A recent federal district court ruling in a criminal anti-money laundering case suggests that the transmission of virtual currency on behalf of another person requires a state money transmission license—even if the state’s money transmission law does not expressly address the regulation of virtual currency. This interpretation has the potential to significantly disrupt current compliance approaches taken by some organizations engaging in virtual currency activity, and could make a challenging regulatory landscape even tougher to navigate.
U.S. v. Harmon – Overview
The ruling at issue arises out of an indictment of an Ohio resident (the “Defendant”) who allegedly operated a cryptocurrency laundering service called Helix. The Department of Justice alleged that Helix “functioned as a bitcoin ‘mixer’ or ‘tumbler,’ allowing customers, for a fee, to send bitcoin to designated recipients in a manner that was designed to conceal the source or owner of the bitcoin,” and moved the equivalent of more than $300 million in this manner. The indictment (as quoted in the ruling) further explains that Helix “was located on the Darknet — a collection of hidden websites accessible only to anonymized users” and was allegedly “‘advertised . . . as a way to’ mask drug, gun, or other illegal ‘transactions from law enforcement.’” Based on these alleged activities, the Defendant was indicted on three counts: (1) conspiracy to launder monetary instruments; (2) operating an unlicensed money transmitting business; and (3) engaging in the business of money transmission in the District of Columbia (“DC”) without a license under the DC money transmission act (the “MTA”). See U.S. v. Harmon, Case 1:19-cr-00395-BAH (D.D.C. Jul. 24, 2020).
The Defendant moved to dismiss the second and third counts on the grounds that bitcoin is not “money” under the MTA and, therefore: (1) he was not engaging in the business of money transmission without a license; and (2) in turn, he did not violate 18 U.S.C. § 1960(b)(1)(B) by operating an “unlicensed money transmitting business.”
The Court’s Ruling and Its Implications
Almost all U.S. states regulate money transmitters under state-specific licensing regimes, and statutory definitions of money transmission are quite broad and can cover any entity that receives money for transmission. In general, unless otherwise exempt, a license is required to engage in the “business of money transmission”—i.e., to receive and transmit money—under the money transmission law of each state in which a person has customers. Separately, a person who is engaged in money transmission activity will generally also be deemed a “money services business” under the federal Bank Secrecy Act (“BSA”) and subject to a registration requirement and related anti-money laundering compliance program requirements. The Financial Crimes Enforcement Network (“FinCEN”), which implements the BSA, has affirmed through guidance that certain activities involving virtual currency—including receiving and transmitting the same—are subject to these requirements. The BSA also operates to reinforce compliance with state money transmission laws by making it a federal felony to engage in money transmission in a state without a required state money transmission license. See 18 U.S.C. § 1960(b)(1)(B). This provision—and therefore what constitutes unlicensed state money transmission activity involving bitcoin—is at the heart of the Harmon ruling.
The Harmon court denied the Defendant’s motion to dismiss on the grounds that bitcoin is “money” under the MTA even though the MTA “never defines ‘money’.” The Defendant attempted to argue that the definition of money in the Uniform Commercial Code (as adopted by DC) should apply; this would limit money to “a medium of exchange currently authorized or adopted by a domestic or foreign government.” The court instead looked within the MTA itself and used what it believed to be an “ordinary meaning” of the term: “a medium of exchange — that is, a token that can be traded for goods or services.” The court reasoned that bitcoin “is these things.” The court supported this conclusion by pointing to “the breadth of the MTA’s definition of money transmission,” which covers “receiving money for transmission” or “transmitting money” “by any and all means . . .” This definition, according to the court, “suggests that the goal is to regulate not just traditional transfers of fiat currency but all kinds of transfers of funds.”
Of particular significance is that the DC money transmission regulator had not previously provided a public, formal interpretation of whether the MTA applies to activities involving bitcoin or other virtual currency. The regulator had previously issued guidance to consumers that “[u]ntil this form of currency [i.e., virtual currency] is regulated, D.C. residents should be aware of the increased risks.” The Defendant argued that this statement indicates that DC did not regulate receiving and transmitting bitcoin under the MTA. The court countered that the “statement that bitcoin is not yet ‘regulated’ is neither an official interpretation of the law” nor consistent with practice because other companies engaging in receiving and transmitting virtual currency have obtained money transmission licenses under the Act—that is, are regulated. The court also asserted that there was precedent for concluding that bitcoin activity is subject to regulation under the Act based on United States v. E-Gold, Ltd., 550 F. Supp. 2d 82, 92 (D.D.C. 2008). (That case, however, involved MTA violations arising out of exchanging virtual currency for fiat currency, and not solely the receipt and transmission of virtual currency.)
The court also rejected Defendant’s arguments that other state interpretations of whether and to what extent virtual currency activity is subject to regulation as money transmission should bear on the interpretation of “money” under the Act. As a general matter, the underlying question of whether virtual currency activity (including handling fiat currency in connection with facilitating virtual currency exchange or transfers) comes within current definitions of “money” or “monetary value” (or otherwise may come within the scope of state money transmission laws) has been subject to numerous and divergent state interpretations. Some states (such as Alabama and Georgia) have addressed the issue by amending their money transmission laws to incorporate virtual currency activity, while others (such as New Mexico) have issued guidance interpreting their money transmission laws to apply to virtual currency activity. Other states (including Illinois, Kansas, and Texas) have issued formal guidance concluding that activity involving receiving and transmitting virtual currency does not, alone, constitute receiving and transmitting money under the applicable state money transmission law. The guidance varies based on state-specific definitions, but in general, the states have concluded that statutory definitions of money exclude virtual currency. For example, Illinois guidance states that “[a]lthough digital currencies are a digital representation of value that is used as a medium of exchange, store of value, or unit of account, they are not considered money for the purposes of [the Illinois Transmitters of Money Act (“TOMA”)] as digital currencies have not been ‘authorized or adopted by a domestic or foreign government as a part of its currency.’”
The court was dismissive of this inconsistency in interpretation. Instead, the court concluded that “[i]n this patchwork landscape, a state legislature’s failure to specify that virtual currency is money cannot be, and has not been, interpreted as a choice not to regulate virtual currency.” And, because the Defendant could be found to be operating an unlicensed money transmission business under the MTA, the court summarily concluded that the Defendant could also be found in violation of 18 U.S.C. § 1960(b)(1)(B) for operating without said license.
The Harmon ruling is an interpretation of state money transmission licensing laws by a federal court that suggests that activity involving virtual currency is subject to state money transmission licensing unless: (1) applicable definitions of regulated money transmission activity within a state’s money transmission law operate to exclude virtual currency from the scope of covered activity; or (2) a state banking department has issued formal guidance that a person engaged in the specified virtual currency activity is not subject to the state’s money transmission licensing law. The ruling also appears to suggest that the fact that other companies that engage in virtual currency activity are licensed in a particular state could be sufficient to put a person on notice that the activity is subject to regulation in the state.
Even though this case arises out of significant allegations of criminal anti-money laundering activity, the court’s interpretation of 18 U.S.C. § 1960(b)(1)(B) appears to suggest a default assumption that money transmission licenses are required to receive and transmit virtual currency. And, the ruling appears to suggest that other activity involving receiving and transmitting money—even if not historically subject to regulation under state money transmitter licensing laws—could be deemed to constitute engaging in unlicensed money transmission activity in the absence of a formal state interpretation to the contrary.