Bitcoin is not “Real” Money, Just "Property"
Few would say that one would not benefit from having more money. Given the birth of cryptocurrency[1], can the same be said about Bitcoin? That, at least in part, depends on whether Bitcoin is equivalent to money. What is Bitcoin?[2] In a nutshell—Bitcoin is a decentralized, open financial network unlike the U.S. banking system which requires a partnership with an existing bank and compliance with complex rules. For Bitcoin, one does not need any permission or assistance to create new Bitcoin-based financial services.[3] [4] Perhaps the most notable thing is that the Bitcoin network has its own currency. Transactions on this network are conducted via a monetary unit called “Bitcoin”, which uses a process called “mining” (a computational race with a “prize” being Bitcoins) to introduce new currency into circulation.[5]
However, the virtual currency Bitcoin is not money, according to Miami-Dade Circuit Judge Teresa Pooler in a ruling issued Monday.[6] [7] [8] Accordingly, she dismissed a Florida money laundering case involving Defendant Michell Espinoza, a web designer facing felony charges for illegally transmitting and laundering $1,500 worth of Bitcoin to undercover police officers even though they told him they intended to purchase stolen credit card numbers with the virtual currency.[9]
Thus despite Florida’s money laundering laws stating that a person can be charged with money laundering if they engage in a financial transaction that will “promote” illegal activity, Judge Pooler ruled that such laws are currently too vague to apply to Bitcoin. She expressed concern that the word “promote”, if left undefined, may lead to arrests of people who believe their conduct is legal.[10]
Judge Pooler went on to reason that unlike money, Bitcoin is not “tangible wealth” that could be “hidden under a mattress like cash and gold bars” and was not backed by any government or bank. In sum, she believed that “the Bitcoin has a long way to go before it is the equivalent of money”,[11] [12] ultimately viewing the Bitcoin transaction as the selling of one’s property to another[13]--which is consistent with the IRS treatment of Bitcoin transactions as property, not money, transactions.[14]
Presently, the Miami-Dade Attorney General’s Office is reviewing Judge Pooler’s order to determine whether they will appeal the decision.[15] If the Attorney General’s Office does appeal the decision, it must do so carefully, as this case has received global attention, in what is potentially the first money laundering case involving virtual currency. [16]
Inherently, the ruling reiterates that without actual, “real” money, there cannot be money laundering, and the IRS appears to agree.[17]
—By Keobopha Keopong, Esq., Barnes Law
Keo Keopong is an associate attorney with Barnes Law, licensed to practice law in California.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Cryptocurrency is “a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank: ‘decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation.’" (Oxford Dictionary Online: http://www.oxforddictionaries.com/us/definition/american_english/cryptocurrency) Other examples of cryptocurrencies are listed here.
[2] For Bitcoin basics, read here.
[3] https://www.washingtonpost.com/news/the-switch/wp/2013/11/19/12-questions-you-were-too-embarrassed-to-ask-about-bitcoin/
[4] “In 2014, Federal Reserve Chair Janet Yellen told a Senate committee that the Fed can’t regulate bitcoin because it operates outside the banking system.” (http://www.usatoday.com/story/money/2016/07/25/miami-judge-bitcoin-isnt-money/87527832/)
[5] https://www.washingtonpost.com/news/the-switch/wp/2013/11/19/12-questions-you-were-too-embarrassed-to-ask-about-bitcoin/
[6] The State of Florida v. Michell Abner Espinoza, Case No. F14-2923, “Order Granting Defendant’s Motion to Dismiss The Information” <http://www.miamiherald.com/latest-news/article91701087.ece/BINARY/Read%20the%20ruling%20(.PDF>.
[7] http://fortune.com/2016/07/25/bitcoin-money-laundering-miami-judge/
[8] Note that “[t]he decision follows a series of earlier rulings by other government officials in an effort to categorize and control the nascent technology. In 2014, the IRS declared that Bitcoin would be treated and taxed as property. Last year, the Commodities and Futures Trading Commission said it would define virtual currencies as commodities for regulatory purposes.” (http://fortune.com/2016/07/25/bitcoin-money-laundering-miami-judge/)
[9] The State of Florida v. Michell Abner Espinoza, Case No. F14-2923, “Order Granting Defendant’s Motion to Dismiss The Information” <http://www.miamiherald.com/latest-news/article91701087.ece/BINARY/Read%20the%20ruling%20(.PDF>; http://www.miamiherald.com/news/local/crime/article91682102.html; http://fortune.com/2016/07/25/bitcoin-money-laundering-miami-judge/ .
[10] http://www.miamiherald.com/news/local/crime/article91682102.html
[11] The State of Florida v. Michell Abner Espinoza, Case No. F14-2923, “Order Granting Defendant’s Motion to Dismiss The Information” <http://www.miamiherald.com/latest-news/article91701087.ece/BINARY/Read%20the%20ruling%20(.PDF>; http://www.miamiherald.com/news/local/crime/article91682102.html.
[12] At the hearing in May, a defense expert Charles Evans (a Barry University economics professor) testified that Bitcoin is not money, no central government or banks back Bitcoin, government regulation remains messy and varied by state and even county, and notably, the IRS considers Bitcoin deals as bartering, like poker chips someone is willing to buy from you. (http://www.miamiherald.com/news/local/crime/article91682102.html)
[13] “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,” stated Judge Pooler in her ruling. (http://www.miamiherald.com/news/local/crime/article91682102.html)
[14] IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply, IR-2014-36, March 25, 2014. (https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidance)
[15] http://www.miamiherald.com/news/local/crime/article91682102.html
[16] It is believed that Espinoza’s case is the first money laundering prosecution involving virtual currency. (http://www.miamiherald.com/news/local/crime/article91682102.html)
[17] Of note, the IRS distinguishes virtual currency from “real” money--i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction. (IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply, IR-2014-36, March 25, 2014. <https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidance>)
** For related posts about the IRS & virtual currency, read: http://www.barneslawllp.com/virtually-no-tax-guidance-virtual-currency/; and http://www.barneslawllp.com/bitcoin-money-property-federal-courts-irs-positions-diverge/
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** Updated news 9/20/16: https://www.cryptocoinsnews.com/bitcoin-money-rules-u-s-judge-coin-mx-case/ ; http://www.investopedia.com/news/bitcoin-money-rules-federal-judge-landmark-case-jpm/#ixzz4KoQ5NOeV; http://fortune.com/2016/09/20/judge-rules-bitcoin-is-money/; http://www.reuters.com/article/us-jpmorgan-cyber-bitcoin-idUSKCN11P2DE