'Guinea pig' money laundering case will determine Bitcoin's legal status

If Bitcoin is not a legal currency, can it be used to launder money? A lawsuit in Florida may give us the answer.

How to launder money if it is not money?

Michel Espinoza, a programmer and early bitcoin investor, was arrested in January 2014 and later charged with operating a money transmitter business without a money transmitter license and attempted money laundering.

Espinoza’s legal team filed a motion to dismiss the charges in the case, arguing that Florida law does not define Bitcoin as a currency, so the charges do not apply.

Charles Evans, an economics professor at Barry University, testified for the defense. He said the legal definition of Bitcoin is confusing, with different definitions in different states. The IRS defines Bitcoin as a similar trading commodity.

According to a news report, Miami-Dade County Circuit Judge Teresa Mary Pooler called the case

"This is the most interesting case I have heard in this court in a long time."

Pooler will make a decision by June 17 after hearing further arguments and will issue a written judgment after that.

The legal team is confident

Michel Espinoza, once an active trader on LocalBitcoins.com in Miami, was arrested in a lengthy sting operation. After attending the 2013 North American Bitcoin Summit, a shadow has been cast over the local Bitcoin community in Miami. Espinoza’s attorney, Palomino, said the shadow came from the possibility that local traders may be “illegally scrutinized” by local police using test cases.

Palomino told CNN he was confident Judge Pooler would make a reasonable ruling because she did background research, asked a lot of interesting questions, and understood the economic rules surrounding the case. She said:

"Based on the evidence in this case and the video I've seen, this young man is completely innocent of any wrongdoing."

Palomino said Espinoza had no intention of setting up a bitcoin exchange or bank, and that he simply conducted person-to-person transactions without a third party, and that he had no criminal record.

Additionally, there are no laws or precedents to guide how people conduct Bitcoin-related transactions.

“Bitcoin is not subject to any current legal provisions governing financial transactions,” Palomino said, adding that the allegation of attempted money laundering was even less plausible.

Guinea Pig Test Case

Espinoza made three $500 transactions with the detective posing as a Bitcoin enthusiast. Later, he met with the detective again in a hotel, who asked for a $30,000 transaction. They also talked about a foreigner who specialized in stealing credit card accounts.

He felt that such a transaction in a hotel was not right and asked to go to a bank for the transaction, which is when he was arrested. Police initially charged Espinoza with suspected money laundering, but later the charge was reduced to attempted money laundering because the transaction did not take place.

Detectives targeted Espinoza and another trader, Pascal Reid, in the early days of bitcoin, when other state governments were just beginning to explore the uses of the virtual currency, so Espinoza's legal team dubbed the case a "guinea pig case."

Reid was charged with operating a money transmitter without a license, to which he later pleaded guilty and received a suspended sentence, with the money laundering charge dropped.

Bitcoin and money laundering

Espinoza may be the first person to be charged with money laundering for trading bitcoin, but he is not the most famous. In December 2014, Charlie Shrem, former CEO of bitcoin exchange pioneer BitInstant, was sentenced to two years in prison on similar charges.

In Shrem’s case, he and his partner, Robert Faiella, traded large amounts of Bitcoin, which were later used to trade drugs on the Silk Road marketplace.

He was arrested at New York's Kennedy Airport in a very high-profile manner just as he was returning from the Ramsterdam Bitcoin Summit. Bitcoin enthusiasts felt that the New York authorities were putting on a show.

Florida's situation

Espinoza received such ridiculous charges for trading such a small amount of money. Money laundering cases usually involve millions of dollars and a longer period of time.

In an even more ironic twist, the Bal Harbour Police Department and the Everglades County Sheriff's Office in Florida were investigated for allegedly laundering $70 million for South American drug dealers, with local law enforcement agencies having some connection to the case.

The sting operation involved 54 transactions with Chicago crime syndicates, including luxury goods, hotels, airline tickets, etc. During the "investigation" of them, no police officers were arrested.