Is it possible to commit money laundering with virtual currency? At least one federal judge thinks so. Last month, U.S. District Judge Katherine Forrest refused to dismiss a money laundering charge premised on the use of a Bitcoin-based payment system. She is the first federal judge to hold that the federal money laundering statute is broad enough to encompass the use of Bitcoin in financial transactions.
In February 2014, a grand jury in the Southern District of New York returned an indictment charging Ross William Ulbricht on four counts for participation in a narcotics trafficking conspiracy, a continuing criminal enterprise, a computer-hacking conspiracy, and a money-laundering conspiracy. The charges stemmed from Ulbricht’s alleged creation and operation of an underground website known as Silk Road. Prosecutors alleged that Ulbricht designed, launched, and administered the online marketplace to facilitate the anonymous sale of illegal drugs, malicious computer software, and other illicit goods and services. Two features of the site allegedly protected buyers and sellers from government surveillance and tracking. First, Silk Road operated using Tor—software and a network that allows for anonymous, untraceable Internet browsing. The site also required all purchases to be made in Bitcoin, an anonymous, untraceable form of payment.
Ulbricht asked the court to dismiss all four counts, including the charge for participation in a money-laundering conspiracy. Ulbricht argued that the money-laundering charge should be dismissed on grounds that Bitcoin transactions are not “financial transactions,” as defined under the statute.
The federal money laundering statute prohibits “financial transactions” involving the proceeds of illegal activity when conducted by a person who intends to further the illegal activity or who knows the transaction is designed to conceal material information about the proceeds, such as their source or location. The “financial transaction” requirement may be satisfied by: (i) a transaction involving the movement of funds by wire or other means; (ii) a transaction involving a monetary instrument; or (iii) a transaction involving the transfer of certain types of property. To fall within the second definition, the transaction must involve a “monetary instrument”—i.e., U.S. or foreign coin or currency, checks, money orders, investment securities, or negotiable instruments.
Ulbricht argued for dismissal of the money-laundering charge based on the second definition. Specifically, he contended that Bitcoins do not meet the statutory definition for monetary instruments, so the alleged transactions cannot form the basis for a money-laundering conviction.
But according to Judge Forrest, Ulbricht missed the mark by focusing exclusively on the second definition of “financial transaction.” She prefaced her analysis by acknowledging that anonymous financial transactions are not per se criminal. But in Ulbricht’s case, Bitcoins were problematic because they were alleged to be the medium of exchange for commercial transactions related to illegal activity—narcotics trafficking and computer hacking. The prosecution had ample support for its claim that Ulbricht chose Bitcoin as Silk Road’s exclusive payment system in order to conceal the nature of those transactions.
The court also explained that the government had alleged the necessary elements for a money-laundering conspiracy regardless of whether Bitcoin was deemed to be a “monetary instrument.” The statute defines “financial transaction” more broadly to include any transaction involving the movement of funds by wire or otherwise. Bitcoins were deemed to fit this broad definition because they are used as funds to pay directly for things or as a medium of exchange and can be converted into currency which can pay for things. As Judge Forrest noted, “the only value of Bitcoin lies in its ability to pay for things . . . . The money laundering statute is broad enough to encompass the use of Bitcoins in financial transactions. Any other reading would – in light of Bitcoins’ sole raison d’etre – be nonsensical.”
There is an inescapable irony here. While proponents of Bitcoin favor recognition of the currency as a financial instrument, large operators like Ulbricht argue the opposite.