Michell Espinoza had a good Monday.
On that day last week, the South Florida bitcoin exchanger saw money transmission and money laundering charges against him dismissed. Espinoza was arrested in 2014 for selling bitcoins to an undercover law enforcement agent, and he has again been thrust into the spotlight due to the potential impact of the case.
The court’s eight-page opinion, discussing the application of Florida money transmission and money laundering statutes to sales of bitcoin, was the first of its kind, and it suggested that certain notions of how the law views transactions made in bitcoin may be revisited.
All told, the Espinoza opinion may have only triggered a policy fight that will redefine Florida’s position on cryptocurrencies, as it reached a somewhat controversial conclusion when interpreting Florida’s money transmission statute.
For example, it is clear that the sale of bitcoin by a person to another person in exchange for US dollars is not a three-party transaction as required for money transmission, as the court outlined. But while it could have stopped its analysis there, concluding that the facts did not support the government’s charge, it determined that bitcoin was not “currency, monetary value or a payment instrument”.
The surprise wasn’t only that the court addressed the issue at all, but also its conclusion.
Although the court did not need to reach the issue, there was ample support for it to rule either way.
The court could have relied upon in SEC v Shavers, where it was concluded that bitcoin “is a currency or form of money”, or followed other federal precedent. US v Ulbricht, for instance, suggests that cryptocurrencies are considered money equivalents.
Based on these precedents, the court could have concluded that bitcoin was “monetary value,” under Florida’s money transmission statute.
Instead, it relied on the IRS classification of cryptocurrencies (called “virtual currencies” in the IRS Guidance) as property, and upon the Florida Office of Financial Regulation’s Declaratory Statement Final Order entered in In re: Moon Inc, which held that a bitcoin kiosk network that sold bitcoins to people was not engaged in money transfer.
In In re: Moon Inc, the petitioner explained that bitcoins were “a unit of digital property”, and argued that their bitcoin kiosks that sold bitcoin for cash did not transmit money under Florida law.
The Court’s conclusion in Espinoza appears to be consistent with both IRS guidance and In re: Moon Inc. Although support exists for either conclusion, the court chose a more liberal approach.
What is clear is that the determination made was based upon analysis of Florida’s specific money transfer laws. (If other states laws materially vary, this precedent will probably not apply).
The court’s analysis of the money laundering claim did not relate to anything intrinsic about bitcoin.
To the contrary, the court presumed that a sale of bitcoin for fiat currency is a “financial transaction” under Florida’s statute because US dollars were used. The specific statute at issue required the party selling the bitcoin to demonstrate its intent to conceal or disguise the nature, location, source, ownership or control of the property or to avoid a transaction reporting requirement, as opposed to mere knowledge of the other party’s intent.
Thus, the government would have to prove that Espinoza had the intent, along with the purchaser, to engage in an illegal activity. The Court ultimately treated Espinoza like (here comes the bad analogy) a bank that dispenses money through its ATM – whether the person receiving the cash uses it to buy dinner or illegal drugs, the bank is not responsible, absent some showing of the bank’s intent to facilitate the nefarious use of the cash.
This inquiry, critically, is fact specific. (It depends on facts to show the transacting party’s intent, and thus, likely not of presidential value).
As noted by Stephen Palley, even the legal conclusions of the Espinoza opinion are of limited precedential value; the conclusions may be reargued, or appealed.
Even if Espinoza is not appealed, another court in Florida could reach a different decision under similar facts, and it would be up to an appellate court to review both orders and resolve the conflict.
Judge Pooler directly called for Florida’s legislature to revisit its money laundering statutes in Espinoza. It is possible, given the attention created by the opinion, that Florida’s legislature may change its laws to establish its own policy on cryptocurrencies. One lawmaker has already said she intends to do just that.
Ultimately that may be Espinoza’s legacy – forcing Florida’s legislators to address bitcoin.
Hopefully, Florida’s Legislature will consider the impact of cryptocurrencies like bitcoin, and craft legislation to balance their potential for abuse with their potential to foster innovation, create jobs and generate wealth, and to toe the line of protecting consumers while still between permitting experimentation and innovation.