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Are Cryptocurrencies Considered “Money” or “Funds”?


August 4, 2017

Are Cryptocurrencies “Money” or “Funds” Under 18 U.S.C. 1960?

As of 2011, there were less than a handful of digital currencies (aka cryptocurrencies) in circulation. Today, there are over 900, with another initial coin offering (ICO) hitting the market almost every day. The cryptocurrency market has surpassed a market cap of $100 billion.

Are Cryptocurrencies Money or Funds Under 18 U.S.C. 1960?

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That type of “coin,” tends to attract regulatory agencies and, just as importantly, innovative prosecutors armed with old statutes and a bottle of new gloss. One of those older statutes is 18 U.S.C. 1960, an anti-money laundering statute, that prohibits unlicensed money transmitting businesses. The question is whether cryptocurrencies constitute “money” or “funds” under the statute.

Brief Overview of 18 U.S.C. 1960

At its core, Section 1960 effectively bars a person or entity from any involvement with an unlicensed money transmitting business. The statute’s operational text reads: “Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.” This seemingly uncomplicated prohibition is tangled by the statute’s confusing definitions of “unlicensed money transmitting business” and “money transmitting.”

Section 1960 defines an “unlicensed money transmitting business” as a “money transmitting business which affects interstate or foreign commerce in any manner” and is (a) operated without the appropriate state license; (b) fails to comply with the registration requirements under 31 U.S.C. 5330 or its implementing regulations; or (c) “involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity.”

A business engaged in “money transmitting” is one that “transfer[s] 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.”

Thus, a successful Section 1960 prosecution will require the government to prove that a person was involved with a scheme or entity that “transferr[ed] funds on behalf of the public” and did so without the required state licenses or federal registrations, or with knowledge that the “funds” were obtained from, or will be used for, illicit activity. Even a foreign entity that has no offices or employees in the U.S., but opens and maintains U.S. bank accounts through which funds are transferred is subject to Section 1960 liability. United States v. Mazza-Alaluf, 607 F. Supp. 2d 484 (S.D.N.Y. 2009) (convicting owner of Chilean business that physically transported Euros from Chile into the United States and, after having it converted to dollars through an exchange, deposited it into the entity’s U.S. bank accounts).

When the funds transmitted are in the form of dollars or a foreign currency, the statute clearly applies. But what about when the funds are in the form of a cryptocurrency?

The Battle Lines Drawn By The Early Bitcoin-Related Prosecutions

In a series of recent cases, defendants criminally charged under Section 1960 for owning or operating a business that transmits cryptocurrencies have challenged whether the statute applies. These cases, almost all of them focused on Bitcoin, held that Bitcoins do, indeed, constitute “funds” under the statute. United States v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014); see also United States v. Budovsky, 2015 U.S. Dist. LEXIS 127717 (S.D.N.Y. Sept. 23, 2015); United States v. Murgio, 209 F. Supp. 3d 698 (S.D.N.Y. Sept. 19, 2016). Critical to their finding was that Bitcoin “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” Faiella, 39 F. Supp. 3d at 545.

Are Cryptocurrencies Money or Funds Under 18 U.S.C. 1960?

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Seven months ago, a magistrate in the Western District of New York opted to go in another direction. In United States v. Petix, 2016 U.S. Dist. LEXIS 165955 (W.D.N.Y. Dec. 1, 2016), the magistrate recommended dismissing the Section 1960 count on the grounds that Bitcoin are not “funds” or “money” under Section 1960. The court reasoned: “Bitcoin is not ‘money’ as people ordinarily understand that term,” because it “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.” Id. at *18.

Unfortunately, the defendant in Petix accepted a plea deal before the magistrate’s recommendation could be accepted or rejected by the district court. Moreover, its reasoning has been rejected by at least one other district court. See United States v. Mansy, 2017 U.S. Dist. LEXIS 71786, at *2 (D. Me. May 11, 2017)(holding Bitcoin constitute “funds” under Section 1960 and rejecting Petix because “[n]ot only was this decision never adopted by the district court, but this Court is not persuaded by its reasoning”).

Conclusion

While the quantity of authority weighs in favor of finding that cryptocurrencies fall within the scope of Section 1960, the question is not conclusively resolved. Smart businesses would be wise to err on the side of caution and comply with state licensing and federal registration requirements, at least until a robust consensus of authority emerges in the circuit courts of appeals or the United States Supreme Court weighs in. Ideally (though unlikely in the near-term), Congress would implement comprehensive legislation.

In the meantime, individuals and businesses ensnared in a Section 1960 prosecution should continue to highlight the differences between cryptocurrencies and what we normally think of as money. In doing so, an important area of future litigation may be the distinction between coins that are purely stores of value, such as Bitcoin, and those coins (more accurately classified as “tokens”) that are much more robust in their functionality, including those that act as gateways to the token generator’s digital ecosystem.

Do you have any questions regarding cryptocurrencies or how they pertain to 18 U.S.C. 1960? Would you like to discuss the matter further? If so, please contact me, Roshan Shah, at 201-806-3364.

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