In another installment of the continuing saga surrounding the shuttering of the Silk Road online marketplace and arrest of its alleged creator and operator, Ross William Ulbricht (Ulbricht), a Southern District of New York judge denied Ulbricht’s motion to dismiss the four-count indictment against him. The indictment alleges that Ulbricht designed Silk Road to be a virtual marketplace that allowed sellers to offer, and consumers to procure, narcotics and other illegal and fraudulent goods and services. The government also contended that Silk Road limited the form of payment on the site to Bitcoin in order to frustrate any attempts to identify patrons. In so doing, the government alleged that Ulbricht participated in narcotics trafficking, computer hacking and money laundering conspiracies. In a 51-page opinion issued July 9, 2014, Judge Katherine Forrest explained why each of Ulbricht’s challenges to the indictment failed. In this regard, Judge Forrest not only allowed the case against Ulbricht to continue but also further fortified law enforcement’s ability to apply federal law to Bitcoin-based transactions.
Central to the government’s money laundering case against Ulbricht was his designation of Bitcoin as the sole form of payment permitted on Silk Road. Given that Bitcoin use had yet (as of the time of the filing of Ulbricht’s motion) to form the basis of a money laundering charge, Ulbricht argued that the government could not sufficiently allege a “financial transaction” as required under 18 U.S.C. § 1956(h). Relying on Internal Revenue Service (IRS) Notice 2014-21 (which found that virtual currencies like Bitcoin were “property” rather than currency for the purposes of federal tax law), and the Financial Crimes Enforcement Network’s (FinCEN) March 18, 2013 Guidance on the Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (which distinguished virtual currencies like Bitcoin from “the coin and paper money of the United States or of any other country”), Ulbricht argued that if Bitcoin fell outside the traditional definition of “currency,” then it likewise fell outside the definitions of “funds” and “monetary instruments” and therefore could not be used in “financial transactions” of the type to which the money laundering statute applied. In essence, Ulbricht urged that if Bitcoin was not “money,” then the government could not prove that he had engaged in money laundering.
Noting first that neither FinCEN nor the IRS purported to address the question of whether Bitcoin satisfies the definition of “financial transaction” under the money laundering statute, the court opted to read the language of the statute broadly, and according to Judge Forrest, consistent with “its ordinary meaning.” Settling on a definition of “financial transaction” that “capture[d] all movements of ‘funds’ by any means, or monetary instruments,” and designating “funds” as “money” or something that “can be used to pay for things,” the court concluded that Bitcoin constitutes “funds” that may be used in “financial transactions.” Indeed, according to the court, “the only value for Bitcoin lies in its ability to pay for things . . . . Its form is digital-bits and bytes that together constitute something of value. And they may be bought and sold using legal tender.” As the court rationalized, because Congress intended to prevent criminals from finding ways to “wash the proceeds of criminal activity by transferring proceeds to other similar or different items that store significant value,” it would be consistent to conclude that one “can money launder using Bitcoin.”
While this opinion constitutes the first time a court has tackled the issue of whether Bitcoin falls under the definition of “financial transactions,” this is not the first time that federal law has been interpreted to cover Bitcoin transactions. Although Bitcoin investors and entrepreneurs must understand that their Bitcoin-based activities will be scrutinized Judge Forrest did acknowledge that “an allegation that Bitcoins are used as a payment system [would have been] insufficient in and of itself to state a claim for money laundering,” and the “fact that Bitcoins allow for anonymous transactions does not ipso facto mean that those transactions relate to unlawful activities.” The court clarified that it was the use of Bitcoins as the medium of exchange in financial transactions relating to narcotics trafficking and computer hacking that, if proved, would render the transactions alleged in this case illegal. The government in this case admitted the same in its complaint, stating that “Bitcoins are not illegal in and of themselves and have known legitimate uses.”
The court’s discussion of the other allegations against Ulbricht, including the bases for the government’s narcotics and computer hacking conspiracy charges, can be found here.