andrew Barnard, who has been using bitcoins for a year.

In the Florida criminal case, Reid and Espinoza each face up to 25 years in prison if convicted of money laundering and engaging in an unlicensed money services business. Reid is free on $100,000 bail but Espinoza has been unable so far to make bail.

The transactions started small — one payment of $500 translated into about half a bitcoin — and eventually built to a proposed swap involving $30,000 in Reid's case.

"Ice cold money. Ice cold cash. Right out of the freezer," the undercover agent, holding a plastic bag of cash tells Reid on the surveillance tape. Just after Reid accepts the bag, the undercover agent says, "We're cooking with gas," an apparent signal to the officers outside to come in.

"You're a cop?" Reid is heard saying on the tape. "You're a cop?"

Reid attorney Ron Lowy said the prosecution was manufactured.

"The government is frightened of bitcoin. Apparently, they see it as an emerging, new type of economic medium of exchange, and they're worried that they're not regulating it close enough," Lowy said. "These facts do not constitute a crime."