On September 19, 2016, a federal U.S. District Court judge in New York ruled in a pre-trial motion that bitcoins were “funds” for purposes of a federal indictment relating to illegal money transmitting business and money laundering. The decision comes less than two months after a Florida state criminal court judge found that bitcoin was not money, a ruling we had previously covered. Ironically, both cases involve the same Florida statute.

The New York case involves Coin.mx, a website that the U.S. government claims is an unlawful bitcoin exchange. The government brought a nine-count indictment against four individuals relating to Coin.mx. Of those nine counts, Anthony Murgio was named in eight of them, and four of those eight counts relate to bitcoin. He was charged with two counts of operating (and conspiring to operate) an unlicensed money transmitting business and two counts of engaging in (and conspiring to engage in) money laundering, all in violation of federal law. Mr. Murgio filed a pre-trial motion to dismiss these counts, claiming that bitcoins were not “funds” under federal law and that Coin.mx was not a “money transmitting business.” The court denied the motion.

Federal law makes it a crime to operate an unlicensed money transmitting business. Under that statute, “money transmitting” includes “transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier.” The first issue was whether bitcoins were “funds” under the federal law. The court ruled that they were “funds” based upon other federal cases construing the term “funds” as well as the Webster’s Dictionary definition of “funds.” Specifically, the court found that bitcoins can be accepted as payment for goods or services, can be bought directly from an exchange with a bank account, and can act as a medium of exchange.

Mr. Murgio raised several arguments, all of which the court rejected. He first argued that the definition of “funds” should be the one appearing in Black’s Law Dictionary, which defined the term as a “sum of money or other liquid assets established for a specific purpose.” The court rejected this argument because Black’s is a legal dictionary, which went beyond the rule that ambiguous terms in statutes are to be given “ordinary meaning” and are not to be treated as a term of art found in a legal dictionary. Mr. Murgio also argued that the Internal Revenue Service (IRS) treats virtual currency as property and not currency. The court rejected this argument by noting that the IRS made its determination with respect to tax purposes only. The court similarly rejected Mr. Murgio’s argument that the Commodity Futures Trading Commission (CFTC) classified bitcoin as a commodity (rather than funds) because the CFTC was defining bitcoin for purposes of the federal commodity laws, not for purposes of construing the federal law prohibiting operation of an unlicensed money transmitter.

The next issue was whether Coin.mx was a “money transmitting business” within the meaning of the federal law. One of the definitions of “money transmitting business” under the federal law is whether the business was operating “without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony.” The state at issue in this case was Florida, which does license money transmitters and operating an unlicensed money services business (which includes a money transmitter) is a felony under Florida law. This is the same Florida law as was construed in the Espinoza case we covered in July. Mr. Murgio raised the Espinoza case and argued that under the ruling in that case, bitcoins were not “payment instruments” and thus not included within the definition of a “money transmitter” under Florida law, which defines a “money transmitter” in part as someone that “received currency, monetary value, or payment instruments for the purpose of transmitting the same.”

The U.S. District Court, however, disagreed with the Espinoza reasoning, finding that the Espinoza court did not “contemplate the possibility that bitcoins qualify as ‘monetary value’” under the Florida law. This court found that bitcoins did function as a “medium of exchange” and therefore met the Florida definition of “monetary value.” In addition, the court found that bitcoins met the Florida definition of “payment instruments” because a bitcoin qualified as “a check, draft, warrant, money order, travelers check, electronic instrument, or other instrument, payment of money or monetary value whether or not negotiable.”  (Emphasis in original.)  The court reasoned that, because bitcoins are “monetary value,” they meet the definition of “payment instruments.”

Based on the above reasoning, the U.S. District Court denied the defendant’s motion to dismiss the bitcoin sections of the indictment, finding that the government had sufficiently alleged that that Coin.mx was an unlicensed money transmitting business being operated by Mr. Murgio.

This case, like the Espinoza case, still is in the pre-trial stage although, unlike Espinoza, this matter is moving forward and more may be learned if and when a trial occurs.

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