Chino v. N.Y. Dep’t Fin. Servs., 2017 NY Slip Op. 51908 (U) (N.Y. S. Ct. Dec. 21, 2017)

Chino v. N.Y. Dep’t Fin. Servs., 2017 NY Slip Op. 51908 (U) (N.Y. S. Ct. Dec. 21, 2017) [Link]

Summary: Applicant for N.Y. Bitcoin license challenged the constitutionality and enforcement of the state’s licensing law. Suit dismissed for lack of standing.


  • [P]ursuant to 23 NYCRR § 200.3 (a), anyone engaged in virtual currency business activity must first obtain a license.
  • [P]etitioner intended to set up a business in New York that was to install Bitcoin processing services in bodegas in New York State.
  • Petitioner applied for a Virtual Currency Business license on behalf of LTD on August 7, 2015. Petitioner annexes a copy of the application as Exhibit IX to his petition. He provided the name but not the address of LTD. He did not provide an authorization as required by 23 NYCRR § 200.3 (a) (3); instead, he wrote on the form that he did not authorize the release of information. He filled out some but not all financial information on the form requested, and he indicated that he had no insurance and kept no financial or accounting books. For his background report certification, he wrote: “[Could] not obtain in time.” He filled out a personal information form but he refused to disclose his employment history for the last fifteen years, and he did not provide the names and addresses of past employers. He did not disclose whether he was employed by, performed services for, or had business connections with any agency or authority of the State of New York, or any institutions subject to DFS supervision. He stated he had no financial interest in any agency or authority in New York or any other state. He provided none of the required references. He stated that his high school, college, and professional or technical school information was not applicable. He refused to disclose his social security number. Along with his application, he submitted a handwritten letter which requested a waiver of the $5,000 application fee based on his characterization of the size of the business, its budget, and its financial status.
  • Petitioner initiated this proceeding, pro se, on October 16, 2015, before he received any response from DFS; he states that he did so because he realized “he would be required to incur expenses beyond his means to comply with the burdensome compliance costs under the Regulation” (Petition, ¶ 91).
  • On January 4, 2016, DFS returned his August 7, 2015 application without processing it. The letter states that DFS could not evaluate the application because it contained “extremely limited” information and, among other things, did not describe the business in which LTD was or would be engaged and did not specify in what respect, if any, the business involved virtual currency (DFS Jan. 4, 2016 letter [Exh. XI to Petition]). The letter explained that because of this DFS could not determine whether LTD was a virtual currency business subject to the regulations.

Issues, Holdings, and Discussion:

  1. Does a petitioner who submitted an incomplete application for a N.Y. Bitcoin license, failed to follow up when DFS stated it was unable to process the application, and could not show losses due to licensing have standing to challenge the licensing regulations? No:

Petitioner did not complete LTD’s application, and did not respond to DFS’ January 2016 letter which notified him of his failure to do so. Petitioner acknowledges that he abandoned the application process because of the pendency of this hybrid action/proceeding challenging the regulation (Chino Aff. in Opp. To Cross-Motion, at ¶ 16). CPLR § 7803 provides a petitioner with a means to challenge “whether a determination was made in violation of lawful procedure, was affected by an error of law or was arbitrary and capricious or an abuse of discretion” (CPLR § 7808 [3]). Moreover, “one who objects to the acts of an administrative agency must exhaust available administrative remedies before being permitted to litigate in a court of law” (DiBlasio v Novello, 28 AD3d 339, 341 [1st Dept 2006] [citations and internal quotation marks omitted]). Courts cannot “interject themselves into ongoing administrative proceedings until final resolution of those proceedings before the agency” (Id.). In the proceeding at hand, DFS did not reach a final decision. Indeed, it did not reach any decision. Accordingly, there is nothing for this Court to review.

The Court notes that an exception exists to the exhaustion requirement when the action “is challenged as either unconstitutional or wholly beyond its grant of power, when resort to an administrative remedy would be futile or when its pursuit would cause irreparable injury” (Martinez 2001 v New York City Campaign Finance Bd.,36 AD3d 544, 548 [1st Dept 2007]). The exception does not apply in this instance. Again, petitioner’s failure to complete his application precludes him from raising this argument. Because of his failure, the agency did not take any action — constitutional or otherwise, and neither within nor exceeding its grant of power. The DFS letter stating more information was necessary is not an action or decision within the meaning of the governing law. Instead, it is the legislation itself that petitioner challenges here. Any irreparable injury petitioner alleges is a result of the underlying law and not of any agency action.

Moreover, even if an ultra vires or unconstitutional action were at issue, petitioner has not shown that DFS has caused it irreparable harm. LTD’s tax returns show three-and-a-half years of losses prior to the initiation of this action, and show comparable losses in 2014 — prior to the existence of the regulation — due to ongoing operation expenses.

. . . .

Next, the Court examines the question of whether petitioner has standing to challenge the constitutionality of the regulation. This presents a much closer issue than that of his Article 78 proceeding. To establish standing, a plaintiff must show injury in fact, which, “[a]s the term itself implies, . . . must be more than conjectural” (Quast v Westchester County Bd. of Elections, 155 AD3d 674, 674 [2nd Dept 2017]). In addition, the plaintiff must establish that he or she falls within the zone of interest which the regulation impacts (See id.). Moreover, “personal disagreement and speculative financial loss are insufficient to confer standing” (Roulan v County of Onandaga, 21 NY3d 902, 905 [2013] [rejecting plaintiff’s standing argument that he sustained financial harm because challenged plan caused him to be assigned fewer criminal cases]; see New York State Psychiatric Assoc., Inc. v Mills, 29 AD3d 1058, 1059 [3rd Dept 2006] [asserted financial harm to psychiatrists was speculative]).

. . . .

[P]etitioner did not apply for certification,[8] and has not shown sufficient economic loss. Any argument as to the $5,000 application fee was waived because petitioner did not pay the fee or pursue the application. His economic loss argument is otherwise insufficient because LTD has never made a profit and petitioner showed proof of only one $279.41 sale. Moreover, its losses in 2016, once petitioner thought LTD was subject to the regulation, are not inconsistent with LTD’s prior financial history.


  • Standing and similar doctrines make it difficult to challenge government actions in all areas. Challenges to cryptocurrency regulations are no different and will need to be carefully tailored – with appropriate case “vehicles” – or they will be dismissed.

Bitcoin and Money Laundering – U.S. v. Lord

With the recent opinion in United States v. Lord, we return once again to the question of whether or not Bitcoin can be considered money under FinCEN regulations and money laundering statutes. Earlier cases have split on this issue. See, for example, our post on United States v. Petix, which held that it was not money, and our post on United States v. Faiella, which held that it was money.

United States v. Lord, No. 15-00240-01/02 (W.D. La. Apr. 20, 2017) [Link]

Summary: Fincen regulations make any business that exchanges “money, funds, or other value that substituted for currency” a “money transmitting business” under 18 U.S.C. 1960, which makes unlicensed businesses criminally liable.


  • Defendants operated their bitcoin business through a website called, on which they posted advertisements for bitcoin exchange services. See id. at 14. Persons who engaged Defendants’ services would transfer money to Defendants by some traditional means, such as cash or wire transfer. See id. Then, Defendants would purchase bitcoins from Coinbase, another online bitcoin broker, and transfer the bitcoins back to the buyer after subtracting their commission. See id. . . .At some point in the spring of 2014, Coinbase contacted Defendants regarding the volume of activity that had been occurring in their account and its consequences. See Record Document 42 at 15-16. Coinbase informed Defendants that because they were acting as bitcoin exchangers they were required to register with the Federal Crimes Enforcement Network (“FinCEN”), a division of the Department of the Treasury, under March 2013 guidance from FinCEN that clarified that bitcoin exchangers were subject to registration requirements. See id. In July 2014, Defendants represented to Coinbase that they were registered with FinCEN, though they were not registered with FinCEN at that time. See id. Defendants did not register with FinCEN until November 2014. See id. By that time, Defendants’ bitcoin business had exchanged more than $2.5 million for bitcoins for customers all around the United States. See id. at 15-17. Defendants continued operating the bitcoin exchange business through 2015. See id. at 11-25.
  • On November 18, 2015, a federal grand jury for the Western District of Louisiana issued a 15-count indictment against Defendants. See Record Document 1. Count 1 of the indictment charged Defendants with conspiracy to operate an unlicensed money service business in violation of 18 U.S.C. § 371 (conspiracy) and 18 U.S.C. § 1960 (unlicensed money transmitting businesses). See id. at 1-3. Counts 2-14 charged Defendants with various other crimes associated with operating their bitcoin exchange business. See id. at 7-16. Count 15 charged Michael Lord with being a member of a drug conspiracy in violation of 21 U.S.C. § 846, 841(a)(1), and (b)(1)(C). See id. at 17. On April 19, 2016, Defendants appeared before this Court and pleaded guilty to Count 1 of the indictment and Michael Lord pleaded guilty to Count 15 of the indictment pursuant to a plea agreement with the Government.

Issues, Holdings, and Discussion:

  1. Does running a Bitcoin exchange make a company a “money transmitting business” subject to registration requirements and therefore criminal penalties for failing to register? Yes:

Regulations promulgated under 31 U.S.C. § 5330 and other statutes define a “money service business” as a business engaging in at least one of several different varieties of financial business. 31 C.F.R. § 1010.100(ff). One such variety is a “money transmitter,” a person that engages in “the acceptance of currency, funds, or other value that substituted for currency from one person and the transmission of currency, funds, or other value that substituted for currency to another location or person by any means.” 31 C.F.R. § 1010.100(ff)(5)(A). All businesses that meet the definition of “money services businesses” must register with FinCEN through the registration procedures set forth in 31 C.F.R. § 1022.380. One such requirement is that an MSB must submit its registration form to FinCEN within 180 days of the date the business is established. See 31 C.F.R. § 1022.380(b)(3).

As stated in the Factual and Procedural Background, supra, FinCEN released interpretive guidance in March 2013 clarifying the application of these regulations to businesses like that of Defendants. See Dept. of the Treasury, FinCEN, FIN-2013-G001, (March 18, 2013). This guidance clarified that though a user of a virtual currency like bitcoin is not an MSB, “an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.” See id. at 1 (emphasis in original). It is undisputed that Defendants failed to register with FinCEN until November 2014, well past the 180-day deadline for such registration, which commenced sometime in 2013 when Defendants first began their bitcoin exchange business. See Record Document 42 at 11-25 (guilty plea testimony of Darrin Heusel, IRS Criminal Investigations Division). Thus, because “it is unlawful to do business [as an MSB] without complying with 31 U.S.C. § 5330 and [31 C.F.R. § 1022.380]” regardless of compliance with any state licensing requirements, the Court finds that Defendants have not asserted their actual innocence of the crime to which they pleaded guilty in Count 1 of the indictment. 31 C.F.R. § 1022.380(e).


  • Lord exacerbates the split between Petix and Faiella, and it does so without genuinely confronting the issue: Can FinCEN essentially define Bitcoin as “money”? This question takes on particular importance as judges – including now-Justice Gorsuch – continue to question Chevron’s deference to agency regulations.

Where Are Digital Assets Located?

This seems like a silly question until you realize that it’s actually critical for determining jurisdiction. In other words, what court can order me to hand over cryptocurrency? What court can order me to pay taxes on that cryptocurrency? Where do I owe taxes on it? These are all important and open questions, and they apply to all intangible digital assets. Recently, the Second Circuit decided a case that many are watching as a bellwether for these issues.

In the Matter of a Warrant to Search a Certain E-Mail Account Controlled and Maintained by Microsoft Corporation, 829 F.3d 197 (2d Cir. 2016) [Link] [Denial of En Banc Review]

Summary: Stored Communications Act authorizes government subpoenas for e-mail communications, but does not reach extraterritorial communications. E-mails stored on a Microsoft server in Ireland are located extraterritorially and beyond the reach of an SCA Warrant, even though a Microsoft employee could retrieve the e-mails from terminals in the United States.


Microsoft Corporation appeals from orders of the United States District Court for the Southern District of New York denying its motion to quash a warrant (“Warrant”) issued under § 2703 of the Stored Communications Act (“SCA” or the “Act”), 18 U.S.C. §§ 2701 et seq., and holding Microsoft in contempt of court for refusing to execute the Warrant on the government’s behalf. The Warrant directed Microsoft to seize and produce the contents of an e-mail account that it maintains for a customer who uses the company’s electronic communications services. . . .

Microsoft produced its customer’s non-content information to the government, as directed. That data was stored in the United States. But Microsoft ascertained that, to comply fully with the Warrant, it would need to access customer content that it stores and maintains in Ireland and to import that data into the United States for delivery to federal authorities. It declined to do so. Instead, it moved to quash the Warrant. The magistrate judge, affirmed by the District Court (Preska, C.J.), denied the motion to quash and, in due course, the District Court held Microsoft in civil contempt for its failure.

. . . .

One of Microsoft’s datacenters is located in Dublin, Ireland . . . . According to Microsoft, when its system automatically determines, “based on [the user’s] country code,” that storage for an e-mail account “should be migrated to the Dublin datacenter,” it transfers the data associated with the account to that location. . . .

. . . .

Microsoft asserts that, after the migration is complete, the “only way to access” user data stored in Dublin and associated with one of its customer’s web-based e-mail accounts is “from the Dublin datacenter.” Id. at 37. Although the assertion might be read to imply that a Microsoft employee must be physically present in Ireland to access the user data stored there, this is not so. Microsoftacknowledges that, by using a database management program that can be accessed at some of its offices in the United States, it can “collect” account data that is stored on any of its servers globally and bring that data into the United States. Id. at 39-40.

Issues, Holdings, and Discussion:

  1. Do the warrant provisions of the Stored Communications Act contemplate extraterritorial application? No:

We dispose of the first question with relative ease. The government conceded at oral argument that the warrant provisions of the SCA do not contemplate or permit extraterritorial application.

. . . .

When Congress intends a law to apply extraterritorially, it gives an “affirmative indication” of that intent. Morrison, 561 U.S. at 265, 130 S.Ct. 2869. . . . We see no such indication in the SCA.

. . . .

The government asserts that “[n]othing in the SCA’s text, structure, purpose, or legislative history indicates that compelled production of records is limited to those stored domestically.” Gov’t Br. at 26 (formatting altered and emphasis added). . . . We find this argument unpersuasive: It stands the presumption against extraterritoriality on its head. It further reads into the Act an extraterritorial awareness and intention that strike us as anachronistic, and for which we see, and the government points to, no textual or documentary support.

Congress’s use of the term of art “warrant” also emphasizes the domestic boundaries of the Act in these circumstances.

. . . .

The term is endowed with a legal lineage that is centuries old.

. . . .

As the term is used in the Constitution, a warrant is traditionally moored to privacy concepts applied within the territory of the United States: “What we know of the history of the drafting of the Fourth Amendment … suggests that its purpose was to restrict searches and seizures which might be conducted by the United States in domestic matters.” In re Terrorist Bombings of U.S. Embassies in East Africa, 552 F.3d 157, 169 (2d Cir. 2008) (alteration omitted and ellipses in original) (quoting United States v. Verdugo-Urquidez, 494 U.S. 259, 266, 110 S.Ct. 1056, 108 L.Ed.2d 222 (1990)). Indeed, “if U.S. judicial officers were to issue search warrants intended to have extraterritorial effect, such warrants would have dubious legal significance, if any, in a foreign nation.” Id. at 171. Accordingly, a warrant protects privacy in a distinctly territorial way.

2. By requiring Microsoft personnel in the United States to retrieve data located in a Dublin datacenter, would the warrant reach extraterritorially? Yes:

Because the content subject to the Warrant is located in, and would be seized from, the Dublin datacenter, the conduct that falls within the focus of the SCA would occur outside the United States, regardless of the customer’s location and regardless of Microsoft’s home in the United States. Cf. Riley v. California, ___ U.S. ___, 134 S.Ct. 2473, 2491, 189 L.Ed.2d 430 (2014) (noting privacy concern triggered by possibility that search of arrestee’s cell phone may inadvertently access data stored on the “cloud,” thus extending “well beyond papers and effects in the physical proximity” of the arrestee).

The magistrate judge suggested that the proposed execution of the Warrant is not extraterritorial because “an SCA Warrant does not criminalize conduct taking place in a foreign country; it does not involve the deployment of American law enforcement personnel abroad; it does not require even the physical presence of service provider employees at the location where data are stored…. [I]t places obligations only on the service provider to act within the United States.” In re Warrant, 15 F.Supp.3d at 475-76. . . . [T]he magistrate judge’s observations overlook the SCA’s formal recognition of the special role of the service provider vis-à-vis the content that its customers entrust to it. In that respect, Microsoft is unlike the defendant in Marc Rich and other subpoena recipients who are asked to turn over records in which only they have a protectable privacy interest.

The government voices concerns that, as the magistrate judge found, preventing SCA warrants from reaching data stored abroad would place a “substantial” burden on the government and would “seriously impede[]” law enforcement efforts. Id. at 474. The magistrate judge noted the ease with which a wrongdoer can mislead a service provider that has overseas storage facilities into storing content outside the United States. He further noted that the current process for obtaining foreign-stored data is cumbersome. That process is governed by a series of Mutual Legal Assistance Treaties (“MLATs”) between the United States and other countries, which allow signatory states to request one another’s assistance with ongoing criminal investigations, including issuance and execution of search warrants. See U.S. Dep’t of State, 7 Foreign Affairs Manual (FAM) § 962.1 (2013), available at (last visited May 12, 2016) (discussing and listing MLATs). And he observed that, for countries with which it has not signed an MLAT, the United States has no formal tools with which to obtain assistance in conducting law enforcement searches abroad.

These practical considerations cannot, however, overcome the powerful clues in the text of the statute, its other aspects, legislative history, and use of the term of art “warrant,” all of which lead us to conclude that an SCA warrant may reach only data stored within United States boundaries. Our conclusion today also serves the interests of comity that, as the MLAT process reflects, ordinarily govern the conduct of cross-boundary criminal investigations. . . .

Thus, to enforce the Warrant, insofar as it directs Microsoft to seize the contents of its customer’s communications stored in Ireland, constitutes an unlawful extraterritorial application of the Act.


Explaining Bitcoin to Federal Judges

Gordon v. Dailey, No. 14-7495 (D.N.J. June 20, 2016) is an excellent example showing why lawyers – especially those dealing with complicated emerging technologies like cryptocurrency – need to explain themselves to federal judges. Though the facts are a bit muddled, it appears that Plaintiffs entered a mining contract with Defendants. They got shorted in some way, and attempted to sue under the securities laws. The Court dismissed their case because they had not demonstrated neither that the mining contract at issue was subject to the securities laws nor that the amount in controversy exceeded $75,000 to trigger diversity jurisdiction.

But the holding itself isn’t very important, because it’s clear that the Court wasn’t making a determination about how the law applies to cryptocurrency. The Court was making a determination about how these particular Plaintiffs had done a poor job of explaining their claim. When the opinion leads off with the following, you know the parties have not done a great job educating the judge:

This suit involves Bitcoin transactions. The Amended Complaint, however, does not explain what Bitcoins are, beyond the allegations that Bitcoins are some form of virtual currency. Extrinsic sources were consulted to understand what Bitcoins are, and how they function.

And the footnotes go even further, calling out every specific term that Plaintiffs failed to define. I’ll give them a hand.

The Amended Complaint does not define or explain “hashrate.”

Hashrate – Bitcoin mining is governed by speed, specifically the speed that your processor can execute the particular calculations that the Bitcoin network requires. The faster your speed, the more likely that you will receive a mining reward in the form of additional bitcoins generated by the network. Hashrate is often measured in GH/s, meaning Gigahashes per second.

The Amended Complaint abbreviates Bitcoin as BTC. It is not clear what “BTC/GH/s” means.

BTC/GH/s – Bitcoins per Gigahash per second. Gigahashes per second is a measure of the hashrate of a particular mining computer or contract. Just as a computer buyer would compare processing speeds when purchasing a computer, people buying mining capacity compare hashrates. People often pay for mining capacity in bitcoins, so BTC/Gh/s is a measure of the price (in bitcoins) for a unit of mining capacity. This provides a stable, objective way of comparing mining contracts from different companies and finding the best price.

One goal of this blog will be to define these common terms in ways that lawyers, judges, and clients can understand them. I’ll try to add such definitions as these terms arise in cases, and will eventually compile them into a glossary.

Is Bitcoin Use Evidence of “Dangerousness to the Community”?

United States v. Donagal, No. 14-cr-00285 (N.D. Cal. Nov. 18, 2014) [Link]

Summary: Bitcoin use is one element demonstrating the size and sophistication of a drug operation, and may be considered in finding a defendant “dangerous to the community” such that he can be bound over for trial without bail.


The Government alleges that Defendant is the leader of a large, industrial illegal drug manufacturing operation. Defendant’s organization allegedly produced over a million illegal alprazolam (Xanax) tablets per week, as well as producing and distributing significant quantities of GHB, steroids, and other drugs. The government further proffers that Defendant arranged for large quantities of Xanax powder and pill-making equipment to be shipped from China, usually to his co-defendants or other nominee addresses. To pay for this material, he wired significant sums of cash to his connections in China, often through Western Union. The government further asserts that Defendant sold his pills online, including using the underground websites Silk Road, Silk Road 2.0, and a personal website, and he shipped drugs to 48 states. Defendant was paid by his customers in cash and in the digital currency of Bitcoins. The government proffered that agents seized over $200,000 in cash and $25,000 in Bitcoins from Defendant’s operation, but it claims that this figure represents a small fraction of the proceeds earned by Defendant. At the time of his arrest, Defendant was in possession of the machinery and raw ingredients necessary to produce very considerable quantities of additional illegal drugs, as detailed below.

Issues, Holdings, and Discussion:

  1. Can use of Bitcoin in a drug operation be considered as evidence of dangerousness, relevant to a bail decision? Yes:

Accepting the Government’s proffers, there is substantial evidence in this case that Defendant poses a danger to the community. Defendant is the head of an organization that manufactures and distributes large quantities of Xanax, and also deals GHB and oxycodone. At the time of his arrest, the Government seized 1.3 million Xanax tablets, over 300 pounds of anabolic steroids, four pounds of suspected oxycodone pills, and over four gallons of GHB, as well as the ingredients to make several million more Xanax pills. Defendant possesses the specialized machines and binding agent necessary for pill manufacture. The Government’s evidence also includes the participation of dozens of individuals, international importation, and the use of bitcoin currency. The scope and sophistication of the alleged enterprise support a finding that Defendant is a danger to the community.


  • It could certainly be argued that the Court’s comment regarding Bitcoin is dicta. While the Court uses it as one factor in its dangerousness analysis, it is very unlikely that the ultimate finding of dangerousness turned on Bitcoin use.
  • While some may find this disturbing, it is actually a very narrow holding. It seems almost certainly to be cabined to the rare situation where a criminal defendant is already running a large, sophisticated, unambiguously criminal enterprise (like a drug operation.)

Can Buying and Selling Bitcoin Be Money Laundering?

In an earlier post, we looked at whether running a bitcoin exchange can be money laundering. In this post, we take a look at a more recent case with similar facts, but a very different conclusion.

While the entire scope of Richard Petix’s actions aren’t clear from the opinion, he was certainly buying and selling bitcoins. This was a violation of his parole, as he wasn’t supposed to be using a computer without permission, but the federal government wanted to tack on a money laundering charge. Magistrate Judge Scott thought this was an overreach. In the process, he almost certainly opened up a split with the Southern District’s decision in Faiella:

United States v. Petix, No. 15-CR-227A (W.D.N.Y. Dec. 1, 2016) [Link]

Summary: For the purposes of the money laundering statute, Bitcoin is neither “money” nor “funds.” Buying and selling Bitcoin is not money laundering.


  • “Between August 2014 and December 2015, Petix engaged in numerous transactions involving the buying and selling of bitcoins. . . . When the agents and probation officers confronted Petix, . . . [t]he open screen of the computer displayed information indicating that Petix had just completed a transaction involving 37 bitcoins with a value, at the time, of approximately $13,000.”

Issues, Holdings, and Discussion:

  1. Does Bitcoin qualify as “money” or “funds” under Section 1960? No:

Taking the two undefined terms in Section 1960 in reverse order, the Supreme Court already has applied the above principles of interpretation to the term “funds.” “The ordinary meaning of `fund[s]’ is `sum[s] of money . . . set aside for a specific purpose.'” Clark v. Rameker, ___ U.S. ___, 134 S. Ct. 2242, 2246 (2014) (ellipsis and brackets in original) (citation omitted). . . .

The ordinary understanding of “funds,” with its reference to “money,” necessarily brings the Court to an assessment of that other term. Legal authorities abound with uses of the term “money.” The Constitution gave Congress the enumerated power “[t]o coin Money, [and to] regulate the Value thereof.” U.S. Const. art. I, § 8, cl. 5. The United States Code, under a subchapter titled “Monetary System,” has a definition of legal tender that covers coins, currency, and notes. 31 U.S.C. § 5103. Another provision of Title 31 refers to “money” and “public money” as something that can be deposited in the United States Treasury. 31 U.S.C. § 3302. A portion of the tax code refers to estate transfers that occur “for a consideration in money or money’s worth.” 26 U.S.C. § 2043. Portions of the judicial code refer to “receiving and paying over money” compared to “disposing of such property,” 28 U.S.C. § 1921(c)(1); and to plural “moneys paid into any court of the United States,” 28 U.S.C. § 2041. Countless other examples exist, written before and after Section 1960, and of course the exact use of the term “money” will vary somewhat across very different statutes and cases.

What all of the above examples have in common, though, is the involvement of a sovereign. Across all of the legal authorities that make some reference to money, and despite new technologies that have emerged over the years within the United States monetary system, there has been a consistent understanding that money is not just any financial instrument or medium of exchange that people can devise on their own. “Money,” in its common use, is some kind of financial instrument or medium of exchange that is assessed value, made uniform, regulated, and protected by sovereign power. See, e.g., David G. Oedel, Why Regulate Cybermoney?, 46 Am. U. L. Rev. 1075, 1077 (1997) (“[I]n the background of most functional definitions are suggestions that money serves as a tool for governments to exercise macroeconomic control and to channel financial commerce along preferred routes.”) (citations omitted).

. . . .

The above context demonstrates that Bitcoin is not “money” as people ordinarily understand that term. Bitcoin operates as a medium of exchange like cash but does not issue from or enjoy the protection of any sovereign; in fact, the whole point of Bitcoin is to escape any entanglement with sovereign governments. Bitcoins themselves are simply computer files generated through a ledger system that operates on block chain technology. See, e.g., Shahla Hazratjee, Bitcoin: The Trade of Digital Signatures, 41 T. Marshall L. Rev. 55, 59 (2015) (“The Bitcoin system operates as a self-regulated online ledger of transactions. These transactions are currently denoted by the change of ownership in Coins. This ledger, also referred to as the `block chain,’ has certain built-in mechanisms that eradicate the risk of double spending or tampering with the master record of all transactions.”). Like marbles, Beanie Babies™, or Pokémon™ trading cards, bitcoins have value exclusively to the extent that people at any given time choose privately to assign them value. No governmental mechanisms assist with valuation or price stabilization, which likely explains why Bitcoin value fluctuates much more than that of the typical government-backed fiat currency. See, e.g., Jennifer R. Bagosy, Controversial Currency: Accepting Bitcoin As Payment for Legal Fees, Orange County Lawyer, June 2014, at 42 (“Bitcoin has other key features that make it very different from other methods of payment. First, the value of Bitcoin is highly volatile. In January 2013, one Bitcoin was worth about $13. By December 4, 2013, the price had skyrocketed to $1,061 per Bitcoin. By April 15, 2014, the value had dropped to $500 per Bitcoin.”) (citation omitted). As for experiences in daily life, ordinary people do not receive salaries in bitcoins, cannot deposit them at their local banks, and cannot use them to pay bills. The Court cannot rule out the possibility that widespread, ordinary use of bitcoins as money could occur someday, but that simply is not the case now[.]


  • Petix creates a rift with the S.D.N.Y.’s decision in United States v. Faiella 39 F. Supp. 3d. 544 (2014). To his credit, Magistrate Judge Scott directly confronts this split:

In United States v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014)a.k.a. the “Silk Road case”—the court turned directly to a dictionary to define both “money” and “funds” and then equated an ordinary understanding of those terms with the dictionary definitions. Accord United States v. Budovsky, No. 13CR368 DLC, 2015 WL 5602853 (S.D.N.Y. Sept. 23, 2015); United States v. Murgio, No. 15-CR-769 (AJN), 2016 WL 5107128 (S.D.N.Y. Sept. 19, 2016). Perhaps there were circumstances in that line of Southern District cases that justified a first and exclusive resort to a dictionary. “Dictionary definitions of `money,’ however, are not helpful in determining congressional intent in employing that term in [a criminal statute].” United States v. Jackson, 759 F.2d 342, 344 (4th Cir. 1985). As the Court noted above, there are several problems with a straight dictionary approach. First, a dictionary approach overlooks the numerous times in the United States Constitution and Code when the term “money” consistently has referred to some kind of instrument issued and regulated by a sovereign. Second, the approach does not address the Supreme Court’s determination of the ordinary meaning of the term “funds.” Third, as the Supreme Court noted in Yates, terms in ordinary life do not always line up with dictionary definitions, and ordinary people simply would not think of any private medium of exchange as money. Finally, resorting exclusively to a dictionary does not address the desire, implicit in Section 1960, to keep the United States monetary system away from criminal activity and transactions that support it. The weight of those authorities, experiences, and statutory objectives must be allowed to control here over broad technical definitions that lack context.

  • While Petix does not address it, Faiella‘s broad definition of money may open the door to money laundering charge for all buyers and sellers of bitcoins and, indeed, buyers and sellers of commodities in general. It seems unlikely that Congress intended the money laundering statute to sweep so broadly as to encompass a significant chunk of the economy as a whole. In a future post, I’ll look at money laundering cases beyond the Bitcoin context to try and place both Faiella and Petix in a broader frame.
  • Judge Scott suggests that while bitcoins may not be money at the moment, that could change: “The Court cannot rule out the possibility that widespread, ordinary use of bitcoins as money could occur someday, but that simply is not the case now[.]” Something that is not currently a crime could become a crime with no intervening statute or regulation. That seems troubling.

Is My Cryptocurrency a Security? (Part 2)

In a previous post, I looked at a paper that concluded cryptocurrency might be a security – and thus regulated by the SEC – but didn’t have to be a security. Trendon Shavers ran the unwisely-named “First Pirate Savings & Trust” (which he later renamed to “Bitcoin Savings and Trust.”) Shavers solicited business partners who provided him with Bitcoins, which he claimed to be selling to local buyers for a profit. When the SEC came calling, he claimed that he was not offering a security. Magistrate Judge Mazzant disagreed:

SEC v. Shavers, No. 4:13-cv-416 (E.D. Tex. Aug. 6, 2013) [Link]

Summary: When a party solicits business partners to supply him with Bitcoin with promises of investment returns, those solicitations are subject to the securities laws and the SEC can regulate them.


  • “Beginning in November of 2011, Shavers began advertising that he was in the business of ‘selling Bitcoin to a group of local people’ and offered investors up to 1% interest daily ‘until either you withdraw the funds or my local dealings dry up and I can no longer be profitable’ (Dkt. #3 at 3). During the relevant period, Shavers obtained at least 700,467 Bitcoin in principal investments from BTCST investors, or $4,592,806 in U.S. dollars, based on the daily average price of Bitcoin when the BTCST investors purchased their BTCST investments (Dkt. #3 at 4). The BTCST investors who suffered net losses (compared to investors who received more in withdrawals and purported interest payments than they invested in principal), collectively lost 263,104 Bitcoin in principal, that is $1,834,303 based on the daily average price of Bitcoin when they purchased their BTCST investments, or in excess of $23 million based on currently available Bitcoin exchange rates. Id.”

Issues, Holdings, and Discussion:

  1. When a party solicits business partners to supply him with Bitcoin with promises of investment returns, are those “investment contracts” subject to SEC regulation? Yes, per the three-part test from SEC v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946):
    1. Bitcoin Savings & Trust “investments constitute an investment of money [because] Bitcoin can be used as money . . . [and] can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan.”
    2. Shavers and his investors were engaged in a common enterprise “because the investors here were dependent on Shavers’ expertise in Bitcoin markets and his local connections. In addition, Shavers allegedly promised a substantial return on their investments as a result of his trading and exchanging Bitcoin.”
    3. Shavers’ investors expected profits. “At the outset, Shavers allegedly promised up to 1% interest daily, and at some point during the relevant period the interest promised was at 3.9%.”


  • SEC v. Shavers shows that securities regulations do not necessarily depend on which cryptocurrency you’re dealing in. Nor do they depend on whether you are accepting cash or only cryptocurrency investments. Ultimately, they will probably depend on how you are marketing your particular business.