Implications of Bitcoin Not Being Actual Currency: The Espinoza Case

Vol. 36 No. 1 | November 2016

By

Bitcoin is virtual money held in a virtual account.1 There is no central bank or clearing-house or other third-party administrator. Rather, transactions are peer-to-peer, made directly between sender and receiver. Users download software onto their computers or smart phones to create a “wallet”2 and use the wallet to send and receive bitcoin. The payor sends a “public key” that gives the receiver ownership rights. He certifies the transaction by signing with his “private key.”

There is no entity that issues bitcoin. Rather, new bitcoins enter the system through “mining.” The verification and reconciliation of bitcoin transactions requires solving increasingly complex mathematical problems. “Miners” provide the computing power needed to complete the task and receive newly-created bitcoins as payment for their services.3 Currently-existing bitcoins can be obtained either by receiving them as a payment or gift or through an exchange that allows users to convert cash to bitcoins and vice versa by matching buyers and sellers.4

There is a finite number of bitcoins available, about 21 million when all are mined. The program’s designer projected that number to be reached in 2140.5 As part of this finite system, each bitcoin has its own private digital fingerprint that cannot be used again after it has been activated.

The value of a bitcoin is not tied to the value of the dollar or any other currency but rather fluctuates based on the market. Because the bitcoin system maintains daily historical pricing information, purchase and sale prices can be easily tracked.6

I. Concerns About Use of Bitcoin

Bitcoin is not the first virtual currency. It has, however, garnered the most attention by being embroiled in several scandals. With transfers made peer-to-peer, anonymously, encrypted, and without the use of an administrative clearing house, bitcoin has proven to be the currency of choice for those who want to purchase illegal goods or services anonymously.7 Probably the most well-known illegal activity involving bitcoin is Silk Road, an underground virtual marketplace involved in the online sale of illegal drugs and other unlawful goods and services. Ross Ulbricht, with an online presence as the “Dread Pirate Roberts,” operated the website. Sales were kept anonymous by using a special computer setup that concealed the identity of the users and using bitcoin to make purchases. Eventually the site was shut down and Ulbricht convicted of seven different crimes including distribution of narcotics, engaging in a continuing criminal activity, computer hacking, and conspiracy to commit money laundering.8

Bitcoin was Ulbricht’s choice of currency because the system is both anonymous and transparent. Transfers are anonymous in that they are recorded using user addresses. As long as a wallet address is not associated with the user, the user’s identity remains hidden. The system is transparent in that all transactions are recorded and stored publicly and permanently on the network in a “block chain.”9 Anyone with a computer can see the balance and transactions of a bitcoin address.10

II. Tax Implications of Bitcoin

For tax purposes, bitcoin is, in essence, nothing more than a medium used to carry out barter exchanges.11 Those who are paid in bitcoin for goods or services rendered have gross income.12 Compensation payments are subject to the same payroll tax withholding requirement for FICA and FUTA as other compensation payments,13 and the employer must satisfy the usual information reporting requirements.14

Those who “mine” bitcoins by using their own computer resources to validate bitcoin transactions receive compensation for services.15 That income is self-employment income, subject to self-employment tax.16

Those who pay with (or otherwise dispose of) bitcoins have a disposition of property on which gain or loss generally must be recognized.17 As with all assets sold, the character of a gain depends on how a taxpayer held the bitcoins.18 For taxpayers who hold bitcoins as an investment, the character will be capital.19 Any net gain will be taxed at the preferential rates if held for more than one year,20 and the amount of net loss that can be recognized may be limited.21 If bitcoins are held by a taxpayer as inventory, any gain will be ordinary.22

III. The Espinoza Case: Selling Bitcoin Does Not Mean the Seller Is a Criminal

In Miami Beach, a detective worked with a Special Agent from the United States Secret Service’s Miami Electronic Crimes Task Force to investigate the purchase and sale of bitcoins in South Florida. They began by visiting a peer-to-peer bitcoin exchange used by potential bitcoin sellers and buyers.23 They identified a seller who they thought might be engaged in illegal activity based on his user name, the fact he was available to make trades 24 hours a day, and that he wanted to make the trades in public locations.24

The detective contacted the seller and arranged a meeting where he purchased 0.40322580 bitcoins for $500. The seller explained he made a profit by buying and selling bitcoins. He would buy at 10 percent below-market prices and sell at 5 percent above-market prices.25

The detective arranged a second meeting at which he bought one bitcoin for $1,000. He also asked the seller if the seller would be willing to accept stolen credit card numbers as payment for bitcoin purchases. The seller was noncommittal.26 Through text message communication, the detective purchased another $500 in bitcoins.27

The detective arranged a third meeting, this time in a hotel room where the detective told the seller he wanted to buy $30,000 in bitcoin. He showed the seller a wad of cash.28 The seller was nervous about accepting the cash and never took possession of it. During that meeting, the seller was arrested and charged with unlawfully engaging in a money services business29 and money laundering.30

The seller-defendant filed a motion to dismiss the information. With respect to the charge of being unlawfully engaged in a money services business by being a money transmitter, the court easily determined that the charge did not fit the transaction. The seller was not receiving currency in order to transfer it to a third party; he did not act as a middleman. That type of service more closely resembled the services offered by businesses like Western Union. Rather, the court concluded seller-defendant was more akin to a day trader, buying low and selling high to make a profit on bitcoin transactions.31

The government then alleged the defendant-seller was a payment instrument seller.32 A payment instrument includes a check, money order, travelers check, etc.33 Because bitcoin is property and not an actual currency, it did not meet the definition of “payment instrument;” the seller did not violate the statute by selling bitcoin.34 The court concluded “Bitcoin has a long way to go before it is the equivalent of money.”35 It dismissed the charge of unlawfully engaging in a money services business.36

With respect to the money laundering charge, the court first considered the nature of money laundering. “’Money laundering’ is commonly understood to be the method by which proceeds from illicit activity (‘dirty money’) becomes legitimized.”37 In Florida, it is illegal for an individual to be involved in a financial transaction involving property that is being used to facilitate an unlawful activity when the person’s conduct is intended to promote the unlawful activity. The transaction must involve a “monetary instrument.” A “monetary instrument” is an item such as U.S. currency, travelers’ checks, or personal checks. Bitcoin, a form of property, is not a monetary instrument.38 Moreover, because the bitcoin purchase was to be made with cash, and not the represented stolen credit card numbers, the court concluded the transaction did not facilitate an unlawful activity.39

The court ended by observing that the seller-defendant was not promoting any illegal activity: he was merely selling his property. The buyer-detective’s claim that the seller intended to use the property for illicit purposes did not establish a crime. The court dismissed the money laundering charge.40

IV. What About the Tax Implications?

The seller.  In the case discussed, the seller explained to the detective what he was doing. He was selling appreciated property. Gain from the sale of appreciated property must be recognized by the seller.41 It is unclear from the court’s order granting the defendant’s motion to dismiss whether the seller reported any of the gain from the bitcoin sales, though it is beyond question that he should have. The reason he bought and sold bitcoins was to make a profit.

Valuation—the issue that usually complicates determining the amount of gain from the disposition of property—is not present in bitcoin purchases and sales. Valuation issues arise when there is no easily administrable means for determining what something is worth. For example, airlines years ago began awarding customers enrolled in frequent flyer programs “points” (i.e., virtual currency) when they purchase a ticket. When enough points are accumulated, customers can cash them in for a free ticket or use them to pay for food or hotel rooms or other items. The ability to earn points has since expanded. Now, many businesses have “rewards programs” that allow customers to earn reward points that can be used to purchase products or be converted to cash equivalents. Given the administrative burden of tracking and valuing the airline-awarded points, the Service announced it would not seek to tax points received as the result of business travel and used for personal purposes.42

Because bitcoin tracks daily pricing information that is publicly available, the bitcoin value on the day of purchase and day of sale easily can be determined, without the use of experts or competing opinions on value or great uncertainty. Moreover, the Service has shown no hesitation in basing a tax deficiency on receipt of virtual currency. In Shankar v. Commissioner43 Mr. Shankar received “thank you points” as a noncash award for opening a bank account. He redeemed some of the points to purchase a plane ticket. The Tax Court held the points were given in exchange for the use of his money, making them interest. Because interest is taxable,44 Shanker had income equal to the value of the ticket.45

For the seller-defendant, the only real difficulty would have been determining which bitcoin he sold. To the extent he held multiple bitcoins purchased on different days and at different prices, he would have needed to determine which bitcoins were sold to know the basis in each and, from there, the amount of gain or loss from each sale. Notice 2014-2146 does not provide guidance on how a seller makes this determination.

Presumably, a seller could merely identify which bitcoins he sold. If he failed to do so, the fungibility of bitcoins suggests that an analogy could be made to stock sales. When a seller sells stock and does not adequately identify which stock was sold, the stock identification regulations treat the seller as having sold the last stock that was purchased (last in, first out).47 The same presumption could apply to a bitcoin seller.

When identical stock is purchased on the same day through a single trade order with an aggregate total cost reflected on the confirmation report, the stock identification regulations provide that the taxpayer can determine basis by averaging the cost of each share.48 Bitcoin, regardless of when purchased, has identical attributes, arguably making an average cost of all bitcoins purchased on a single day an option by analogy.49

Not only would the seller-defendant be liable for the tax on the gains generated from the sales, but if he failed to report the gain, he would be liable for the negligence penalty.50 Negligence includes the failure to make a reasonable attempt to comply with the Code, exercise ordinary and reasonable care in preparing the return, keep adequate books and records, and substantiate items properly.51 In light of Notice 2014-21 classifying bitcoins as property, any failure by the seller to report gain from a disposition of bitcoins constitutes negligence.

Of course, if the seller-defendants’ failure to include the gain was intentional, he might be liable for the civil fraud penalty.52 The Service would have the burden of establishing that the seller committed fraud by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.53 To satisfy this burden, the Service would have to show the seller engaged in wrongdoing with the specific intent to avoid a tax on the gain that he knew or believed to be due. Without direct evidence of the seller’s intent, the Service would look to circumstantial evidence through the so-called “badges of fraud.”54 More would have to be known before there could be any assumptions made about the applicability of the fraud penalty to the seller-defendant.

The peer-to-peer exchange. From the information provided in the opinion, it is difficult to determine if the peer-to-peer bitcoin exchange55 would be classified as a barter club or barter exchange subject to the rules applicable to such organizations. The website does not fit neatly into what might traditionally be thought of as a barter club. In the past, such organizations advertised themselves as that—barter clubs—for the purpose of attracting people who wanted to engage in barter transactions. The Service defines a barter exchange as

Any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services.56

Neither the Code nor the regulations include a definition of what it means to “barter property or services.” However, a barter transaction usually means a transaction where property or services are traded directly and no cash is involved.

To the extent bitcoins are purchased and sold for cash, the organization is a money transmitter business and not a barter club. If bitcoins are being exchanged for property or services, as with the Silk Road website where bitcoins were being exchanged for (illegal and illicit) goods and services, the exchange would be a barter club. In Espinoza, if most transactions resembled those suggested by the detective, bitcoin for stolen credit card numbers, the peer-to-peer exchange likely is a barter club. Without more information about the nature of the transactions, it is not possible to draw any conclusion about whether the website was a barter club.

From the seller-defendant’s perspective, it does not matter if the website is a barter club: commercial barter transactions are subject to tax the same as any other transactions.57 The classification as a barter club, however, might make a difference for the website. If the website is a barter exchange that has more than 100 transactions in a year, it is required to issue Forms 1099-B, Proceeds From Broker and Barter Exchange Transactions.58

Form 1099-B is an informational return59 provided to taxpayers so they can correctly complete their tax returns and verify that the amount reported to the Service is accurate and complete. A barter club may incur a penalty if it either fails to file an information return with the Service or fails to provide a copy of an information return to the payee. Irrespective of how many errors an information return contains, the Code imposes only one penalty of $250 per information return (with a maximum annual penalty60 ). The barter club can decrease the amount of the penalty to $50 per return if it corrects the error within 30 days of the due date of the return.61

Because the bitcoin seller was the focus of the detective’s investigation and the Service was not clearly involved, it is unclear whether the Service would have taken the position that the peer-to-peer site should have been treated as a barter exchange required to issue Forms 1099-B. Moreover, it is not clear whether the site dealt with a sufficient number of barter transactions to make it a “barter club” subject to the reporting obligations.

V. Going Forward

In Espinoza, the detective and the members of the Task Force seemed to equate the buying and selling of bitcoin with engaging in an illegal activity. Certainly, their suspicions were not completely without foundation, as others who had bought and sold bitcoin had been convicted of the crimes with which they charged the seller-defendant.

The most well-known cases are likely those involving the Silk Road website. Thomas and Amanda Callahan served as a bitcoin exchanger (exchanging fiat currency into bitcoins and vice versa) for users of the Silk Road website. Clients sent Mr. Callahan cash, and he converted the cash into bitcoins.62 During a search of their house, Mrs. Callahan transferred 50.44 in bitcoins to the federal agents.63 In an action for forfeiture of the bitcoins, the court found the Callahans had failed to register their exchange service as a money service business with FinCEN, a criminal offense.64

Robert Faiella also was involved in the Silk Road website. He was charged with operating an unlicensed money transmitting business.65 Faiella received cash from his clients, converted the cash into bitcoins, and transferred the bitcoins to the client’s accounts on the Silk Road website.66 Bitcoins qualified as “funds” because they can easily be purchased in exchange for ordinary currency, act as a denominator of value, and be used to conduct financial transactions.67 Accordingly, having found all the elements under the statute, the court held Faiella could be held liable for running an unlicensed money transmitting business.68

The Financial Crimes Enforcement Network (FinCEN) is a bureau in the Treasury Department that operates as a bridge between law enforcement and the financial industry. One of its responsibilities is implementation of the Bank Secrecy Act (BSA),69 which includes a comprehensive federal anti-money laundering and counter-terrorism financing statute. The requirement to register a money transmitting business is part of the BSA.

A money transmitting business is a business that transmits funds between parties: it receives money from a customer and then transmits that money to a recipient in a place the customer designates. The customer pays a fee for the service.70 It includes a business that cashes checks or is a money transmitter service provider.71 Money transmitter services include accepting currency and transmitting the currency through an electronic funds transfer network.72 A money transmitting business or a money transmitter service must register with FinCEN and, in some states, with the state as a money service business.73 There is no requirement that the money transmitting business or the money transmitter service provider be engaged in an illegal activity,74 but it is illegal to knowingly run an unlicensed money transmitting business.75 FinCEN has ruled that a business that exchanges bitcoins is required to register with FinCEN as a money transmitting business.76

The facts in Espinoza were different from the Silk Road cases. There was no evidence the seller was accepting cash to create a bitcoin account on behalf of the buyer, as Callahan and Faiella had done. In short, there was no evidence of anything other than that the seller was selling bitcoin for cash.

The fact the seller was selling bitcoin for cash should have raised the question of whether he was complying with the tax laws. Any potential tax implications from bitcoin as currency were put to rest when the Service ruled that bitcoins do not meet the definition of currency but are, instead, property.77 Accordingly, from a tax perspective, in Espinoza, the seller explained to the detective that he was selling appreciated property. Did he report the gain? This question seems to represent the lowest hanging fruit in terms of establishing the seller had done something wrong. However, nothing in the case suggests that avenue was pursued. Going forward, it might make more sense to first consider the more straight-forward tax implications of selling bitcoin. Moreover, by tracing how the bitcoin are being sold, the detective would have had the basic information needed to determine if the seller was in an unlicensed money transmitting business. If the information supported such an allegation, then the seller could have been so charged.

VI. Conclusion

The traits that make bitcoin the virtual currency of choice for those engaged in illegal activities—peer-to-peer transfers, anonymity, encryption, and absence of an administrative clearing house—make bitcoins difficult to monitor for proper tax reporting and compliance purposes. Certainly, it will be favored by those involved in tax evasion schemes and illegal activities. The potential for misuse, however, goes well beyond that. With the tax consequences associated with using bitcoin mostly settled, the focus can shift to whether taxpayers are properly reporting their gains when disposing of bitcoins. This is especially true because, of all the avenues that might be pursued when considering a bitcoin seller engaged in shady behavior, not reporting gain from the bitcoin sales might have been the only case that was winnable.


1 Satoshi Nakamoto”, not his real name, posted papers online laying out the structure of bitcoin, a virtual currency. See Bitcoin: A Peer-to-Peer Electronic Cash System, bitcoin.org; Frequently Asked Questions: How Does Bitcoin Work?, bitcoin.org. A few months later, bitcoin was an operating currency with a market capitalization in excess of $5 million. For information on cryptocurrency market capitalization, see Crypto-Currency Market Capitalizations.

2 Users may own as many wallets as they want.

3 “To perform the work of mining, bitcoin miners download free bitcoin software that they use to solve complex equations. These equations serve to verify the validity of bitcoin transactions by grouping several transactions into a block and mathematically proving that the transactions occurred and do not represent double spending of a bitcoin. When a miner’s computer solves an equation, the bitcoin network accepts the block of transactions as valid and creates 25 new bitcoins and awards them to the successful miner.” U.S. Gov’t Accountability Off., GAO-13-516, Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks 6 (2013). See also Christopher Rajotte, Andrew Ittleman & Mitchell Fuerst, Bitcoin Taxation: Understanding IRS Notice 2014-21, Bitcoin Magazine (Apr. 4, 2014).

6 See, e.g., www.coindesk.com/price.

7 For a further discussion on the difficulties of regulating bitcoin and other virtual currencies, see Omri Y. Marian, supra n.8; Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4 Hastings Sci. & Tech. L.J. 160 (2011).

8 See United States v. Ulbright, 31 F.Supp. 3d 540 (S.D.N.Y. 2014). See also Ross Ulbricht Convicted of Running Silk Road as Dread Pirate, Bloomberg Business News (Feb. 4, 2015). Bitcoin is not the only cryptocurrency used to carry out illegal activities. On May 23, 2013, the government brought an indictment against the operators of Liberty Reserve, a popular virtual currency, charging the operators with money laundering and operating an unlicensed money transmitting business. Indictment, at *14, 16, United States v. Liberty Reserve, 13 Crim. 368 (S.D.N.Y. May 23, 2013).

10 Dean Walsh, Digital Cash – A Beginner’s Guide to Anonymous Digital Currency, HubPages (June 23, 2014); Some Things You Need to Know, Bitcoin.org; Roger Wu, Why We Accept Bitcoin, Forbes (February 13, 2014).

11 Notice 2014-21, 2014-16 I.R.B. 938, Sec. 4, Q/A 1. The notice applies to the federal tax consequences of transactions that use convertible virtual currency. Sec. 3, Notice 2014-21. Accordingly, it applies to bitcoin and the convertible virtual currencies of online video games. See also Rajotte et al., Bitcoin Taxation, supra n. 4.

12 I.R.C. §61(a)(1), (3); Notice 2014-21, Sec. 4, Q/A 3. The taxpayer has the burden of establishing the fair market value of bitcoin received and will take a tax-cost basis. I.R.C. §1012; Notice 2014-21, Sec. 4, Q/A4. The fair market value of bitcoin can be determined by the exchange rate as listed on an exchange if “the exchange rate is established by market supply and demand.” Notice 2014-21, Sec. 4, Q/A 5. Because bitcoin maintains daily historical pricing, purchase and sale prices can be easily tracked.

13 Notice 2014-21, Sec. 4, Q/A 11.

14 Notice 2014-21, Sec. 4, Q/A 12, 13.

16 I.R.C. §1401; Notice 2014-21, Sec. 4, Q/A 9-10.

17 Any realized loss under section 1001(a) is recognized. Notice 2014-21, Sec. 4, Q/A 1, 6. Losses derived from transactions entered into for profit are generally allowed. I.R.C. §165(c)(2). If a bitcoin payment constitutes a business or investment expense, presumably the taxpayer can claim a deduction equal to the amount paid. I.R.C. §§ 162, 212. If the payment is a salary, the employer is required to withhold FICA and FUTA tax and file a Form W-2, the same as if the employee had been paid in cash. Notice 2014-21, Sec. 4, Q/A 11-14.

19 Notice 2014-21, Sec. 4, Q/A 7; I.R.C. §1221. Bitcoin would fail to meet any of the exceptions in Section 1221(a).

22 I.R.C. §1221(a)(1); Sec. 4, Notice 2014-21, Q/A 7. In the hands of a taxpayer who is a “dealer” in that he in the business of buying and selling bitcoin, it will be characterized as an ordinary asset. Id.

23 https://localbitcoins.com.

24 Florida v. Espinoza, Order Granting Defendant’s Motion to Dismiss the Information, at *1-2 (F14-2923, 2016).

25 Id. at *2.

26 Id. 

27 Id. at *2-3.

28 The detective’s cash was counterfeit. Id. at * 3.

31 The government also failed to establish that defendant charged a fee for any money transmitting. Florida v. Espinoza, Order Granting Defendant’s Motion to Dismiss the Information, at *4-5 (F14-2923, 2016).

34 Florida v. Espinoza, Order Granting Defendant’s Motion to Dismiss the Information, at *5 (F14-2923, 2016).

35 Id. at *6.

36 Id.

37 Id.

38 Id. at *6-7.

39 Id.

40 Id. at *7.

41 I.R.C. §1001(b). Of course, the seller also would be able to recognize any loss. I.R.C. §165(c)(1), (2).

42 Announcement 2002-18, 2002-1 C.B. 621. It excluded from amnesty situations where points were converted to cash. See Charley v. Commissioner, 91 F.3d 72 (9th Cir. 1996).

49 It would seem this would come into play only when bitcoins are purchased from different sellers at different prices. One seller selling more than one bitcoin would charge the same price for all bitcoins purchased.

52 The penalty is 75 percent of the underpayment that is attributable to fraud. I.R.C. §6663.

54 No one factor is sufficient to establish fraud. A court may, however, consider a combination of several factors to be persuasive circumstantial evidence of fraud. Moreover, a court may infer an intent to mislead the Service from a pattern of conduct. The badges of fraud include:

  • Understatement of income;
  • Maintaining inadequate records;
  • Giving implausible or inconsistent explanations of behavior;
  • Concealing income or assets;
  • Failing to cooperate with tax authorities;
  • Engaging in illegal activities;
  • Providing incomplete or misleading information to the taxpayer’s tax preparer;
  • Lack of credibility of the taxpayer’s testimony;
  • Filing false documents, including filing false income tax returns;
  • Failing to file tax returns; and
  • Dealing in cash.

55 The exchange can be found at https://www.localbitcoins.com. This website allows buyers and sellers in specific locations, where it has a presence, to connect with each other.

56 “The term does not include arrangements that provide solely for the informal exchange of similar services on a non-commercial basis.” Treas. Reg. §1.6045-1(a)(4). See also I.R.C. §6045(c)(3); Instructions for Form 1099-B (Barter Exchanges); IRS, Barter Exchanges (website information for small businesses).

57 I.R.C. §61(a)(1); Treas. Reg. §1.61-2(d); Rev. Rul. 79-24, 1979-1 C.B. 60. The Service has established a Bartering Tax Center that explains the tax consequences and the proper forms to be used to report a barter transaction. In addition, Publication 525, Taxable and Nontaxable Income, addresses the tax consequences of a barter transaction. See, e.g., Rooney v. Commissioner, 88 T.C. 523 (1987) (goods and services received as payment for services required to be included in income at retail value). See also Sergio Pareja, It Takes a Village: The Problem with Routinely Taxing Barter Transactions, 59 Cath. U. L. Rev. 785 (2010).

58 I.R.C. §6045; Treas. Reg. §1.6045-1. Taxpayers not participating in an exchange may be required to file a Form 1099-MISC. Note that the barter club itself may have tax consequences. See Barter Systems, Inc. of Wichita v. Commissioner, T.C. Memo. 1990-125 (barter exchange must report the fair market value of property received from members in exchange for trade units); Baker v. Commissioner, 88 T.C. 1282 (1987) (owner of barter exchange subject to tax).

59 Generally, information returns must be filed with the Service by March 1. I.R.C. §6721.

60 The maximum penalty is $3 million per calendar year or, for a small business with less than $5 million in gross receipts, $1,000,000. I.R.C. §6721(a), (d)(1)(A).

61 For the reduced penalty, the maximum amount is $500,000 per calendar year and $175,000 for a small business. If the barter club corrects the error 30 days after the due date (generally March 30) but before August 1, the penalty is $100 per return, and the maximum penalty is $1,500,000 per calendar year, $500,000 for small businesses. I.R.C. §6721(b), (d)(1)(B), (C).

63 At the time of the court’s decision, 50.44 bitcoin was worth approximately $27,000.

64 50.44 Bitcoins, 2016 WL at *2. Because the United States had established a connection between the bitcoins and a criminal offense, the bitcoins were forfeited. Id. at *2, n.5. See 18 U.S.C. §§ 981, 983.

68 Faiella, supra n. 83, at 547, denying the defendant’s motion to dismiss.

69 More specifically, FinCEN exercises regulatory functions primarily under the Currency and Financial Transactions Reporting Act of 1970, as amended by Title III of the USA PATRIOT Act of 2001 and other legislation, which legislative framework is commonly referred to as the Bank Secrecy Act.

72 31 U.S.C. §5330(d)(2). Other means of transfer are also included.

73 31 U.S.C. §330; 31 C.F.R. §1022.380(a)(1). A money services business includes any money transmitter, which is a person who transmits currency, funds, or value that substitutes for currency between people or locations. 31 C.F.R. §1010.100(ff)(5).

75 18 U.S.C. §1960. A person is guilty of this offense if he “knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business.” 18 U.S.C. §1960(a). “Money transmitting” is “transferring funds on behalf of the public by any and all means.” 18 U.S.C. §1960(b)(2). “Funds” includes bitcoins. United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014). A business is unlicensed if it fails to meet the regulations under 18 U.S.C. §1960.

76 See Fin. Crimes Enforcement Network, Dep’t of Treasury Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001. It also clarified that a mere user of virtual currency is not engaged in a money transmitting business.  Id.

77 Notice 2014-21, Sec. 2. See also U.S. Gov’t Accountability Off., GOA-14-496, Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges 4 (2014) (a virtual currency is “a digital representation of value that is not government-issued legal tender”); U.S. Gov’t Accountability Off., GAO-13-516, Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks 3 (2013) (a virtual currency is “a digital unit of exchange that is not backed by a government-issued legal tender. Virtual currencies can be used entirely within a virtual economy, or can be used in lieu of a government-issued currency to purchase goods and services in the real economy”); Fin. Crimes Enforcement Network, Dep’t of Treasury, FIN-2013-G001, Guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies 1 (Mar. 18, 2013) (virtual currency is “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.”).

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