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:
- 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.