law you can use: consumer information columnblockchain technology functions as a record, visible to...
TRANSCRIPT
Law You Can Use: Consumer Information column
SO WHAT’S THE DEAL WITH BITCOIN?
For months now, bitcoin has been a steady presence in the news cycle and now other types of virtual
“coin” are appearing and attracting additional buyers, the attention of Wall Street investors and even the
Internal Revenue Service. Recent rapid spikes in the price of the virtual currency have also caused some
early market entrants to become quite rich. In this column, attorney Robert Ellis, a partner at Hennis,
Rothstein & Ellis LLP, explains bitcoin, its pitfalls and the legal implications of the virtual commodity.
What is bitcoin?
Bitcoin is simply a method of exchange – numerical entries that can be added and subtracted from
“accounts” anyone can set up on public ledger software called the “blockchain” that anyone can access.
Blockchain technology functions as a record, visible to all, that records and constantly reconciles any
transfer of bitcoin from one person to another.
But bitcoin is not actual money. It’s not backed by any sovereign nation. There is no central bank to
control inflation and deflation, no deposit insurance, no bitcoin checking accounts, no paper or metal.
(Those shiny “bitcoins” one sees in stock photos are just props.) Transactions on the blockchain do not
involve any bank or government. Bitcoin is nothing more than numbers in cyberspace. It is a “virtual
currency” and as such has no intrinsic value.
Because of this lack of guarantor, if a bitcoin owner loses their password or their bitcoin account is
hacked, they will lose everything in an instant with no possibility of an “undo” or a refund. The same
holds true for those who keep bitcoin in an account on an exchange where they can buy and sell for hard
currency. If the exchange is hacked, which happens frequently, there is no chance of mitigating the loss as
there is with a bank, where your money is insured against fraud.
Investing in bitcoin
So why are people willing to pay real money to acquire bitcoin? The reasons keep changing. Originally,
bitcoin was attractive to the tech savvy and those who liked the idea of a non-governmental, online-only
“currency.” At first it was worth almost nothing, but users found value in it because it could be used as a
medium of exchange and could be converted to and from hard currency if desired.
Unfortunately, bitcoin’s anonymity and untraceable nature quickly attracted the criminal element. Drug
dealers, purveyors of ransomware, gun runners, money launderers, fraudsters and criminals of every sort
all over the world had a field day. They still do. Bitcoin is awash in dirty money, and that is certainly one
of the reasons the demand for it has risen. The anonymous founders of bitcoin, a person or group known
only by the pseudonym Satoshi Nakamoto, created a built-in limit of 21 million bitcoins. Because the
supply of bitcoin is finite, when demand rises, so does the price.
In 2017 the price of bitcoin started increasing rapidly; the market saw many new entrants and bitcoin
futures began trading on the Chicago Board Options Exchange (CBOE). A speculative binge ensued,
driving the price still higher. Though the price of bitcoin has fallen rapidly in the past months, the New
York Stock exchange recently filed with the Securities and Exchange Commission to list two exchange
traded funds that would track bitcoin futures.
Bitcoin & the law
People often ask about the legal and tax aspects of buying and selling bitcoin. There is no “virtual
currency law” in the U.S., so buying, owning and selling bitcoin and using it to purchase goods or
services is perfectly legal.
The IRS considers bitcoin to be property, not money, so if it appreciates or depreciates in value, there’s
no taxable gain or loss until it’s sold or purchased for hard currency (or converted to or from something
with a fair market value in hard currency). Thus, like any other payments made in property, if the fair
market value virtual currency received in payment for goods or services totals $600 or more in a taxable
year, this must be reported to the IRS.
Since bitcoin is a relatively new medium of exchange and so many new blockchain users are entering the
market, it can be useful to follow some simple guidelines in order to avoid losing money or attracting the
attention of government officials. Using a U.S.-based, government-licensed exchange to convert between
bitcoin and dollars is by far the safest approach and one that will not raise any suspicions of money
laundering or tax fraud. U.S. businesses that exchange virtual currency for hard currency or vice versa are
highly regulated and licensed. Offshore businesses that do the same, not so much – and the risks of being
defrauded or being caught up in a criminal investigation are much higher.
Anyone who wants to convert bitcoin into dollars – especially large amounts – and anyone who accepts
bitcoin in payment of goods or services (or who uses bitcoin to pay for them), would do well to consult
with an attorney who is familiar with both the tax and technological aspects of virtual currency. Doing so
might not only result in tax savings, but also could avoid unwanted scrutiny by the IRS.
This “Law You Can Use” column was provided by the Ohio State Bar Association. Articles appearing in this column
are intended to provide broad, general information about the law. This article is not intended to be legal advice.
Before applying this information to a specific legal problem, readers are urged to seek advice from a licensed attorney.
Robert Ellis is a partner at the Columbus-based law firm Hennis, Rothstein & Ellis LLP. He practices in
internet and technology law, business and corporate law, intellectual property law and virtual currency
transactions. He is a frequent speaker on topics related to the internet, digital technology and legal
ethics.
A Fistful of (Digital) DollarsCrypto, Blockchain, and Cybersecurity
Justin L. Root
http://www.bitlisten.com
Disclaimer:
Information provided in this presentation, including any legal
references, is for educational purposes only and is not, and
should not be construed as, legal advice, and is not
necessarily the opinion or position of Dickinson Wright
PLLC. Please consult with your legal advisor to address
specific situations you or your company may face.
Contact Info
Justin L. Root
150 E. Gay St.
Suite 2400
Columbus, Ohio 43215
614-591-5465
Cryptocurrency Basics
What is Cryptocurrency?
Cryptocurrency Basics
“A form of digital currency utilizing asymetric
encryption through a peer-to-peer structure
to publicly validate transactions between
parties.” (J. Root)
-OR-
“A Peer-to-Peer Electronic Cash System”
(Satoshi Nakamoto –
https://bitcoin.org/bitcoin.pdf)
What is Peer to Peer (P2P)?
???
Asymetric Encryption?
???(A boring talk about symetric and
asymetric encryption with a little
explanation of hashing thrown in….)
How do we know a coin
hasn’t been spent before?
An electronic coin is nothing more than a chain of digital signatures.
Each owner transfers the coin to the next owner by digitally signing a
“hash” of the previous transaction and the public key of the next owner
and adding these to the end of the coin. A payee can verify the
signatures to verify the chain of ownership. The public ledger of all
transactions is the blockchain.
Is Bitcoin the only option?
1. Bitcoin
2. AltcoinsA. Bitcoin Cash
B. Litecoin
C. Dogecoin
3. Ethereum
How does it get its value?
Other Problems
Banks are Banning Crypto-JP Morgan Chase
-Bank of America
-Citi
-Capital One
-Lloyds
Countries are Banning Crypto-China
-South Korea
So…how do you get
cryptocurrency?
1. Make it.
2. Mine it.
3. Buy it.
4. Accept it as payment.
5. (Or steal it.)
Hold an Initial Coin Offering (ICO)!
BUT WAIT! This sounds like it should
be regulated. (Should it be regulated?)
Maybe.
https://www.sec.gov/news/public-statement/statement-
clayton-2017-12-11
https://www.sec.gov/news/press-release/2017-227
Mine It.
Remember the blockchain? “Mining
cryptocurrency” is the process or
receiving a small amount of the
cryptocurrency as a reward for
verifying and validating the
transactions on the blockchain.
Mine It.
Buy It.
Accept it as Payment.
Steal it.
(We’ll come back to this.)
So…is that it?
INTRODUCING: ETHEREUM
What is Ethereum?
A cryptographic programming language
that enables users to develop distributed
applications (“DApps”) that serve as
uncontrolled public computers (the
Ethereum Virtual Machine - EVM) with
complete public transparency. DApps
and the EVM are driven by Ether.
Ethereum
Ethereum allows users to program
“smart contracts” that execute at a preset
payment point with no outside
intervention.
Propy Announces World's First
Real Estate Purchase on Ethereum
BlockchainTechCrunch founder Michael Arrington's purchase of an apartment in Ukraine
marks a milestone that opens the floodgates for real asset transfers on the
blockchain.
https://www.prnewswire.com/news-releases/propy-announces-worlds-first-real-
estate-purchase-on-ethereum-blockchain-300528640.html
Sep 29, 2017
https://www.reddit.com/r/ethereum/comments/7p155y/i_just_warr
anty_deeded_my_house_into_an_ethereum/
Stealing Crypto
Mt. Gox (2014) / Coincheck (2018)
BeeToken (phishing attack on ICO)
Canadian Bitcoins, Ottawa, Canada
(armed robbery attempt)
Taxes?
• Treated as a capital gains
• Form 8949
• Schedule D
• Must pay taxes upon divestment,
even if you just traded it for another
cryptocurrency
• More info is available at www.irs.gov
Questions?
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2018 Porter Wright Morris & Arthur LLP
FEDERAL AND OHIO REGULATION OF CRYPTOCURRENCIES
June 1, 2018
2018 Porter Wright Morris & Arthur LLP
JURASSIC PARK
2018 Porter Wright Morris & Arthur LLP
• Is your token a “security”?– The SEC– Enforcement Authorities (Domestic vs. Overseas)
– ICOs, Security Tokens, Utility Tokens
• Is your cryptocurrency a “currency”– The CFTC
• What about Ohio?– Blue Skies Laws
OVERVIEW
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2018 Porter Wright Morris & Arthur LLP
• “[A] contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party.”– SEC v. W.J. Howrey Co., 328 U.S. 293, 299
(1946)
– 3 Part “Howrey” Test1. An investment of money2. In a common enterprise3. With an expectation to make profits predominantly
from the efforts of others
A “SECURITY” DEFINED
2018 Porter Wright Morris & Arthur LLP
• Securities Act of 193315 U.S.C. 77 et seq.
• All public offerings of securities in inter-state commerce, or hrough mail
• Also prohibits fraudulent or deceptive practices
• What about the internet??– “The posting of information on a Web site may
constitute an offer of securities or investment services for purposes of U.S. securities law.”
Securities Act Release No. 7233, Question 20 (Oct. 6, 1995) (60 FR 53458)
– A disclaimer?
THE SEC
2018 Porter Wright Morris & Arthur LLP
Security Tokens
• Causum eXchange, Inc.
– “BITE”
– Blockchain Instrument for Transferrable Equity
– Stock purchase and sale controlled through an Ethereum-based smart contract
Utility Tokens
• More akin to a franchise agreement
– The right to participate and contribute in a decentralized, common enterprise
• But is it a security?
UTILITY TOKENS VS. SECURITY TOKENS
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2018 Porter Wright Morris & Arthur LLP
• “An ‘initial coin offering’ or ‘ICO’ is a. . .fundraising event in which an entity offers participants a unique digital ‘coin’ or ‘token’ in exchange for consideration (most commonly, Bitcoin, Ether, or fiat currency). The tokens are issued on a ‘blockchain’ or cryptographically-secured ledger.” In re Munchee, No. 3-18304.
– ICOs also referred to as TGEs(“Token Generation Events”).
AN INITIAL COIN OFFERING
2018 Porter Wright Morris & Arthur LLP
• Fall 2017
• “Munchee” an Apple Mobile Application
• Developed a plan to improve the application
• Would raise capital through an offering off “Mun Tokens”
MUNCHEE CASE STUDY
2018 Porter Wright Morris & Arthur LLP
• The Promotional Materials:– “199% Gains on MUN token at ICO price!”– “Speculated that a $1000 investment could
create $94,000 return.”
THE MUNCHEE ECO-SYSTEM
Source: SEC Cease and Desist Order In re Munchee at 4.
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2018 Porter Wright Morris & Arthur LLP
• Investors could pay 1 Ether or .05 BTC to purchase 4,500 MUN.– November 1, 2017 Trading Prices
• Ether $300
• Bitcoin $6500 ($325 for MUN)
– Munchee halted trading after contact from the SEC
MUNCHEE ICO
2018 Porter Wright Morris & Arthur LLP
• Purchasers would reasonably have expected Munchee and its agents would expend significant efforts to develop the application to increase the value of MUN.
• Value of MUN token would depend upon the development of “eco-system.”
• Munchee engaged in “general solicitation” through YouTube advertisements.
• “Even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security.”
MUN AS A “SECURITY”
2018 Porter Wright Morris & Arthur LLP
Some considerations• What are the properties of the token?
– Security Tokens?– Utility Tokens?
• How will the ICO be marketed?• Who will invest?
– Accredited Investors?• VC, Financial Institutions• Persons with net worth greater than $1 million• Trust with assets greater than $5 million
– Sophisticated Investors?• What exemptions may apply??
INITIAL COIN OFFERINGS
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2018 Porter Wright Morris & Arthur LLP
• “This is an emergency action to stop Lacroix, a recidivist securities law violator in Canada, and his partner Paradis-Royer, from further misappropriating investor funds illegally raised through fraudulent and unregistered offer and sale of securities called ‘PlexCoin’ or ‘PlexCoin Tokens’ in a purported ‘Initial Coin Offering.’”
SEC v. Plexcorps, 17-CV-7007 (E.D.N.Y. filed Dec. 1, 2017)
WHAT COULD GO WRONG?
2018 Porter Wright Morris & Arthur LLP
US Commodities Futures Trading Commission• Commodities Exchange Act
– 7 U.S.C. 1 et seq.
• A “Commodity” as defined in 1a(9) includes“all services, rights, and interests. . .in which contracts for future delivery are presently or in the future dealt in.”– also includes “soybean oil.”
• Section 9(1)• Makes it unlawful for any person to “use or employ, in
connection with. . .a contract of sale of any commodity in interstate commerce. . .any manipulative or deceptive device or contrivance[.]”
THE CFTC
2018 Porter Wright Morris & Arthur LLP
• The definition of a commodity is extremely broad and can include currency and interest rates
• Tendered for the payments of debts, although it is not required that it be accepted
• Commodities Fraud Elements1. The making of a misrepresentation, misleading
statement, or a deceptive omission2. scienter (i.e. a guilty mind)3. materiality
CRYPTO AS A COMMODITY
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2018 Porter Wright Morris & Arthur LLP
• CFTC sued Patrick McDonald and his company Coin Drop Markets
• A cryptocurrency day trading online platform
• After soliciting and receiving investors’ funds, ceased communication and misappropriated the funds
CFTC V. MCDONALD, 287 F. SUPP. 3D 213 (E.D.N.Y. 2018)
2018 Porter Wright Morris & Arthur LLP
Are you engaging in the contract for the sale of a commodity?
• Registration requirements as a currency exchange
• Manipulation of virtual currency
CRYPTO CURRENCY EXCHANGES
2018 Porter Wright Morris & Arthur LLP
• Ohio has not, to-date, passed any cryptocurrencyor blockchain specific legislation
• If you are considering an Ohio ICO (based in Ohio or targeting Ohio investors), you will also have to comply with Ohio securities law
• The Ohio “Blue Sky” law (ORC 1707.01–99) regulates the securities that may be sold in the state of Ohio
OHIO
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2018 Porter Wright Morris & Arthur LLP
QUESTIONS?
2018 Porter Wright Morris & Arthur LLP
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STATE
BLOCKCHAIN
REGULATIONBY YOSEF SCHIFF
OVERVIEW
Timeline
New York
Vermont
Arizona
Conclusion
THE EARLY YEARS
2007-2013
2007-2008: Financial
crisis/Lehman Bros
Oct. 2008: Bitcoin white
paper
Jan. 3, 2009: First Bitcoin
mined
2009-2013: Bitcoin
continues developing
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BITCOIN’S ANGST-Y
TEENAGE YEARS
2013
Mar. 2013: Cyprus banking
crisis and increase in price
($12-$200)
Oct. 2013: Silk Road shut down
Nov. 2013: Chinese demand
skyrockets and price peaks at
$1,242 (10,000%)
Dec. 2013: China bars banks from
handling Bitcoin transactions.
Price plummets 28%
BITCOIN: STILL FINDING
ITSELF
2014-PRESENT
Feb. 2014: Mt. Gox collapses
2014-2015: More price fluctuations
Mid-2016: DAO attack
2017-Present: Massive price fluctuations ($1,000 to
$20,000 back to $7,000)
REGULATION
Volatility
Rampant criminal activity (Silk Road, Ponzi schemes , exchange hacking, etc.)
Poorly run businesses
Disruption
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STATES
NEW YORK
NEW YORK
1st state to regulate virtual currencies
• BitLicense (2014-2015)
• Assembly Bill 9685 (proposed 2018)
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BIT-LICENSE
NY Dept. of Financial Services: BitLicense
Proposed July 2014. Effective August 2015
New York Codes, Rules, and Regulations
• Title 23 Dept. of Financial Services• Ch. 1 Regulations of the Superintendent of Financial Services
• Part 200 Virtual Currencies
BIT-LICENSE
Need license to engage in virtual currency business activities (banks are excluded)
“Virtual currency business activity” means transmit ting, storing, holding, buying, selling, etc. virtual cur rency.
“Virtual currency” means “any type of digital unit that is used as a medium of exchange or a form of digitally store d value.”
BIT-LICENSE
$5,000 application fee. 90 day approval time
Compliance program
Capital reqs
Surety bond or trust account. 100% “reserve”
Must get approval for new products and services
Books and records/reporting reqs
Know your customer/anti-money laundering laws
Cyber security program
Consumer protection, disclosure of risks, complaint procedure
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AB 9685 (PROPOSED 2018)
Task force to study impact of a state-issued crypto currency
U.S. Constitution, Art. I, Sec. 10: “No State shall … coin Money, emit Bills of Credit, [or] make any Thing bu t gold and silver Coin a Tender in Payment of Debts…”
Is crypto money? Even if it is, tethering?
VERMONT
VERMONT
1st state to pass broad blockchain regulation
• HB 868 (passed 2016)• Broad blockchain enabling
• HB 182 (passed 2017)• Money transmitter law
• SB 269 (passed legislature 2018)• BBLLCs and study
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HB 868 (PASSED 2016)
Enabling
Defines “blockchain”:
• “A mathematically secured, chronological, and decentralized consensus ledger or database whether maintained via Internet interaction, peer-to-peer network, or otherwise.”
Document & object (e.g. artwork) authentication
Evidence
HB 182 (PASSED 2017)
Added definition of “virtual currency” to money tra nsmitter law. "Virtual currency" means stored value that:
• Can be a medium of exchange, a unit of account, or a store of value;
• Has an equivalent value in money or acts as a substitute for money;
• May be centralized or decentralized; and
• Can be exchanged for money or other convertible virtual currency
Permissible investment for licensees
SB 269 (PASSED 2018)
Blockchain Based Limited Liability Companies (BBLLCs )
• Amended from DCLLC
“A BBLLC may provide for its governance, in whole o r in part, through blockchain technology.” (DAO)
Requirements, e.g. cyber security protocols
Awaiting governor’s signature
As Introduced: taxes and study…
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SB 269 CONT’D
Study Estonia’s e-residency program (As Intro, not passed)
• Allows access to Estonian company formation, banking, payment processing, and taxation
• Easy access to EU markets
• Estcoin “token” and Euro?
ARIZONA
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ARIZONA
HB 2417 (passed 2017)
• EnablingHB 2216 (passed 2017)
• Firearm tracking techHB 2601 (passed 2018)
• SecuritiesHB 2602 (passed 2018)
• MiningHB 2603 (passed 2018)
• Corporate dataSB 1091 (vetoed 2018)
• Taxes
HB 2417 (PASSED 2017)
Amends AZ’s Electronic Transactions Act
Defines “blockchain technology” and “smart contract”
Records auth’d on a blockchain are electronic records
Contract not unenforceable merely because it contai ns a smart contract term
HB 2417 CONT’D
"Blockchain technology" means:
• “Distributed ledger technology… which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.” (cf. Vermont)
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HB 2417 CONT’D
"Smart contract" means:
• “An event-driven program… that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and instruct transfer of assets on that ledger.”
HB 2216 (PASSED 2017)
Unlawful to req person to be subject to firearm trac king tech
“Firearm tracking technology”:
• “[A] platform… that uses a shared ledger, distributed ledger or block chain technology or any other similar… technology… that is used to locate or control the use of a firearm.”
HB 2601 (PASSED 2018)
Securities, crowdfunding, and ICOs
Defines “virtual coin” and “virtual coin offering”
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HB 2601 CONT’D
"Virtual coin" means a digital representation of va lue that can be digitally traded and that functions as a medium o f exchange, unit of account and store of value.
“Virtual coin offering” (more commonly, initial coin offering)
• Means an offer for sale of a virtual coin that either is, or is treated by the issuer as, a security; and
• Does not include an offer that:• Is not marketed as an investment; and
• Grants the purchaser the right to use the service within 90 days of purchase
So, a VCO is any offer of coins that is also a secu rity. Why?...
HB 2601 CONT’D
Adds crowdfunding and virtual coin offerings to Ari zona’s intrastate offering exemption:
• Don’t need to register a securities offering with the ACC if it is purely intrastate, is less than $5 million, and meets certain other conditions.
HB 2602 (PASSED 2018)
Localities cannot prohibit residential crypto-minin g
• Lots of energy req’d
Home rule – statewide concern
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HB 2603 (PASSED 2018)
HB 2603 (passed 2018)
Allows corporations to hold and share data on a blo ckchain
Adds definition to corporate formation and governin g laws: “‘Writing’ or ‘written’ includes blockchain technolo gy as defined in [HB 2417].”
SB 1091 (VETOED 2018)
SB 1091 (vetoed 2018)
Would have allowed payment of taxes in crypto
Amendments
Final (vetoed) version:
• “The department may develop, adopt and use a payment system that enables the immediate remittance and collection of tax in real time at the point of sale, including payments of additional amounts after audit.”
CONCLUSION
Variety
States still figuring this stuff out
Different approaches:
• Hands off and enabling (Vermont)
• Hands on and prescriptive (New York)
• Middle ground (Arizona)
An overview of Bitcoin & blockchain regulation
By Jad Mubaslat
bitquick.co
Who am I?Jad Mubaslat
● Founder/Advisor and former CEO of BitQuick.co
● BS in Biomedical Engineering from OSU in May 2015
● MS in IHE at WSU studying healthcare+blockchain
● BJJ blue belt and crossfit
Outline1. Why Bitcoin and blockchain?
2. BitQuick.co and legal challenges
3. Ethereum, ICO’s, SEC, CFTC
Why Bitcoin and Blockchain?
50% of adults around the world are unbanked Demirguc-Kunt and Klapper 2012
Why Bitcoin and Blockchain?
USD supply has 4x since 2008 3000% inflation in Venezuela over 2 yrs
Decentralized open-source digital currency and payments system that allows transfers to be:● Instant● Global● Inexpensive● Secure
How?
Users
Miners
Bob sends 0.1 BTC to Allison
Unconfirmed Transaction Pool
Bitcoin Blockchain (where confirmed transactions live)
Next block
Key Implications1. Created a trustless method to transfer value without a 3rd party
2. Created an auditable, provable, immutable log of transactions
3. Financial incentive for everyone to behave honestly by rewarding
digital tokens to users/miners (bitcoins)
What about Ethereum?● Bitcoin was just money
● Ethereum is programmable money
Bitcoin Address 1Jx5...
Account Balance: 1 BTC
Ethereum Address 0xf5...
Account Balance: 1 ETH
Code: If I receive ETH, keep half and send half to Ethereum Address 0x44….
So what is “a blockchain”?A distributed, cryptographic ledger
But we really have 2 types..
Public
Anybody can participate.
Pros: Censorship resistance, maximum decentralization, network effect
Cons: Privacy (except XMR), scalability
Examples:
Permissioned
Only a select group of people can participate.
Pros: Privacy, scalability, easier to integrate with legacy systems
Cons: Censorship prone, centralized point of failure, difficult to grow
Examples:
BitQuick.co Beginnings
ME
How BitQuick works
1. Place Hold on listing
2. Cash Deposit 3. Upload Receipt
To Buy:
1. Create Listing 2. Send BTC 3. Receive Cash from Buyers
To Sell:
Silicon Valley.. The Hack.. The Acquisition!
February, 2015
March, 2016
June, 2016
Legal Challenges1. Typical startup considerations (incorporation, taxes)
2. Money Service Business regulationsa. Is Bitcoin money?
b. If we only hold Bitcoin, are we an MSB?
c. Do we need a Money Transmission License from every state?
And it is expensive!We spent nearly 30% of our fundraise on legal
● Obtaining legal opinions
● Implementing new monitoring software
● Discussing on a state by state basis
● Human resources to file reports and communicate
Getting MTL coverage in all 50 states can run $1-1.5M and take 2 years -faisalkhan.com
CoinCenter’s Digital Currency Framework
● Consolidation of state-by-state MTL to a federal structure
● Efforts to exclude digital currency activity from MTL via guidance
● New legislation to reduce ambiguities
● Exemptions for startups with obligations of less than $5M
https://coincenter.org/entry/state-digital-currency-principles-and-framework
ICO’s (Initial Cryptocurrency Offering)● New way to raise capital
How do ICO’s work
https://bitcointalk.org/index.php?topic=3910487.0
“Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.”
● February 6, 2018
● Senate Committee on Banking
Housing and Urban Affairs
● SEC Chairman Jay Clayton (left)
● CFTC Chairman Christopher
Giancarlo (right)
My (unqualified) opinion● Overall, very positive developments that establish long term legitimacy● Crypto to crypto trading should continue to be regulated as MSB activity● Concern around garbage ICO’s
○ Enforcement may lead to fewer unregistered ICO’s in the US and/or enforcement action against cryptocurrency trading platforms leading to reduced liquidity short term
Amanda George
PositiveAs of: May 31, 2018 8:07 PM Z
United States v. Ulbricht
United States District Court for the Southern District of New York
July 9, 2014, Decided; July 9, 2014, Filed
14-cr-68 (KBF)
Reporter31 F. Supp. 3d 540 *; 2014 U.S. Dist. LEXIS 93093 **; 2014 WL 3362059
UNITED STATES OF AMERICA -v- ROSS WILLIAM ULBRICHT, a/k/a "Dread Pirate Roberts," a/k/a "DPR," a/k/a "Silk Road,", Defendant.
Subsequent History: Motion denied by United States v. Ulbricht, 2014 U.S. Dist. LEXIS 145553 (S.D.N.Y., Oct. 10, 2014)
Motion denied by United States v. Ulbricht, 2014 U.S. Dist. LEXIS 151230 (S.D.N.Y., Oct. 24, 2014)
Request granted United States v. Ulbricht, 2014 U.S. Dist. LEXIS 177412 (S.D.N.Y., Dec. 11, 2014)
Motion denied by, Motion granted by, Motion granted by, in part, Motion denied by, in part, Motion denied by, As moot United States v. Ulbricht, 2015 U.S. Dist. LEXIS 2016 (S.D.N.Y., Jan. 7, 2015)
Motion granted by, Motion granted by United States v. Ulbricht, 2015 U.S. Dist. LEXIS 11936 (S.D.N.Y., Feb. 1, 2015)
Motions ruled upon by United States v. Ulbricht, 2015 U.S. Dist. LEXIS 11938 (S.D.N.Y., Feb. 2, 2015)
Core Terms
conspiracy, Indictment, alleges, narcotics, coconspirators, site, Bitcoins, transactions, charges, buyer, conspirators, seller, conspiratorial, website, defendant argues, money laundering, alleged conduct, online, designing, launched, software, distribute, requisite, hacking, argues, internal quotation marks, matter of law, citations, participants, violations
Counsel: [**1] For Ross William Ulbricht, also known as, Dread Pirate Roberts, also known as, Silk Road, also known as, Sealed Defendant 1, also known as, DPR, Defendant: Joshua Lewis Dratel, Law Offices of Joshua L. Dratel, P.C., New York, NY.
For USA, Plaintiff: Serrin Andrew Turner, U.S. Attorney's Office, SDNY (Chambers Street), New York, NY; Timothy Turner Howard, U.S. Attorney's Office, SDNY, New York, NY.
Judges: KATHERINE B. FORREST, United States District Judge.
Opinion by: KATHERINE B. FORREST
Opinion
[*546] OPINION & ORDER
KATHERINE B. FORREST, District Judge:
On February 4, 2014, a Grand Jury sitting in the Southern District of New York returned Indictment 14 Cr. 68, charging Ross Ulbricht ("the defendant" or "Ulbricht") on four counts for participation in a narcotics trafficking conspiracy (Count One), a continuing criminal enterprise ("CCE") (Count Two), a computer hacking conspiracy (Count Three), and a money laundering conspiracy (Count Four). (Indictment, ECF No. 12.) Pending before the Court is the defendant's motion to dismiss all counts. (ECF No. 19.) For the reasons set forth below, the Court DENIES the motion in its entirety.1
The Government alleges that Ulbricht engaged in narcotics trafficking, computer hacking, and money laundering conspiracies by designing, launching, and administering a website called Silk Road ("Silk [*547] Road") as an online marketplace for illicit goods and
1 This Opinion & Order addresses various issues both as background informing its decision herein [**2] and to preview for the parties a number of issues that are relevant to the trial of this matter.
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services. These allegations raise novel issues as they relate to the Internet and the defendant's role in the purported conspiracies.
A conspiracy claim is premised on an agreement between two or more people to achieve an unlawful end. The Government alleges that by designing, launching, and administering Silk Road, Ulbricht conspired with narcotics traffickers and hackers to buy and sell illegal narcotics and malicious computer software and to launder the proceeds using Bitcoin. There is no allegation that Ulbricht conspired with anyone prior to his launch of Silk Road. Rather, the allegations revolve around the numerous transactions that occurred on the site following its launch.
The Government alleges that Silk Road was designed to operate like eBay: a seller would electronically post a good or service for sale; a buyer would electronically [**3] purchase the item; the seller would then ship or otherwise provide to the buyer the purchased item; the buyer would provide feedback; and the site operator (i.e., Ulbricht) would receive a portion of the seller's revenue as a commission. Ulbricht, as the alleged site designer, made the site available only to those using Tor, software and a network that allows for anonymous, untraceable Internet browsing; he allowed payment only via Bitcoin, an anonymous and untraceable form of payment.
Following the launch of Silk Road, the site was available to sellers and buyers for transactions. Thousands of transactions allegedly occurred over the course of nearly three years — sellers posted goods when available; buyers purchased goods when desired. As website administrator, Ulbricht may have had some direct contact with some users of the site, and none with most. This online marketplace thus allowed the alleged designer and operator (Ulbricht) to be anywhere in the world with an Internet connection (he was apprehended in California), the sellers and buyers to be anywhere, the activities to occur independently from one another on different days and at different times, and the transactions to occur [**4] anonymously.
A number of legal questions arise from conspiracy claims premised on this framework. In sum, they address whether the conduct alleged here can serve as the basis of a criminal conspiracy — and, if so, when, how, and with whom.
Question One: Can there be a legally cognizable "agreement" between Ulbricht and one or more coconspirators to engage in narcotics trafficking,
computer hacking, and money laundering by virtue of his and their conduct in relation to Silk Road? If so, what is the difference between what Ulbricht is alleged to have done and the conduct of designers and administrators of legitimate online marketplaces through which illegal transactions may nevertheless occur?
Question Two: As a matter of law, who are Ulbricht's alleged coconspirators and potential coconspirators? That is, whose "minds" can have "met" with Ulbricht's in a conspiratorial agreement? What sort of conspiratorial structure frames the allegations: one large, single conspiracy or multiple smaller ones?
Question Three: As a matter of law, when could any particular agreement have occurred between Ulbricht and his alleged coconspirators? Need each coconspirator's mind have met simultaneously with [**5] Ulbricht's? With the minds of the other coconspirators? That is, if Ulbricht launched Silk Road on Day 1, can he be said, as a matter of law, to have entered into an agreement with the user who joins on Day 300? Did Ulbricht, simply by designing [*548] and launching Silk Road, make an enduring showing of intent?
Question Four: As a matter of law, is it legally necessary, or factually possible, to pinpoint how the agreement between Ulbricht and his coconspirators was made? In this regard, does the law recognize a conspiratorial agreement effected by an end user interacting with computer software, or do two human minds need to be simultaneously involved at the moment of agreement?
Question Five: If Ulbricht was merely the facilitator of simple buy-sell transactions, does the "buyer-seller" rule apply, which in certain circumstances would preclude a finding of a criminal conspiracy?
****
The defendant also raises the following additional arguments with respect to Counts One, Two, and Three: the rule of lenity, the doctrine of constitutional avoidance, the void-for-vagueness doctrine, constitutionally defective over-breadth, and a civil immunity statute for online service providers. The Court refers [**6] to these collectively as the "Kitchen Sink" arguments. While this is a case of first impression as to the charged conduct, the fact that the alleged conduct constitutes cognizable crimes requires no legal contortion and is not surprising. These arguments do not preclude criminal charges.
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With regard to Count Two, the defendant alleges that, as a matter of law, his conduct cannot constitute participation in a CCE (under the so-called "kingpin" statute). The defendant argues that the Indictment fails to allege that he had the requisite managerial authority in the conspiracy and that the Indictment fails to allege a sufficient "continuing series" of predicate violations. The Court disagrees and finds that the allegations in the Indictment are sufficient.
With regard to Count Three, the defendant contends that the allegations in the Indictment are insufficient to support the type of conduct covered by a computer hacking conspiracy. The defendant confuses the requirement for establishing the violation of the underlying offense with the requirements for establishing a conspiracy to commit the underlying offense; he finds ambiguity where there is none. The Government alleges a legally cognizable [**7] claim in Count Three.
Finally, with respect to Count Four, the defendant alleges that he cannot have engaged in money laundering because all transactions occurred through the use of Bitcoin and thus there was therefore no legally cognizable "financial transaction." The Court disagrees. Bitcoins carry value — that is their purpose and function — and act as a medium of exchange. Bitcoins may be exchanged for legal tender, be it U.S. dollars, Euros, or some other currency. Accordingly, this argument fails.
I. THE INDICTMENT
Rule 7(c)(1) of the Federal Rules of Criminal Procedure provides that an indictment "must be a plain, concise, and definite written statement of the essential facts constituting the offense charged." Fed. R. Crim. P. 7(c). It need not contain any other matter not necessary to such statement. Id. ("A count may allege that the means by which the defendant committed the offense are unknown or that the defendant committed it by one or more specified means.").
An indictment must inform the defendant of the crime with which he has been charged. United States v. Doe, 297 F.3d 76, 87 (2d Cir. 2002). "By informing the defendant of the charges he faces, the indictment protects the [**8] defendant from double jeopardy and allows the defendant [*549] to prepare his defense." Id.; United States v. Dhinsa, 243 F.3d 635, 667 (2d Cir. 2001). Rule 7(c) is intended to "eliminate prolix indictments," United States v. Carrier, 672 F.2d 300, 303 (2d Cir. 1982), and "secure simplicity in procedure."
United States v. Debrow, 346 U.S. 374, 376, 74 S. Ct. 113, 98 L. Ed. 92 (1953). The Second Circuit has "consistently upheld indictments that do little more than track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime." United States v. Walsh, 194 F.3d 37, 44 (2d Cir. 1999) (internal quotation marks and citation omitted); see also United States v. Cohen, 518 F.2d 727, 733 (2d Cir. 1975).
Nevertheless, "[a] criminal defendant is entitled to an indictment that states the essential elements of the charge against him." United States v. Pirro, 212 F.3d 86, 91 (2d Cir. 2000). "[F]or [**9] an indictment to fulfill the functions of notifying the defendant of the charges against him and of assuring that he is tried on the matters considered by the grand jury, the indictment must state some fact specific enough to describe a particular criminal act, rather than a type of crime." Id. at 93.
"An indictment must be read to include facts which are necessarily implied by the specific allegations made." United States v. Stavroulakis, 952 F.2d 686, 693 (2d Cir. 1992) (internal quotation marks and citations omitted). "[C]ommon sense and reason prevail over technicalities." United States v. Sabbeth, 262 F.3d 207, 218 (2d Cir. 2001) ("[A]n indictment need not be perfect."). While an indictment must give a defendant "sufficient notice of the core of criminality to be proven against him," United States v. Pagan, 721 F.2d 24, 27 (2d Cir. 1983) (citation omitted), the "'core of criminality' of an offense involves the essence of the crime, in general terms," and not "the particulars of how a defendant effected the crime." United States v. D'Amelio, 683 F.3d 412, 418 (2d Cir. 2012) (citation omitted).
As with all motions to dismiss an indictment, the Court accepts as true the allegations [**10] set forth in the charging instrument for purposes of determining the sufficiency of the charges. See United States v. Sampson, 371 U.S. 75, 78-79, 83 S. Ct. 173, 9 L. Ed. 2d 136 (1962); United States v. Goldberg, 756 F.2d 949, 950 (2d Cir. 1985).
The Indictment here alleges that Ulbricht designed, created, operated, and owned Silk Road, "the most sophisticated and extensive criminal marketplace on the Internet." (Ind. ¶¶ 1-3.) Silk Road operated using Tor, software and a network that enables users to access the Internet anonymously — it keeps users' unique identifying Internet Protocol ("IP") addresses obscured,
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preventing surveillance or tracking. All purchases occurred on Silk Road using Bitcoin, an anonymous online currency.
Silk Road allegedly functioned as designed — tens of thousands of buyers and sellers are alleged to have entered into transactions using the site, violating numerous criminal laws. Over time, thousands of kilograms of heroin and cocaine were allegedly bought and sold, as if the purchases were occurring on eBay or any other similar website.
Count One charges that, from in or about January 2011 up to and including October 2013, the defendant engaged in a narcotics trafficking conspiracy. To wit, [**11] "the defendant . . . designed [Silk Road] to enable users across the world to buy and sell illegal drugs and other illicit goods and services anonymously and outside the reach of law enforcement." (Ind. ¶ 1.) The defendant allegedly "controlled all aspects of Silk Road, with the assistance of various [*550] paid employees whom he managed and supervised." (Ind. ¶ 3.) "It was part and object of the conspiracy" that the defendant and others "would and did deliver, distribute, and dispense controlled substances by means of the Internet" and "did aid and abet such activity" in violation of the law. (Ind. ¶ 7.) The controlled substances allegedly included heroin, cocaine, and lysergic acid diethylamide ("LSD"). (Ind. ¶ 9.) The defendant allegedly "reaped commissions worth tens of millions of dollars, generated from the illicit sales conducted through the site." (Ind. ¶ 3.) According to the Indictment, the defendant "pursued violent means, including soliciting the murder-for-hire of several individuals he believed posed a threat to that enterprise." (Ind. ¶ 4.)
Count Two depends on the conduct in Count One. Count Two alleges that Ulbricht's conduct amounted, over time, to his position as a "kingpin" [**12] in a continuing criminal enterprise (again, "CCE"). (Ind. ¶ 12.) Ulbricht is alleged to have engaged in a "continuing series of violations" in concert "with at least five other persons with respect to whom Ulbricht occupied a position of organizer, a supervisory position, and a position of management, and from which . . . Ulbricht obtained substantial income and resources." (Id.)
Count Three charges that Ulbricht also designed Silk Road as "a platform for the purchase and sale of malicious software designed for computer hacking, such as password stealers, keyloggers, and remote access tools." (Ind. ¶ 14.) "While in operation, the Silk Road website regularly offered hundreds of listings for such
products." (Id.) The object of this conspiracy was to "intentionally access computers without authorization, and thereby [to] obtain information from protected computers, for purposes of commercial advantage and financial gain." (Ind. ¶ 16.)
Count Four alleges that Ulbricht "designed Silk Road to include a Bitcoin-based payment system that served to facilitate the illegal commerce conducted on the site, including by concealing the identities and locations of the users transmitting and receiving [**13] funds through the site." (Ind. ¶ 18.) "[K]nowing that the property involved in certain financial transactions represented proceeds of some form of unlawful activity," Ulbricht and others would and did conduct financial transactions with the proceeds of specified unlawful activity, "knowing that the transactions were designed . . . to conceal and disguise the nature, the location, the source, the ownership and the control of the proceeds." (Ind. ¶ 21.)
II. THE LAW OF CONSPIRACY
A. Elements of a Conspiracy
"The essence of the crime of conspiracy . . . is the agreement to commit one or more unlawful acts." United States v. Praddy, 725 F.3d 147, 153 (2d Cir. 2013) (emphasis in original) (citation omitted); see also Iannelli v. United States, 420 U.S. 770, 777, 95 S. Ct. 1284, 43 L. Ed. 2d 616 (1975) ("Conspiracy is an inchoate offense, the essence of which is an agreement to commit an unlawful act."); United States v. Falcone, 311 U.S. 205, 210, 61 S. Ct. 204, 85 L. Ed. 128 (1940); United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181, 1191 (2d Cir. 1989) ("The gist of conspiracy is, of course, agreement."); United States v. Rosenblatt, 554 F.2d 36, 38 (2d Cir. 1977). Put differently, a conspiracy is the "'combination of minds for an unlawful purpose.'" [**14] Smith v. United States, U.S. , 133 S.Ct. 714, 719, 184 L. Ed. 2d 570 (2013) (quoting United States v. Hirsch, 100 U.S. 33, 34, 25 L. Ed. 539 [*551] (1879)).2
1. Agreement
2 There is no overt act requirement to establish a violation of a drug conspiracy prosecuted under 21 U.S.C. § 846. See United States v. Shabani, 513 U.S. 10, 11, 115 S. Ct. 382, 130 L. Ed. 2d 225 (1994); United States v. Anderson, 747 F.3d 51, 60 n.7 (2d Cir. 2014). Similarly, a conviction for conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(h) does not require proof of an overt act in furtherance of the conspiracy. Whitfield v. United States, 543 U.S. 209, 219, 125 S. Ct. 687, 160 L. Ed. 2d 611 (2005).
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A meeting of the minds is required in order for there to be an agreement. Krulewitch v. United States, 336 U.S. 440, 447-48, 69 S. Ct. 716, 93 L. Ed. 790 (1949) (Jackson, J. concurring); Rosenblatt, 554 F.2d at 38. Two people have to engage in the "act of agreeing" in order for this requirement to be met. Rosenblatt, 554 F.2d at 38 (internal quotation marks and citation omitted). The conspirators must agree to the object, or unlawful end, of the conspiracy. Id. While the coconspirators need not agree to every detail, they must agree to the "essential nature" of the plan. Blumenthal v. United States, 332 U.S. 539, 557, 68 S. Ct. 248, 92 L. Ed. 154 (1947); Praddy, 725 F.3d at 153 [**15] (internal quotation marks and citations omitted); United States v. Geibel, 369 F.3d 682, 689 (2d Cir. 2004) (internal quotation marks and citations omitted); Rosenblatt, 554 F.2d at 38.3
"It is not necessary to prove that the defendant expressly agreed with other conspirators on a course of action; it is enough, rather, to show that the parties had a tacit understanding to carry out the prohibited conduct." Anderson, 747 F.3d at 61 (internal quotation marks, alteration, and citation omitted). However, "a defendant's mere presence at the scene of a crime, his general knowledge of criminal activity, or his simple association with others engaged in a crime are not, in themselves, sufficient to prove the defendant's criminal liability for conspiracy." Id. (citations omitted).
2. Object of the Conspiracy
To be convicted of a conspiracy, a defendant must know what "'kind of criminal conduct was in fact contemplated.'" Rosenblatt, 554 F.2d at 38 [**16] (quoting United States v. Gallishaw, 428 F.2d 760, 763 n.1 (2d Cir. 1970)). That is, the defendant has to know what the "object" of the conspiracy he joined was. A "general agreement to engage in unspecified criminal conduct is insufficient to identify the essential nature of the conspiratorial plan." Rosenblatt, 554 F.2d at 39. Indeed, "[t]he government must prove that the defendant agreed to commit a particular offense and not merely a vague agreement to do something wrong." United States v. Salameh, 152 F.3d 88, 151 (2d Cir. 1998) (citation and internal quotation marks omitted) (emphasis in original). That said, "[t]he government
3 In Rosenblatt, the Second Circuit overturned a conspiracy conviction on the basis that while two individuals agreed to commit offenses against the United States, they did not agree to commit the same offenses and therefore were not conspirators. 554 F.2d at 40.
need not show that the defendant knew all of the details of the conspiracy, so long as he knew its general nature and extent." United States v. Huezo, 546 F.3d 174, 180 (2d Cir. 2008) (citation and internal quotation marks omitted).4
[*552] 3. Participation
The crime of conspiracy requires that a defendant both know the object of the crime and that he knowingly and intentionally join the conspiracy. United States v. Torres, 604 F.3d 58, 66 (2d Cir. 2010). The requisite knowledge can be proven through circumstantial evidence. Id.
The quantum of proof necessary at trial to sustain a finding of knowledge varies. "A defendant's knowing and willing participation in a conspiracy may be inferred from, for example, [his] presence at critical stages of the conspiracy that could not be explained by happenstance, . . . a lack of surprise when discussing the conspiracy with others, . . . [or] evidence that the defendant participated in conversations directly related to the substance of the conspiracy; possessed items important to the conspiracy; or received or expected to receive a share of the profits from the conspiracy." United States v. Aleskerova, 300 F.3d 286, 293 (2d Cir. 2002) [**18] (citations omitted). Indeed, under the appropriate circumstances, "[a] defendant's participation in a single transaction can suffice to sustain a charge of knowing participation in an existing conspiracy." United States v. Zabare, 871 F.2d 282, 287 (2d Cir. 1989); see also United States v. Murray, 618 F.2d 892, 903 (2d Cir. 1980).
B. Types of Conspiracies
Conspiracies come in myriad shapes and sizes: from a small conspiracy involving two people to achieve a limited end to a large one involving numerous participants and with an expansive scope. Similarly, a defendant may participate in a single conspiracy or
4 A defendant may also be found culpable under the conscious avoidance doctrine. Under such circumstances, a crime's "knowledge element is established if the factfinder is persuaded that the defendant consciously avoided learning [a given] fact while aware of a high probability of its existence, unless the factfinder is persuaded [**17] that the defendant actually believed the contrary." United States v. Finkelstein, 229 F.3d 90, 95 (2d Cir. 2000). "The rationale for imputing knowledge in such circumstances is that one who deliberately avoided knowing the wrongful nature of his conduct is as culpable as one who knew." Id.
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multiple conspiracies. Most questions as to size and number are left to trial. Here, the Court addresses these issues only insofar as they inform whether and how the Government might ultimately prove the conspiracies alleged in the Indictment.
"Whether the government has proven the existence of the conspiracy charged in the indictment and each defendant's membership in it, or, instead, has proven several independent conspiracies is a question of fact for a properly instructed jury." United States v. Johansen, 56 F.3d 347, 350 (2d Cir. 1995); see also United States v. Barret, 824 F. Supp. 2d 419, 445 (E.D.N.Y. 2011) [**19] (citing cases); United States v. Ohle, 678 F. Supp. 2d 215, 222 (S.D.N.Y. 2010); United States v. Rajaratnam, 736 F. Supp. 2d 683 (S.D.N.Y. 2010) (citing cases). Where an indictment charges a single conspiracy and the evidence later shows multiple conspiracies, the court will only set aside a jury's guilty verdict due to the variance if the defendant can show "substantial prejudice, i.e. that the evidence proving the conspiracies in which the defendant did not participate prejudiced the case against him in the conspiracy in which he was a party." Johansen, 56 F.3d at 351 (emphasis in original).
1. Overview of Single Conspiracies
"[A]cts that could be charged as separate counts of an indictment may instead be charged in a single count if those acts could be characterized as part of a single continuing scheme." United States v. Aracri, 968 F.2d 1512, 1518 (2d Cir. 1992) (internal quotation marks and citations omitted). In determining whether a single conspiracy involving many people exists, the question is whether there is a [*553] "mutual dependence" among the participants. Geibel, 369 F.3d at 692 (citation omitted); United States v. Williams, 205 F.3d 23, 33 (2d Cir. 2000). The Government must [**20] show that each alleged member of the conspiracy agreed to participate "'in what he knew to be a collective venture directed towards a common goal.'" United States v. Eppolito, 543 F.3d 25, 47 (2d Cir. 2008) (quoting United States v. Berger, 224 F.3d 107, 114 (2d Cir. 2000)); see also Geibel, 369 F.3d at 692 (explaining that when two participants do not mutually benefit from the other's participation, a finding of a single conspiracy is less likely).
A "'single conspiracy is not transformed into multiple conspiracies merely by virtue of the fact that it may involve two or more spheres or phases of operation, so long as there is sufficient proof of mutual dependence
and assistance.'" Geibel, 369 F.3d at 689 (quoting Berger, 224 F.3d at 114-15). Neither changing membership nor different time periods of participation by various coconspirators precludes the existence of a single conspiracy, "especially where the activity of a single person was 'central to the involvement of all.'" Eppolito, 543 F.3d at 48 (quoting United States v. Langford, 990 F.2d 65, 70 (2d Cir. 1993) (citations omitted)); United States v. Jones, 482 F.3d 60, 72 (2d Cir. 2006) ("Changes in membership, differences in time [**21] periods, and/or shifting emphases in the location of operations do not necessarily require a finding of more than one conspiracy.").
The Second Circuit has outlined three "hypothetical avenues" for establishing a single conspiracy:
1. The scope of the agreement was broad enough to include activities by or for persons other than the small group of core conspirators;2. The coconspirators reasonably foresaw, "as a necessary or natural consequence of the unlawful agreement," the participation of others; or
3. "Actual awareness" of the participation of others.
Geibel, 369 F.3d at 690 (citing United States v. McDermott, 245 F.3d 133, 137-38 (2d Cir. 2001); United States v. Carpenter, 791 F.2d 1024, 1036 (2d Cir. 1986)). Alternatively, a jury may find a single conspiracy provided "'(1) that the scope of the criminal enterprise proven fits the pattern of the single conspiracy alleged in the indictment, and (2) that the defendant participated in the alleged enterprise with a consciousness as to its general nature and extent.'" Eppolito, 543 F.3d at 48 (quoting United States v. Rosa, 11 F.3d 315, 340 (2d Cir. 1993) (internal citation omitted)).
2. Types of Single Conspiracies
Courts often conceptualize [**22] single conspiracies using either a "chain" or a "hub-and-spoke" metaphor. United States v. Borelli, 336 F.2d 376, 383 (2d Cir. 1964).
a) Chain conspiracies
A chain conspiracy refers to a situation in which there are numerous conspiring individuals, each of whom has a role in a "chain" that serves the conspiracy's object. For example, in a narcotics conspiracy, a chain may be comprised of producers, exporters, wholesalers, middlemen, and dealers. The success of each "link" in the chain depends on the success of the others, even though each individual conspirator may play a role that
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is separated by great distance and time from the other individuals involved. Id.; United States v. Mallah, 503 F.2d 971, 984 (2d Cir. 1974); United States v. Agueci, 310 F.2d 817, 826 (2d Cir. 1962).5
[*554] For a chain conspiracy to exist, the ultimate purpose of the conspiracy must be to place the "forbidden commodity into the hands of the ultimate purchaser." Agueci, 310 F.2d at 826 [**23] (citation omitted). This form of conspiracy "is dictated by a division of labor at the various functional levels." Id. In Agueci, the Second Circuit found that "the mere fact that certain members of the conspiracy deal recurrently with only one or two other conspiracy members does not exclude a finding that they were bound by a single conspiracy." Id. "An individual associating himself with a 'chain' conspiracy knows that it has a 'scope' and that for its success it requires an organization wider than may be disclosed by [one's] personal participation." Id. at 827. That is, to support a chain conspiracy, a participant must know that combined efforts are required. Id.
b) Hub-and-spoke conspiracies
In a hub-and-spoke (or "wheel") conspiracy, one person typically acts as a central point while others act as "spokes" by virtue of their agreement with the central actor. See Kotteakos v. United States, 328 U.S. 750, 754-55, 66 S. Ct. 1239, 90 L. Ed. 1557 (1946). Put another way, in a hub-and-spoke conspiracy, "members of a 'core' group deal with a number of contacts who are analogized to the spokes of a wheel and are connected with each other only through the core conspirators." United States v. Manarite, 448 F.2d 583, 589 (2d Cir. 1971).
To [**24] prove a single conspiracy in such a situation, the Government must show that there was a "rim" around the spokes, such that the "spokes" became coconspirators with each other. To do so, the Government must prove that "each defendant . . . participated in the conspiracy with the common goal or purpose of the other defendants." United States v. Taggert, No. 09 Cr. 984 (BSJ), 2010 U.S. Dist. LEXIS 11992, 2010 WL 532530, at *1 (S.D.N.Y. Feb. 11, 2010) (internal quotation marks and citation omitted).
5 The extreme ends of such a conspiracy — for instance, numerous narcotics dealers who each obtain the narcotics they sell from a single wholesaler or middleman — may have elements of a hub-and-spoke conspiracy. Borelli, 336 F.2d at 383.
In the absence of such a "rim," the spokes are acting independently with the hub; while there may in fact be multiple separate conspiracies, there cannot be a single conspiracy. See Zabare, 871 F.2d at 287-88; see also Dickson v. Microsoft Corp., 309 F.3d 193, 203 (4th Cir. 2002) ("A rimless wheel conspiracy is one in which various defendants enter into separate agreements with a common defendant, but where the defendants have no connection with one another, other than the common defendant's involvement in each transaction." (citing Kotteakos, 328 U.S. at 755)).
C. The Buyer-Seller Exception
Of course, not all narcotics transactions occur within a conspiracy. A conspiracy to distribute narcotics does not arise between a buyer [**25] and seller simply because they engage in a narcotics transaction. That is, the mere purchase and sale of drugs does not, without more, amount to a conspiracy to distribute narcotics. See, e.g., United States v. Parker, 554 F.3d 230, 234 (2d Cir. 2009) (explaining that the buyer-seller rule is a narrow one). "[I]n the typical buy-sell scenario, which involves a casual sale of small quantities of drugs, there is no evidence that the parties were aware of, or agreed to participate in, a larger conspiracy." United States v. Hawkins, 547 F.3d 66, 71-72 (2d Cir. 2008) (citations omitted); see also United States v. Mims, 92 F.3d 461, 465 (7th Cir. 1996) (clarifying that "a buyer-seller relationship [*555] alone is insufficient prove a conspiracy"); United States v. Medina, 944 F.2d 60, 65 (2d Cir. 1991); United States v. Valencia, 226 F. Supp. 2d 503, 510-11 (S.D.N.Y. 2002) (Chin, J.). "It is sometimes said that the buyer's agreement to buy from the seller and the seller's agreement to sell to the buyer cannot 'be the conspiracy to distribute, for it has no separate criminal object.'" Parker, 554 F.3d at 235 (quoting United States v. Wexler, 522 F.3d 194, 208 (2d Cir. 2008) (internal alterations [**26] omitted)).
When wholesale quantities are involved, however, the participants may be presumed to know that they are involved in a venture, the scope of which is larger than the particular role of any individual. Murray, 618 F.2d at 902; see also Valencia, 226 F. Supp. 2d at 510-11.
D. The Role of Middlemen
In some cases involving narcotics trafficking, defendants are alleged to have acted as middlemen. Middlemen may be found to have conspired with a buyer, a seller, or both. United States v. Bey, 725 F.3d 643, 649 (7th Cir. 2013). "Evidence that the middleman had a clear stake in the seller's sales is typically sufficient to permit
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the jury to infer the existence of an agreement with the seller." Id. at 650; United States v. Colon, 549 F.3d 565, 568-70 (7th Cir. 2008) (citations omitted). There is no legal doctrine that defines a middleman as having a lesser role than other conspiracy members. Indeed, there is no legal reason why someone characterized as a middleman cannot be a powerful, motivating force behind a conspiracy.
III. DISCUSSION OF CONSPIRATORIAL AGREEMENT
The Indictment alleges that Ulbricht designed Silk Road specifically to enable users to anonymously sell and purchase narcotics [**27] and malicious software and to launder the resulting proceeds. On this motion to dismiss, the Court's task is a narrow one — it is not concerned with whether the Government will have sufficient evidence to meet its burden of proof as to each element of the charged conspiracies at trial. Instead, the Court is concerned solely with whether the nature of the alleged conduct, if proven, legally constitutes the crimes charged, and whether the defendant has had sufficient notice of the illegality of such conduct. See D'Amelio, 683 F.3d at 418; Pagan, 721 F.2d at 27.
The defendant argues that Counts One and Three in the Indictment are legally insufficient for failure to allege a cognizable conspiratorial agreement. (Def.'s Reply at 2-3.) He does not make the same argument with regard to Count Four, but certain aspects of the issue apply to that Count as well.
The Court has set forth five questions that concern the potential existence of a conspiratorial agreement in this case. Each question is now taken up in turn.
Question One: Can there be a legally cognizable "agreement" between Ulbricht and one or more coconspirators to engage in narcotics trafficking, computer hacking, and money laundering [**28] by virtue of his and their conduct in relation to Silk Road? If so, what is the difference between what Ulbricht is alleged to have done and the conduct of designers and administrators of legitimate online marketplaces through which illegal transactions may nevertheless occur?
The "gist" of a conspiracy charge is that the minds of two or more people met — that they agreed in some manner to achieve an unlawful end. For the reasons explained [*556] below, the design and operation of Silk Road can result in a legally cognizable conspiracy.
According to the Indictment, Ulbricht purposefully and intentionally designed, created, and operated Silk Road to facilitate unlawful transactions. Silk Road was nothing more than code unless and until third parties agreed to use it. When third parties engaged in unlawful narcotics transactions on the site, however, Ulbricht's design and operation gave rise to potential conspiratorial conduct. The subsequent sale and purchase of unlawful narcotics and software on Silk Road may, as a matter of law, constitute circumstantial evidence of an agreement to engage in such unlawful conduct. See United States v. Svoboda, 347 F.3d 471, 477 (2d Cir. 2003) ("A conspiracy [**29] need not be shown by proof of an explicit agreement but can be established by showing that the parties have a tacit understanding to carry out the prohibited conduct.") (internal quotation marks and citation omitted); United States v. Miranda-Ortiz, 926 F.2d 172, 176 (2d Cir. 1991) ("The defendant's participation in a single transaction can, on an appropriate record, suffice to sustain a charge of knowing participation in an existing conspiracy.") (citations omitted); United States v. Roldan-Zapata, 916 F.2d 795, 803 (2d Cir. 1990) (affirming the conviction of a defendant based on his admitted "involvement in narcotics dealing and [] a pattern of trafficking," combined with other circumstantial evidence). Additionally, the Indictment charges that Ulbricht obtained significant monetary benefit in the form of commissions in exchange for the services he provided via Silk Road. He had the capacity to shut down the site at any point; he did not do so. The defendant allegedly used violence in order to protect the site and the proceeds it generated.
Ulbricht argues that his conduct was merely as a facilitator — just like eBay, Amazon, or similar websites.6 Even were the Court to accept this [**30] characterization of the Indictment, there is no legal prohibition against such criminal conspiracy charges provided that the defendant possesses (as the Indictment alleges here) the requisite intent to join with others in unlawful activity.
Moreover, in this case, the charges in the Indictment go further than Ulbricht acknowledges. The Indictment alleges that Ulbricht engaged in conduct that makes Silk Road different from other websites that provide a
6 While the defendant refers to Amazon and eBay as similar, there are certain important factual differences between them. For instance, Amazon has warehouses which may fulfill certain orders. Silk Road is not alleged to have ever possessed products for fulfillment.
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platform for individual buyers and sellers to connect and engage in transactions: Silk Road was specifically and intentionally designed for the purpose of facilitating unlawful transactions. The Indictment does not allege that Ulbricht is criminally liable simply because he is alleged to have launched a website that was — unknown to and unplanned by him — used for illicit transactions. If that were ultimately the case, he would lack the mens rea for criminal liability. Rather, [**31] Ulbricht is alleged to have knowingly and intentionally constructed and operated an expansive black market for selling and purchasing narcotics and malicious software and for laundering money. This separates Ulbricht's alleged conduct from the mass of others whose websites may — without their planning or expectation — be used for unlawful purposes.
It is certainly true that the principles set forth in this Opinion would apply to other [*557] third parties that engaged in conduct similar to that alleged here; but it is also true that the essential elements for (by way of example) a narcotics conspiracy would be absent if a website operator did not intend to join with another to distribute (for instance) narcotics. Thus, administrators of an eBay-like site who intend for buyers and sellers to engage in lawful transactions are unlikely to have the necessary intent to be conspirators.
Question Two: As a matter of law, who are Ulbricht's alleged coconspirators and potential coconspirators? That is, whose "minds" can have "met" with Ulbricht's in a conspiratorial agreement? What sort of conspiratorial structure frames the allegations: one large single conspiracy or multiple small conspiracies?
The [**32] Indictment charges a single conspiracy in each of Counts One, Three, and Four. Ulbricht's alleged coconspirators are "several thousand drug dealers and other unlawful vendors." (Ind. ¶ 2.) If these individuals possessed the requisite intent, there is no legal reason they could not be members of the conspiracies charged in the Indictment.
A more complicated question is whether any or all of Ulbricht's coconspirators also conspired with each other, so as to create a potentially vast single conspiracy. In this regard, the Government may argue that the conspiracy was a "chain" conspiracy or that it was a "hub-and-spoke" conspiracy (in which case it would be necessary for the Government to prove the existence of a "rim"). Each approach has its own complexities regarding the (largely anonymous) inter-conspirator
relationships on the Internet. While this is not an issue the Government need address at this stage, see D'Amelio, 683 F.3d at 418; Pagan, 721 F.2d at 27, it will be relevant as the proof comes in at trial.
Of course, ultimately, the form of the conspiracy is not as important as a determination that at least one other person joined in the alleged conspiratorial agreement with Ulbricht. [**33] With respect to the narcotics conspiracy charge, to prove that the drug types and quantities alleged in the Indictment were the objects of a conspiracy Ulbricht knowingly and intentionally joined, the Government will have to prove either a single such conspiratorial agreement or an aggregation of conspiracies.7 While, as explained, proof of participants' intent could involve numerous complexities, these are issues for trial and not for this stage.
Question Three: As a matter of law, when could any particular agreement have occurred between Ulbricht and his alleged coconspirators? Need each coconspirator's mind have met simultaneously with Ulbricht's? With the minds of other coconspirators? That is, if Ulbricht launched Silk Road on Day 1, can he be said, as a matter of law, to have entered into an agreement with the user who joins on Day 300? Did Ulbricht, simply by designing and launching Silk Road, make an enduring showing of intent?
The issue here is one of temporal proximity. For [**34] the sake of illustration, assume that Ulbricht launched Silk Road on Day 1. A narcotics trafficker posted illegal drugs on the site on Day 2 and another posted on Day 300. Does the Day 2 trafficker enter into a conspiratorial agreement with Ulbricht on Day 2 and the Day 300 trafficker on Day 300? More importantly, can Ulbricht [*558] have agreed to a conspiracy on Day 1 with an alleged coconspirator who, at that time, had not even contemplated engaging in an unlawful transaction, and determined to do so only on, for example, Day 300?8
One way of thinking about this issue is to look to the basic contract principles of offer and acceptance. On
7 There are additional complexities when other factors such as differences in types of drugs, temporal proximity, and the roles of coconspirators are taken into account. These too are questions for trial.
8 As suggested in connection with Question One, another question is whether the Day 2 and the Day 300 trafficker could ever enter into a conspiracy with each other.
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Day 1, according to the Indictment, Ulbricht "offers" to work with others to traffic illegal narcotics, engage in computer hacking, and launder money. He makes this offer by creating and launching a website specifically designed and intended for such unlawful purposes. Ulbricht's continued operation of the site evinces an enduring intent to be bound with those who "accept" his offer and utilize [**35] the site for its intended purpose. It is as though the defendant allegedly posted a sign on a (worldwide) bulletin board that said: "I have created an anonymous, untraceable way to traffic narcotics, unlawfully access computers, and launder money. You can use the platform as much as you would like, provided you pay me a percentage of your profits and adhere to my other terms of service." Each time someone "signs up" and agrees to Ulbricht's standing offer, it is possible that, as a matter of law, he or she may become a coconspirator.
To put this another way, the fact that Ulbricht's active participation may occur at a different point in time from the agreement by his coconspirator(s) does not render the conspiracy charges legally defective. Courts have long recognized that members of a conspiracy may be well removed from one another in time. See, e.g., Borelli, 336 F.2d at 383-84. The law has similarly recognized that coconspirators need not have been present at the outset of a conspiracy in order to be found criminally responsible; they may join at some later point. See, e.g., id.; United States v. Nersesian, 824 F.2d 1294, 1303 (2d Cir. 1987). A lapse in time — in particular in a [**36] narcotics chain conspiracy, where a manufacturer creates a substance months prior to a wholesale or retailer selling it, not knowing (and perhaps never knowing) who, precisely, will ultimately distribute it — does not ipso facto render the alleged conspiracy defective as a matter of law. Similarly, the law long ago accepted that coconspirators may not know each other's identity. Blumenthal, 332 U.S. at 557-58. The alleged conduct here is another step along this established path. The common law anticipates and accepts application to new fact patterns.
Question Four: As a matter of law, is it legally necessary, or factually possible, to pinpoint how the agreement between Ulbricht and his coconspirators was made? In this regard, does the law recognize a conspiratorial agreement effected by an end user interacting with computer software, or do two human minds need to be simultaneously involved at the moment of agreement?
Another issue raised by this case is whether a
conspiratorial agreement may be effected through what are primarily automated, pre-programmed processes. This is not a situation in which Ulbricht is alleged to have himself approved or had a hand in each individual transaction [**37] that occurred on Silk Road during the nearly three-year period covered by the Indictment. Instead, he wrote (or had others write) certain code that automated the transaction. Yet, as a legal matter, this automation does not preclude the formation of a conspiratorial agreement. Indeed, whether an agreement occurs electronically [*559] or otherwise is of no particular legal relevance.
It is well-established that the act of agreeing, or having a meeting of the minds, may be proven through circumstantial evidence. United States v. Rodriguez, 392 F.3d 539, 544 (2d Cir. 2004). There is no requirement that any words be exchanged at all in this regard, so long as the coconspirators have taken knowing and intentional actions to work together in some mutually dependent way to achieve the unlawful object. See Diaz, 176 F.3d at 97. In this regard, "how" any agreement between two coconspirators may be proven at trial depends solely on the evidence presented. See Anderson, 747 F.3d at 61. Though automation may enable a particular transaction to take place, it is the individuals behind the transaction that take the necessary affirmative steps to utilize that automation. It is quite clear, for example, that [**38] if there were an automated telephone line that offered others the opportunity to gather together to engage in narcotics trafficking by pressing "1," this would surely be powerful evidence of the button-pusher's agreement to enter the conspiracy. Automation is effected through a human design; here, Ulbricht is alleged to have been the designer of Silk Road, and as a matter of law, that is sufficient.9
9 Acceptance of the terms of service, the payment of commissions, placing Bitcoins in escrow, and other intervening steps involved in the transactions that allegedly occurred on Silk Road could, in this regard, perhaps constitute evidence that Silk Road users entered into an unlawful conspiracy with Ulbricht (and others). It will be for the Government to prove which conduct in fact occurred, and how, at trial. See, e.g., United States v. Lorenzo, 534 F.3d 153, 161 (2d Cir. 2008) (noting that "a defendant's knowing agreement to join a conspiracy must, more often than not, be proven through [**39] circumstantial evidence" and there are "cases where the circumstantial evidence considered in the aggregate demonstrates a pattern of behavior from which a rational jury could infer knowing participation") (internal quotation marks and citations omitted).
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Question Five: If Ulbricht was merely the facilitator of simple buy-sell transactions, does the "buyer-seller" rule apply, which in certain circumstances would preclude a finding of a criminal conspiracy?
Ulbricht is not alleged to have been a buyer or seller of narcotics or malicious software. Following the design and launch of Silk Road, his role is alleged to have been that of an intermediary. While it will be for the Government to prove the defendant's specific role vis-à-vis his alleged coconspirators at trial, one issue that may arise is whether the participation of an intermediary could itself (all other factors remaining the same) eliminate the applicability of the "buyer-seller" rule to a given narcotics transaction involving a small quantities bought and sold on the site. In other words, can mere buyers and sellers of small quantities of narcotics — who might not otherwise legally be coconspirators if the transactions occurred in the brick-and-mortar world — become conspirators due to the interposition of a website or website administrator? Plainly, the level of involvement in any transaction by the website would be relevant. [**40] And there are certainly instances in which the participation of three participants renders what might otherwise be a simple purchase or sale into a conspiracy. See, e.g., Medina, 944 F.2d at 65. There can be no hard and fast rule that answers this question — its ongoing relevance will depend on how the proof comes in at trial.
IV. OTHER LEGAL ISSUES RAISED WITH REGARD TO COUNT ONE
The defendant argues that while Count One charges him with conspiracy to [*560] possess with intent to distribute various controlled substances (i.e., heroin, cocaine, and LSD), Ulbricht is not alleged to have himself been a buyer, seller, or possessor of any of the controlled substances at any point during the conspiracy. (Def.'s Mem. at 9.)10 And, by alleging only that he designed, launched, and operated a website, the Government has not described the conduct of a coconspirator in a narcotics conspiracy. (Id. at 10.) At most, argues the defendant, the Government has alleged that Ulbricht has acted in a manner akin to that
10 The [**41] defendant argues that imposing criminal liability for Ulbricht's alleged conduct would constitute "an unprecedented and extraordinarily expansive theory of vicarious liability." (Def.'s Mem. at 1.) This is incorrect. The Government alleges direct — not indirect — participation in the crimes charged. The law of conspiracy (see supra) has long recognized the many varied roles participants may play.
of a landlord, and the law is clear that merely acting as a landlord to drug dealers is itself insufficient to make one a coconspirator in narcotics transactions occurring on the premises. (Id. at 10-13.)
According to the defendant, the statutory violation that occurs when one "knows" his premises have been or are being used for unlawful activities is either civil forfeiture pursuant to 21 U.S.C. § 881(a)(7) or the "crack house" statute passed by Congress in 1986, 21 U.S.C. § 856. (Id. at 11.) The statute outlaws the knowing operation, management, or leasing of premises where crack cocaine and other illicit drugs are manufactured, distributed, or used. 21 U.S.C. § 856(a). The defendant argues that because Silk Road is, at most, a type of "premise" for the distribution of narcotics, he should have been charged under either §§ 881 or 856, not with a narcotics conspiracy under §§ 841 or 846. (Def.'s Mem. at 12.) Alternatively, the defendant argues that his conduct should be analogized to that of [**42] a "steerer" in a drug transaction, not a coconspirator.11 (Id. at 13.)
The defendant's arguments stem from an incorrect set of assumptions: first, that conduct may constitute only one type of statutory violation or must seek civil forfeiture relief to the exclusion of criminal liability. While the defendant may be chargeable with a violation of the "crack house" statute, he may well be chargeable with other crimes as well. How a defendant is charged is within [**43] the discretion of the prosecution. United States v. Batchelder, 442 U.S. 114, 124, 99 S. Ct. 2198, 60 L. Ed. 2d 755 (1974); United States v. Stanley, 928 F.2d 575, 580-81 (2d Cir. 1991). Additionally, no legal principle prevents the Government from seeking to impose civil forfeiture along with criminal liability — and it is done all the time. Here, in addition to criminal conspiracy, the Government has separately sought civil forfeiture under 18 U.S.C. § 982(a)(2)(A), see Case No.
11 Conduct demonstrating that an individual merely helps a willing buyer find a willing seller, and is therefore acting as a mere "steerer," is, without more, insufficient to establish a conspiratorial agreement. See United States v. Tyler, 758 F.2d 66, 69 (2d Cir. 1985); United States v. Hysohion, 448 F.2d 343, 347 (2d Cir. 1971). However, when a defendant steers buyers to sellers as part of a continuing business arrangement, or is otherwise the "conduit" for the transaction, criminal liability may attach. See. e.g., United States v. Vargas-Nunez, 115 F. App'x 494, 495-96 (2d Cir. 2004) (discussing defendant's purported role as a "steerer" in the sentencing context); United States v. Esdaille, 769 F.2d 104, 108-09 (2d Cir. 1985).
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13-cv-6919 (JPO), as well as in the Indictment itself. (Ind. ¶¶ 22-24.)
Nor is the Government limited to charging a violation of the "crack house" statute simply because facilities (whether electronic [*561] or physical) are alleged to be at issue. It may well be that the Government could have charged such a violation — but that does not mean it is necessarily limited to that. When conduct allows for multiple charges — as is alleged here — a court does not second guess which charge is chosen. See Stanley, 928 F.2d at 581.
In this case, the Government has alleged that more is in play than the conduct which is encompassed by the "crack house" statute, or in the context of a non-conspiratorial "steerer." The Government has alleged that the defendant [**44] set up a platform for illicit drug transactions designed with the specific needs of his buyers and sellers in mind. Thus, Ulbricht's alleged conduct is not analogous to an individual who merely steers buyers to sellers; rather, he has provided the marketing mechanism, the procedures for the sale, and facilities for the actual exchange. He is alleged to know that his facilities would be used for illicit purposes and, in fact, that he designed and operated them for that purpose. In this regard, he is alleged to have "intentionally and knowingly" "combine[d], conspire[d], confederate[d], and agree[d]" with others to violate United States criminal law. (Ind. ¶ 5.) Ulbricht's alleged conduct is more akin to a builder who designs a house complete with secret entrances and exits and specially designed traps to stash drugs and money; this is not an ordinary dwelling, but a drug dealer's "dream house."
The defendant argues that Count One must be dismissed because he is not alleged to have distributed or possessed any controlled substance. No such allegation is required. The law of conspiracy recognizes that members of a conspiracy may serve different roles. See United States v. Santos, 541 F.3d 63, 72 (2d Cir. 2008); [**45] United States v. Garcia-Torres, 280 F.3d 1, 4 (1st Cir. 2002) ("[A] drug conspiracy may involve ancillary functions (e.g., accounting, communications, strong-arm enforcement), and one who joined with drug dealers to perform one of those functions could be deemed a drug conspirator."); United States v. Burgos, 94 F.3d 849, 859 (4th Cir. 1996) (explaining that "a variety of conduct, apart from selling narcotics, can constitute participation in a conspiracy sufficient to sustain a conviction"). There are numerous examples of participants in narcotics conspiracies who did not themselves intend physically to possess or distribute
narcotics; an individual may have been a middleman, the protective muscle, the lookout, a decoy, a person with information or contacts, etc. — in any event, the individual may nonetheless be found to be part of the conspiratorial enterprise. See, e.g., United States v. Pitre, 960 F.2d 1112, 1121-22 (2d Cir. 1992) (affirming conviction of defendant where evidence revealed that defendant was acting as a lookout and was carrying a beeper to facilitate narcotics transactions); United States v. Barnes, 604 F.2d 121, 161 (2d Cir. 1979) (explaining that defendant's "actions [**46] as a 'middleman' in three transactions . . . constituted sufficient evidence of knowledgeable participation in the operations of the conspiracy with an expectation of benefiting from them").
Finally, Ulbricht expresses surprise that the Government states in its opposition brief that by operating Silk Road, Ulbricht "entered into a joint venture with thousands of drug dealers around the world to distribute drugs online." (Gov't Opp'n at 9.) This characterization of the defendant's alleged conduct is substantively no different than the allegation in the Indictment that several thousand drug dealers and hundreds of thousands of buyers used the site. (Ind.¶ 2.) However, the fact that such an allegation falls within a reasonable reading of the Indictment is a separate [*562] question from whether the Government will in fact be able to prove one joint venture or single conspiracy at trial. As noted above, proving that thousands of dealers were in a single joint venture together with each other as well as with Ulbricht presents numerous challenges due to temporal and other considerations.
Count One adequately alleges both the elements of a narcotics conspiracy as well as the conduct alleged underlying [**47] the charges; the defendant is sufficiently on notice of the charges against him so as to preclude later issues of double jeopardy.
V. OTHER LEGAL ISSUES RAISED WITH REGARD TO COUNT TWO
Count Two alleges that the defendant's conduct amounted to participation in a CCE in violation of 21 U.S.C. § 848(a). As an initial matter, a "continuing criminal enterprise" requires a determination that a provision of the Controlled Substances Act has been violated. Ulbricht's liability under this provision is therefore premised on a conviction on Count One, the narcotics conspiracy. Next, the trier of fact will need to determine if the violation of the Controlled Substances Act (that is, the narcotics conspiracy) was one of a series of such violations. 21 U.S.C. § 848(c). The law
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has defined "a series" as constituting at least three violations. See United States v. Flaharty, 295 F.3d 182, 197 (2d Cir. 2002) (explaining that the Second Circuit has "interpreted 'a continuing series' to mean at least three felony drug violations committed over a definite period of time") (citation omitted).
Finally, Ulbricht must have undertaken this series of violations in concert with five or more persons with respect [**48] to whom he occupied a position of organizer, supervisor, or manager, and he must have obtained substantial income or resources from such conduct. 21 U.S.C. § 848(c).
Ulbricht argues (1) that the Indictment fails to allege sufficiently that he occupied the requisite position vis-à-vis five persons, and that, in this regard, the Government has failed to allege (and could not allege) that he acted in concert with the buyers and sellers on the site; and (2) that the Indictment fails to enumerate a predicate series of violations. (Def.'s Mem. at 13.) Ulbricht is correct that Count Two does not explicitly identify the five individuals whom he is alleged to have organized, managed, or supervised. He similarly is correct that the Government has not specified the dates, times, or transaction details of the "series" of violations. Nonetheless, the allegations of the Indictment are sufficient. Paragraphs 11 and 12 recite the necessary statutory language to charge a continuing criminal enterprise; and the allegations set forth in Paragraphs 1 through 4 (which are incorporated by reference into Count Two) set forth necessary factual detail.
The law is clear that the Indictment should be read to incorporate [**49] those facts that while not explicitly stated, are implicit in the existing allegations. United States v. Silverman, 430 F.2d 106, 111 (2d Cir. 1970). In terms of the facts alleged, here the Indictment asserts that "several thousand drug dealers" and "well over a hundred thousand buyers worldwide" used the site. (Ind. ¶ 2.) With the "assistance of various paid employees whom he managed and supervised" (Ind. ¶ 3), Ulbricht is alleged to have controlled all aspects of Silk Road.
From these facts, the Government argues that by owning, operating, and controlling all aspects of the operation of the site (Ind. ¶¶ 2-3), Ulbricht occupied the necessary position as organizer, manager, or supervisor of the "vendors selling drugs on the site." (Gov't Opp'n at 15.) Ulbricht [*563] is alleged not only to have designed the online structure which enabled and allowed transactions, but, in controlling all aspects of its operations, to have set the rules the vendors and buyers
had to follow, policed accounts for rule violations, determined commission rates, and taken commissions on every transaction. In addition, Ulbricht allegedly oversaw the efforts of others who assisted him in the administration and operation [**50] of the site. Thus, the Government contends that it has set forth sufficient allegations of Ulbricht's occupying the requisite position as organizer, manager, or supervisor. This Court agrees.
The "continuing criminal enterprise" statute is broadly worded — and broadly intends to encompass those who are leaders of a criminal enterprise which engages in a series of violations of the narcotics laws. See United States v. Scarpa, 913 F.2d 993, 1007 (2d Cir. 1990) (explaining that the operative words in the statute — "organize," "manage," and "supervise" — should be given their ordinary, everyday meanings) (citation omitted). That is precisely what the Government has alleged here. The statute does not require that Ulbricht have had a particular form of contact with each of the five or more individuals that he purportedly organized, managed, or supervised. United States v. Cruz, 785 F.2d 399, 407 (2d Cir. 1986); see also United States v. Joyner, 201 F.3d 61, 71 (2d Cir. 2000) (affirming a conviction where a defendant sold to otherwise independent resellers but required them, inter alia, to obtain permission from him to discount their prices and sell in certain locations so that he could monitor [**51] their activity).
Here, Ulbricht also argues that he cannot have had the requisite role with respect to individuals who merely assisted him with administering the site. (Def.'s Mem. at 15.) This, however, is a question of fact, not law. Whether those who assisted Ulbricht had the requisite mental state to be acting "in concert" with him is a factual inquiry. If those who assisted Ulbricht had the requisite state of mind, there is no legal reason why they could not constitute the necessary group of "five or more."
Ulbricht argues that he cannot separately have had the requisite position vis-à-vis the buyers and sellers, as they are referred to as having "used" the site, and not, for instance, as employees. (Ind. ¶ 2).12 In this regard, the defendant argues that, at most, his alleged conduct
12 Ulbricht also argues that he cannot have engaged in a CCE merely by aiding and abetting drug dealers. This is not, however, the Government's allegation. The Government contends that Ulbricht was the leader of a vast criminal enterprise.
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amounted to his being a conduit or facilitator for those engaging in illegal activity. This is, again, a factual argument cast as a legal one. There is no legal reason why one who designs, launches, and operates a website or any facility for the specific purpose of facilitating narcotics transactions that he knows will occur, and acts as the rule-maker of the site — determining the terms and conditions [**52] pursuant to which the sellers are allowed to sell and the buyers are allowed to buy, taking disciplinary actions to protect that enterprise (allegedly including murder-for-hire on more than one occasion) — could not be found to occupy the requisite position. See Cruz, 785 F.2d at 407 (no distinction between salaried employees and independent contractors). In this regard, the allegations amount to Ulbricht acting as a sort of "godfather" — determining the territory, the actions which may be undertaken, and the commissions he will retain; disciplining [*564] others to stay in line; and generally casting himself as a leader — and not a service provider. Again, whether the Government can prove the facts alleged is not a question at this stage of the proceedings.
Ulbricht also argues that Count Two fails to allege the specific series of continuing violations. The Indictment does allege thousands of separate transactions. (Ind. ¶ 2.) The type of specificity the [**53] defendant urges is not required. Flaharty, 295 F.3d at 197 (granular particularity not required). The Government need not enumerate the specific who, when, or where of the series in the Indictment; it is enough that it is clear from the face of the Indictment that he is alleged to have engaged in a continuing series of narcotics conspiracies punishable under 21 U.S.C. §§ 841, 843, 846. (Ind. ¶ 12). See United States v. Simmons, 923 F.2d 934, 952 (2d Cir. 1991).
VI. OTHER LEGAL ISSUES RAISED WITH REGARD TO COUNT THREE
The defendant argues that the allegations in the Indictment are insufficient to support the type of conduct covered by a computer hacking conspiracy in 18 U.S.C. § 1030 (the "Computer Fraud and Abuse Act"). (Def.'s Mem. at 21.) According to the defendant, the allegations are "only that the Silk Road website 'provided a platform for the [exchange] of malicious software.'" (Id. (quoting a portion of the Indictment at ¶¶ 15-16).)
The Indictment in fact alleges more. It alleges that "Silk Road . . . provided a platform for the purchase and sale of malicious software designed for computer hacking, such as password stealers, keyloggers, and remote
access tools. While in operation, [**54] the Silk Road website regularly offered hundreds of listings for such products." (Ind. ¶ 14.) It also alleges that the defendant conspired with others to "intentionally access computers without authorization, and thereby would and did obtain information from protected computers, for commercial advantage and private financial gain." (Ind. ¶ 16.)
The defendant correctly states that to establish a violation of 18 U.S.C. § 1030(a)(2)(C) requires "proof that the defendant intentionally accessed information from a protected computer." United States v. Willis, 476 F.3d 1121, 1125 (10th Cir. 2007). However, the defendant incorrectly extends this to the requirements for sufficiently alleging a computer hacking conspiracy. At this stage, such a claim requires not proof — as the defendant argues (see Def.'s Mem. at 22) — but rather, only allegations that the defendant agreed with another to "(1) intentionally access[] a computer, (2) without authorization . . . (3) and thereby obtain[] information." Willis, 476 F.3d at 1125. As with any conspiracy, the actual success or failure of the venture is irrelevant. See United States v. Perry, 643 F.2d 38, 46 (2d Cir. 1981) ("It is unnecessary to show [**55] that the conspiracy actually aided any particular sale of heroin since a conspiracy can be found though its object has not been achieved.").
It is, of course, axiomatic — as set forth at length above — that to charge a conspiracy the Government must allege that two or more people agreed to achieve an unlawful end. See Stavroulakis, 952 F.2d at 690. Each conspirator must knowingly and intentionally enter the conspiracy, Torres, 604 F.3d at 66, though it is common for coconspirators to have different roles. See, e.g., United States v. Sanchez, 925 F. Supp. 1004, 1013 (S.D.N.Y. 1996) ("There are many roles in a conspiracy.").
The defendant argues that the Government's charge must fail as it relies upon a concept of "transferred intent" — that is, [*565] that Ulbricht himself is not alleged to have had the intent to obtain unauthorized access, but only to have conspired with another who did. (Def.'s Reply at 13.) According to Ulbricht, he could not know the buyer's intent. (Id.)
As an initial matter, the law of conspiracy does not require that both participants intend to access a computer — but they must both intend that one of them will. Questions as to how the Government will prove its case as [**56] to the buyer's intent are reserved for
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trial.13
Ulbricht also argues that the statutory term "access without authorization" is undefined. (Def.'s Mem. at 39-41 (discussing § 1030(a)(2)(C).) Describing the 1996 amendments to the statute and the addition of the term "any" to unauthorized access of computers over the Internet, the defendant argues that the "ubiquitous use of computers, smartphones, tablets, or any other Internet-enabled device in today's world" places special emphasis on the meaning of the word "authorization" and may criminalize a broad amount of routine Internet activity. (Id. at 41.) The Government counters this argument only in a footnote. (Gov't Opp'n at 31 n.10.)
The defendant's argument is misplaced, or at least premature. The term "authorization" has a plain and ordinary meaning and requires no special construction. [**57] That the statute may implicate a broad swath of conduct is an issue for Congress. Whether this issue has any special significance can only be determined at trial. That is, whether Ulbricht's and his coconspirators' alleged conduct falls into the suggested grey area must await the Government's proof.
VII. THE "KITCHEN SINK" ARGUMENTS
Ulbricht also alleges that since his alleged conduct in Counts One, Two, and Three has never before been found to constitute the crimes charged, a variety of legal principles preclude criminal liability. Those principles include the rule of lenity, the doctrine of constitutional avoidance, void-for-vagueness, and overbreadth. In addition, the defendant argues that the presence of a civil immunity statute for online providers indicates congressional "support for a free-wheeling [I]nternet, including one in which providers or users of interactive computer services can operate without fear of civil liability for the content posted by others." (Def.'s Mem. at 28.) These arguments do not preclude the criminal charges here.
As an initial matter, as set forth above, the conduct charged fits within existing law. It is certainly true that case law to date has not been [**58] applied to the type of conduct that forms the basis for the Government's
13 The defendant's arguments that potentially lawful uses of malicious software also fail. There are numerous examples of lawful products put to unlawful use, resulting in criminal liability. See, e.g., United States v. Zambrano, 776 F.2d 1091, 1092, 1096 (2d Cir. 1985); United States v. Orozco-Prada, 732 F.2d 1076, 1080 (2d Cir. 1984); Perry, 643 F.2d at 44.
charges14 — but that is not fatal. Throughout the history of the common law system there have been times when laws are applied to new scenarios. At each new stage there were undoubtedly those who questioned the flexibility of the law. But when the principles underlying a law are consistent and clear, they may accommodate new fact patterns. See Williams v. Taylor, 529 U.S. 362, 384-85, 120 S. Ct. [*566] 1495, 146 L. Ed. 2d 389 (2000) (Opinion of Stevens, J.) ("[R]ules of law often develop incrementally as earlier decisions are applied to new factual situations."); see also, e.g., ABC, Inc. v. Aereo, Inc., U.S. , 134 S. Ct. 2498, 189 L. Ed. 2d 476, 2014 U.S. LEXIS 4496, 2014 WL 2864485, at *10 (2014) (applying copyright laws customarily imposed upon cable companies to a new type of distributor). The fact that a particular defendant is the first to be prosecuted for novel conduct under a pre-existing statutory scheme does not ipso facto mean that the statute is ambiguous or vague or that he has been deprived of constitutionally appropriate notice.
The defendant's Kitchen Sink arguments are also premised on a view of his alleged conduct as being sufficiently common — i.e., that he is doing nothing more than that done by other designers and operators of online marketplaces — that he could not have known or been on notice of its illegality.
The Court disagrees. Again, on a motion to dismiss an indictment, the Court accepts as true the Government's allegations; whether and how those allegations can be proven is not a question for this stage in the proceedings.
A. The Rule of Lenity and the Doctrine of Constitutional Avoidance
The defendant's arguments with respect to the rule of lenity and the doctrine of constitutional avoidance are based on the incorrect premise that the statutes under which he has been charged in Counts One, Two, and Three are ambiguous when applied to his alleged conduct.
The rule of lenity provides that when a criminal statute is susceptible to two different interpretations — one more and one less favorable to the defendant — "leniency" requires that the court read it in the manner more
14 The Government argues that a conspiracy and CCE have previously been charged in the context of online marketplaces. (Gov't Mem. at 30.) Those cases have entirely [**59] different facts from those alleged here.
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favorable. See Rewis v. United States, 401 U.S. 808, 812, 91 S. Ct. 1056, 28 L. Ed. 2d 493 (1971); United States v. Ford, 435 F.3d 204, 211 (2d Cir. 2006) [**60] (explaining that "restraint must be exercised in determining the breadth of conduct prohibited by a federal criminal statute out of concerns regarding both the prerogatives of Congress and the need to give fair warning to those whose conduct is affected").
The rule of lenity is a principle of statutory construction: it comes into play only if and when there is ambiguity. United States v. Litchfield, 986 F.2d 21, 22 (2d Cir. 1993). It should not be viewed as a general principle requiring that clear statutes be applied in a lenient manner. Callanan v. United States, 364 U.S. 587, 596, 81 S. Ct. 321, 5 L. Ed. 2d 312 (1961) (explaining that the rule of lenity, "as is true of any guide to statutory construction, only serves as an aid for resolving an ambiguity; it is not to be used to beget one").
In Skilling v. United States, 561 U.S. 358, 130 S. Ct. 2896, 177 L. Ed. 2d 619 (2010), the Court addressed the type of conduct encompassed by the ambiguous term "honest services." The Court reiterated the principle that "ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity," and refused to agree with the Government's broad interpretation of the statute. Id. at 410. Instead, the Court limited its coverage to bribery and kickback [**61] schemes. Id. at 412. The Court noted that if "Congress desires to go further . . . it must speak more clearly than it has." Id. at 411.
Here, with regard to Counts One and Two, the defendant does not allege that a word or phrase in a statute requires construction or is susceptible to more than [*567] one interpretation.15 Instead, he argues that even if the elements of, for instance, a narcotics conspiracy are well known, his particular conduct in designing and operating the website does not clearly fall within what the statute is intended to cover. The Court disagrees.
Sections 841 and 846 are intended to cover conduct in which two or more people conspire to distribute or possess with the intent to distribute narcotics. If the Government can prove at trial that Ulbricht has the
15 As discussed supra, the defendant does argue ambiguity with regard to aspects of § 1030; as the Court has stated, whether that alleged ambiguity (or really, breadth) plays any role here is a question for trial.
requisite intent, then these statutory provisions clearly prohibit his conduct. These statutory provisions do not, for instance, require that only one type of communication method be used between coconspirators [**62] (for instance, cellular telephone versus the Internet); they do not prescribe what the various roles of coconspirators must be or are limited to; and they have been applied in the past to individuals alleged to be middlemen in drug transactions. See generally Pitre, 960 F.2d at 1121-23. Here, there is no statutory ambiguity and thus no basis for application of the rule of lenity.
The doctrine of constitutional avoidance provides that when a "statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are avoided, [a court's] duty is to accept the latter." United States ex rel. Attorney General v. Del. & Hudson Co., 213 U.S. 366, 408, 29 S. Ct. 527, 53 L. Ed. 836 (1909); see also Jones v. United States, 526 U.S. 227, 239-40, 119 S. Ct. 1215, 143 L. Ed. 2d 311 (1999); Triestman v. United States, 124 F.3d 361, 377 (2d Cir. 1997).
This doctrine is inapplicable for the same reason as the rule of lenity: there is no ambiguity; the Court is not struggling with dueling interpretations as to whether the alleged conduct, if proven, would be covered. Thus, there are no grave constitutional issues on either side of this question.
B. Void-for-Vagueness and Constitutional [**63] Overbreadth
The defendant also argues that the statutes, as applied to his conduct in particular, are void on the basis that they are either unconstitutionally vague or overbroad. (Def.'s Mem. at 32-38.) The Court disagrees.
The void-for-vagueness doctrine is inapplicable. It addresses concerns regarding (1) fair notice and (2) arbitrary and discriminatory prosecutions. Skilling, 561 U.S. at 412 (citation omitted). To avoid a vagueness challenge, a statute must define a criminal offense in a manner that ordinary people must understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement. Id. at 402-03. The question, in short, is whether an ordinary person would know that engaging in the challenged conduct could give rise to the type of criminal liability charged.
The Government argues that this prosecution is not particularly novel. "[B]oth the narcotics conspiracy
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statute and continuing criminal enterprise statute have specifically been applied in a previous prosecution of defendants involved in operating online marketplaces for illegal drugs." (Gov't Opp'n at 30.) "[T]he computer hacking statute has previously been [*568] applied to persons [**64] involved in providing online services used by others to distribute malicious software." (Id.) The citations by the Government in support of these assertions are, however, merely to indictments. (Id.) And neither case has yet resulted in a published decision which could reasonably have provided notice to the defendant, or which demonstrates an ineffectual legal challenge.
As the Supreme Court has recognized, however, "due process requirements are not designed to convert into a constitutional dilemma the practical difficulties in drawing criminal statutes both general enough to take into account a variety of human conduct and sufficiently specific to provide fair warning that certain kinds of conduct are prohibited." United States v. Lanier, 520 U.S. 259, 271, 117 S. Ct. 1219, 137 L. Ed. 2d 432 (1997) (internal quotation marks and citations omitted). Here, the charged conduct is not merely designing some benign marketplace for bath towels. The conduct is alleged to be specific and intentional conduct to join with narcotics traffickers or computer hackers to help them sell illegal drugs or hack into computers, and to be involved in enforcing rules (including using murder-for-hire) regarding such sales and taking commissions. [**65] No person of ordinary intelligence could believe that such conduct is somehow legal. Indeed, no reasonable person could assume that such conduct is in any way equivalent to designing and running eBay, for example. There is nothing vague about the application of the statute to the conduct charged.
Ulbricht also argues that his alleged conduct also constitutes protected free speech and that the imposition of criminal liability would be overbroad as applied. (Def.'s Mem. at 35-38.) This argument stems from an incorrect premise as to the nature of the criminal charges here.
The defendant does not explain how such conduct could amount to protected speech; even if this Court were to agree that such conduct has a speech element, the law is clear that speech which is part of a crime is not somehow immunized. See United States v. Rahman, 189 F.3d 88, 116-17 (2d Cir. 1999). For instance, no one would doubt that a bank robber's statement to a teller — "This is a stick up" — is not protected speech.
The thrust of the defendant's overbreadth argument appears to be similar to his vagueness, constitutional avoidance, and rule of lenity claims. All are premised in part on the incorrect view that the [**66] challenged conduct occurs on a regular basis by many people, that therefore enforcing these criminal statutes as to Ulbricht amounts to arbitrary enforcement and that the umbrella or tent of the statutes would be stretched beyond reason in order to encompass the alleged conduct.
For all of the reasons set forth above, this is incorrect.
C. Civil Immunity for Online Service Providers
The defendant argues that the existence of a civil statute for certain types of immunity for online service providers expresses a congressional intent to immunize conduct akin to that in which Ulbricht is alleged to have engaged. This Court disagrees. Even a quick reading of the statute makes it clear that it is not intended to apply to the type of intentional and criminal acts alleged to have occurred here. See 47 U.S.C. § 230. It is inapplicable.
VIII. COUNT FOUR
Count Four charges the defendant with participation in a money laundering [*569] conspiracy in violation of 18 U.S.C. § 1956(h). (Ind. ¶¶ 17-21.) The Government has alleged the requisite statutory elements. (See Ind. ¶ 19.) First, the Government has alleged that a conspiracy existed between the defendant and one or more others, the object of which was to [**67] engage in money laundering. In paragraph 20, the Indictment recites the specific elements required for money laundering:
It was a part and an object of the conspiracy that . . . the defendant, and others known and unknown, . . . knowing that the property involved in certain financial transactions represented proceeds of some form of unlawful activity, would and did conduct and attempt to conduct such financial transactions, which in fact involved the proceeds of specified unlawful activity, to wit, narcotics trafficking and computer hacking . . . with the intent to promote the carrying on of such unspecified unlawful activity . . . .
(Ind. ¶ 20.) The defendant argues that the factual allegation that Bitcoins constituted the exclusive "payment system that served to facilitate [] illegal commerce" on Silk Road cannot constitute the requisite "financial transaction." (Def.'s Mem. at 3, 45.) The Court disagrees.
As an initial matter, an allegation that Bitcoins are used
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as a payment system is insufficient in and of itself to state a claim for money laundering. The fact that Bitcoins allow for anonymous transactions does not ipso facto mean that those transactions relate to unlawful activities. [**68] The anonymity by itself is not a crime. Rather, Bitcoins are alleged here to be the medium of exchange — just as dollars or Euros could be — in financial transactions relating to the unlawful activities of narcotics trafficking and computer hacking. It is the system of payment designed specifically to shield the proceeds from third party discovery of their unlawful origin that forms the unlawful basis of the money laundering charge.
The money laundering statute defines a "financial transaction" as involving, inter alia, "the movement of funds by wire or other means, or [] involving one or more monetary instruments, [] or involving the transfer of title to any real property, vehicle, vessel, or aircraft." 18 U.S.C. § 1956(c)(4). The term "monetary instrument" is defined as the coin or currency of a country, personal checks, bank checks, and money orders, or investment securities or negotiable instruments. 18 U.S.C. § 1956(c)(5).
The defendant argues that because Bitcoins are not monetary instruments, transactions involving Bitcoins cannot form the basis for a money laundering conspiracy. He notes that the IRS has announced that it treats virtual currency as property and not as currency. [**69] (Def.'s Mem. at 46-47 (citing I.R.S. Notice 2014-21, http://www.irs.gov/pub/irs-drop/n-14-21.pdf, and U.S. Dep't of Treasury, Fin. Crimes Enforcement Network ("FinCEN"), "Guidance, Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies," March 18, 2013, http://www.fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html).) The defendant argues that virtual currencies have some but not all of the attributes of currencies of national governments and that virtual currencies do not have legal tender status. (See id. at 45-46.) In fact, neither the IRS nor FinCEN purport to amend the money laundering statute (nor could they). In any event, neither the IRS nor FinCEN has addressed the question of whether a "financial transaction" can occur with Bitcoins. This Court refers back to the money laundering statute itself and case law interpreting the statute.
[*570] It is clear from a plain reading of the statute that "financial transaction" is broadly defined. See United States v. Blackman, 904 F.2d 1250, 1257 (8th Cir.
1950) (citation omitted). It captures all movements of "funds" by any means, or monetary instruments. "Funds" is not defined in the statute [**70] and is therefore given its ordinary meaning. See Taniguchi v. Kan Pacific Saipan, Ltd., U.S. , 132 S.Ct. 1997, 2002, 182 L. Ed. 2d 903 (2012) (citation omitted). "Funds" are defined as "money, often money for a specific purpose." See Cambridge Dictionaries Online, http://dictionary.cambridge.org/us/dictionary/american-english/funds?q=funds (last visited July 3, 2014). "Money" is an object used to buy things.
Put simply, "funds" can be used to pay for things in the colloquial sense. Bitcoins can be either used directly to pay for certain things or can act as a medium of exchange and be converted into a currency which can pay for things. See Bitcoin, https://bitcoin.org/en (last visited July 3, 2014); 8 Things You Can Buy With Bitcoins Right Now, CNN Money, http://money.cnn.com/gallery/technology/2013/11/25/buy-with-bitcoin/ (last visited July 3, 2014). Indeed, the only value for Bitcoin lies in its ability to pay for things — it is digital and has no earthly form; it cannot be put on a shelf and looked at or collected in a nice display case. Its form is digital — bits and bytes that together constitute something of value. And they may be bought and sold using legal tender. See How to Use Bitcoin, [**71] https://bitcoin.org/en/getting-started (last visited July 3, 2014). Sellers using Silk Road are not alleged to have given their narcotics and malicious software away for free — they are alleged to have sold them.16
The money laundering statute is broad enough to encompass use of Bitcoins in financial transactions. Any other reading would — in light of Bitcoins' sole raison d'etre — be nonsensical. 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. With respect to this case, the Government has alleged that Bitcoins have a value which may be expressed in dollars. (Ind. ¶ 3 (alleging that Ulbricht "reaped commissions worth tens of millions of dollars, generated from the illicit sales [**72] conducted through the site").)
16 Recently, the U.S. Government auctioned off nearly 30,000 Bitcoins as part of a civil forfeiture proceeding related to Silk Road. See Sydney Ember, After Bitcoin Auction, Winning Bidders Remain Elusive, N.Y. Times Dealbook (June 30, 2014 6:59 P.M.), http://dealbook.nytimes.com/2014/06/30/after-bitcoin-auction-winning-bidders-remain-elusive/?_php=true&_type=blogs&_r=0.
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There is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, and then converted back to cash, that would constitute a money laundering transaction. See, e.g., United States v. Day, 700 F.3d 713, 718 (4th Cir. 2012).
One can money launder using Bitcoin. The defendant's motion as to Count Four is therefore denied.
IX. CONCLUSION
For the reasons set forth above, the defendant's motion to dismiss is DENIED in its entirety. The clerk of the Court is directed to terminate the motion at ECF No. 19.
SO ORDERED.
Dated: New York, New York
July 9, 2014
/s/ Katherine B. Forrest
KATHERINE B. FORREST
United States District Judge
End of Document
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§ 9.04 Virtual Currencies
[1]—Introduction
Online virtual currencies, sometimes called e-currencies or cryptocurrencies, are a fairly new phenomenon; several of them exist today.1
Federal regulations define “currency” as “the coin and paper money of the United States or of any other country that is designated as legal tender, that circulates, and that is customarily used and accepted as a medium of exchange in the country of issuance.”2 A “virtual” currency, according to the Department of the Treasury, is “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.”3 Under that broad definition, virtual currency would include virtually anything: beaver pelts,4 cigarettes,5 gift cards, frequent flier miles6—and
1 The first and most prominent cryptocurrency, Bitcoin, was launched in 2009. See: Nakamoto (pseudonym), “Bitcoin: A Peer-to-Peer Electronic Cash System,” (Nov. 2008), available at https://bitcoin.org/bitcoin.pdf (last visited March 9, 2014); Nakamoto (pseudonym), “Bitcoin v0.1 released” (Jan. 9, 2009), available at http://www.mail-archive.com/[email protected]/msg10142.html (last visited March 9, 2014). As of early 2014, Wikipedia listed at least eight active cryptocurrencies. See http://en.wikipedia.org/wiki/Cryptocurrency (last visited March 8, 2014). Ripple is another example of an open-source digital currency; it converts existing currencies or valuables into an “internal currency” called “XRP” and back. Ripple’s software protocol, unlike Bitcoin’s, allows individuals to loan XRP to others. Mocer, Prepared Testimony, Senate Banking Committee, National Security and International Trade and Finance, p. 5 (Nov. 19, 2013). 2 31 C.F.R. § 1010.00(m). 3 Department of the Treasury, Financial Crimes Enforcement Network, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” p. 1 (March 18, 2013). In its definitions, Treasury does not include “store of value” as a necessary characteristic of either currency or virtual currency. No other country has categorized a virtual currency as “currency.” Although the first Bitcoin ATM was installed in Finland in 2013, in 2014, the Finnish central bank classified Bitcoin as a commodity since it did not meet the definition of either “currency” or of “payment instrument” (which required an issuer responsible for its operation). Phjanpalo, “Bitcoin Becomes Commodity in Finland After Failing Currency Test,” Bloomberg Business Week (Jan. 19, 2014), available at www.businessweek.com/news/2014-01-19/bitcoin-becomes-commodity-in-finland-after-failing-currency-test (last visited March 8, 2014). 4 University of Notre Dame, “Money Substitutes in New Netherland and Early New
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cryptocurrencies. The Department of the Treasury distinguishes between two types of virtual currencies: First, those that use a central repository, typically used for gift cards, loyalty programs, and traditional money transmission services, but also used (or at least attempted to be used) for storing value and serving as a medium of exchange. Second, de-centralized virtual currencies that are exchanged using online peer-to-peer transactional networks rather than a central repository and “that persons may obtain by their own computing or manufacturing effort.”7 This chapter will focus on the latter type.8
Virtual currencies also can be categorized according to how they interact with legal tender currencies: “Closed” virtual currencies are created and can be used only within closed systems having no interaction with the outside world. Artificial currencies used in online games are a typical example; they are earned and can be spent only within the virtual world of the game.9 “Inbound-only” virtual currencies can be purchased with legal tender currency, but once purchased can be used only within their designated closed system.10
York: The Beaver Pelt,” available at http://www.coins.nd.edu/ColCoin/ColCoinIntros/NNBeaver.html (last visited March 8, 2014). 5 Wong, “Cigarettes: The Most Stable International Currency,” Business Week (March 4, 2012), available at www.businessweek.com/articles/2012-03-04/cigarettes-the-most-stable-international-currency (last visited March 8, 2014). 6 See European Central Bank, “Virtual Currency Schemes,” p. 15 (Oct. 2012). Frequent flyer programs “can be viewed as a specific type of [inbound-only] virtual currency scheme.” The total credits held by customers in frequent flyer programs “have reached outstanding values, even surpassing the total amount of dollar notes and coins in circulation (i.e., the M0 supply).” 7 Department of the Treasury, Financial Crimes Enforcement Network, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” p. 5 (March 18, 2013). 8 Although usage varies widely, for purposes of this section the term “digital currency” refers to any digital form of legal tender and thus by definition does not refer to virtual currency. The Canadian government, for example, has considered developing a digital currency called “Mint Chips.” See Greenwood, “Canadian Mint Ready to Test Its Own Digital Money Project,” Financial Post (Canada) (Sept. 19, 2013). 9 Examples: World of Warcraft Gold and Linden Dollars (used in the Second Life virtual world game). 10 Nintendo Points are an example. Users purchase them with legal tender currency
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The closed and inbound-only models present only minor issues from a legal standpoint. “Open” virtual currencies, on the other hand, the focus of this section,11 are quite significant from both a legal and a practical standpoint because they are specifically designed for general purpose use in the real world. They can be purchased with and exchanged for legal tender currency.
[2]—How Virtual Currencies Work
Virtual currencies are based on cryptographic protocols. Since Bitcoin12 is the most prominent virtual currency, an explanation of how it works will, for the most part, apply to virtual currencies generally.13
The threshold test for viability for any decentralized virtual currency is its ability to solve the “double-spending” problem: Making sure that if a person owns a total of X amount of the currency and sends it to A, he or she cannot double-spend it by sending the same X amount to B. Traditionally, double-spending has been precluded by the use of either physical forms of cash or by centralized ledgers maintained by trusted third parties, usually banks.14 Bitcoin is the first currency to solve the and use them within Nintendo games and apps. Between 2009 and 2012, Facebook Credits was a virtual currency that allowed users to purchase virtual goods within Facebook applications. 11 As used in this section, the general term “virtual currency” refers to “open” virtual currency. 12 The term “Bitcoin” is used as a proper name for the virtual currency system and for its protocol. The terms “bitcoin” and “bitcoins” are used to refer to transactional amounts in that currency. 13 For excellent in-depth explanations of the technical side of Bitcoin, see: Nielsen, “How the Bitcoin protocol actually works” (Dec. 6, 2013), available at http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/ (last visited March 12, 2014); Brito and Castillo, “Bitcoin: A Primer for Policymakers,” App. A to Brito, Testimony before Senate Committee on Homeland Security and Governmental Affairs (Nov. 18, 2013); European Central Bank, “Virtual Currency Schemes,” (Oct. 2012). 14 The history of centralized virtual currency ledgers maintained by non-banks (and not connected to commercial services such as frequent flyer programs) is not confidence-inspiring. eGold, started in 1996, was supposedly backed by gold on deposit. Accounts could be opened under pseudonyms with no personal information and were funded by exchanges that accepted cash. All transactions were anonymous. eGold quickly became a system for money laundering, facilitating child pornography,
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double-spending problem without using either cash or a centralized trusted third party ledger. Instead, the Bitcoin protocol uses a decentralized ledger maintained on a multiple peer-to-peer basis. Every bitcoin transaction that has ever occurred (but not the identity of parties to the transaction) has been recorded and is viewable online15 on the ledger, which is called the “block chain.” The transactional integrity of the block chain is maintained by public-key cryptography,16 plus the fact that hundreds of copies of it are maintained—and all transactions validated—by multiple volunteer peer-to-peer users, who provide administrative support for all Bitcoin transactions in the world. These self-appointed users, who provide computing resources that validate Bitcoin transactions and maintain copies of the block chain, are not acting out of altruistic fervor; rather, the Bitcoin protocol has a built-in “reward” function that compensates them by issuing them new bitcoins17 at a pre-defined rate. Not all administrative support users are rewarded; only those who can both
and other crimes. The FBI and Secret Service shut the operation down as an unlicensed money transmitting business. Of the $90 million recovered, $10.8 million was forfeited to the government because of criminal activity. One of the exchanges serving eGold was Western Express, which exchanged $35 million worth of virtual currency. Western Express was shut down for supporting trafficking in stolen credit card data and other crimes; sixteen people were found guilty, including several who were extradited to the U.S. Liberty Reserve was another virtual digital currency that, from 2006 to 2013, offered instant online worldwide payments. Customers used pseudonyms. When the Secret Service shut it down, Liberty Reserve had about a million users and was believed to have laundered more than $6 billion in criminal proceeds. Lowery III, prepared testimony before the Senate Committee on Homeland Security and Governmental Affairs, pp. 4-6 (Nov. 18, 2013). 15 The Bitcoin blockchain can be viewed in real time at http://blockchain.info (last visited April 1, 2014). 16 For further explanation in plain English, see Schneier, “Communications Using Public-Key Cryptography,” Applied Cryptography, p. 31 (1996). 17 Because (under the Bitcoin protocol) the work that such users perform results in the creation of new currency, such users started calling themselves “miners,” in an apparent attempt to characterize themselves in the same light as those who extract minerals from the earth. The difference, as the Chicago Fed has pointed out, is that “Bitcoin is a fiduciary currency. Fiduciary currencies—in contrast with commodity-based currencies (such as gold coins or bank notes redeemable in gold)—have no intrinsic value. . . . The term ‘mining’ may lead one to think that bitcoin is not fiduciary. . . . But once created, the bitcoin has no value other than in exchange, contrary to a gold coin.” Velde, “Bitcoin: A Primer,” Chicago Fed. Letter No. 317, pp. 2-3 (Dec. 2013).
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validate the transaction and solve a complex computational problem (to prove they have sufficient computing resources to serve as transaction validators) more quickly than most others.18 The Bitcoin protocol presumes that computing power will increase, so the reward is set to gradually reduce over time yet require increased computational effort; once the reward becomes so low as to not be an incentive, the protocol substitutes transaction fees as the reward;19 indeed, this is already occurring.20
The second test for viability of any decentralized virtual currency is its ability to prevent counterfeiting. The Bitcoin protocol solves this issue by using decentralization to its advantage: Any new additions of currency to the block chain would have to be verified multiple times by independent competing block chain administrators, so any attempt to insert unauthorized new currency into the system and falsely verify such an insertion would require so much computing power, sufficient to overwhelm the independent verification testing of all other block chain administrators in the world, that doing so would be virtually impossible.21
18 “In Bitcoin proper, a transaction is not considered confirmed until . . . at least 5 blocks follow it. . . . In this case we say that the transaction has ‘6 confirmations.’” Nielsen, “How the Bitcoin protocol actually works,” p. 10 (Dec. 6, 2013), available at http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/ (last visited March 12, 2014). 19 Nielsen describes the process as follows: “For each block of transactions validated, the successful miner receives a bitcoin reward. Initially, this was set to be a 50 bitcoin reward. But for every 210,000 validated blocks (roughly, once every four years) the reward halves. . . . This halving in the rate will continue every four years until the year 2140 CE. At that point . . . the total supply of bitcoins will cease to increase. However, that won’t eliminate the incentive to help validate transactions. Bitcoin also makes it possible to set aside some currency in a transaction as a transaction fee, which goes to the miner who helps validate it. . . . [T]ransaction fees have gradually risen, and are now a substantial additional incentive. . . .” Id., p. 8. 20 “The amount of Bitcoin created by mining will drop over time until it ceases altogether in 2140 at just fewer than 21 million bitcoins in existence. In the meantime, mining will increasingly be rewarded by transaction fees.” Murck, Bitcoin Foundation General Counsel, testimony before Senate Committee on Homeland Security and Governmental Affairs, p. 3 (Nov. 18, 2013). 21 A would-be counterfeiter “is likely to have only a relatively small chance to corrupt the validation process, unless [he] expend[s] a huge amount of computing resources.”
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Once a system is in place that meets these two tests, actual currency transactions are relatively straightforward. When a sender (S), wants to send a certain sum of virtual currency (e.g., 1.02335 bitcoins) to a receiver (R), the process is as follows:
• S and R both download software containing the virtual currency’s cryptography protocol.
• For each of them, the software generates a public key/private key pair, and then using the public key, generates a long string of letters and number that functions as that user’s payment address.
• R posts this payment address (along with R’s public key if desired) so that anyone can use it to send payments.
• Using the software, S generates a pre-formatted transactional instruction, specifying in the appropriate fields that S is paying 1.02335 bitcoins to R’s payment address. S’s software encrypts this instruction using S’s private key—meaning that anyone in the world will be able to use S’s public key to confirm that S and only S could have generated the instruction; i.e., it is genuine.
• S clicks on “pay” and the software submits this payment instruction to the block chain, where, after several independent confirmations (which take a few seconds), the payment is validated and the block chain is updated to show that S has 1.02335 fewer bitcoins and R has 1.02335 more bitcoins.
• Each user’s software generates a transaction serial number called a transaction hash that is forever linked to the payment addresses of both users, so both users, using the software, or searching manually, can look up all transactions they have ever conducted, as well as their current balance.
[3]—Virtual Currencies in the Real World
All virtual currencies have certain inherent characteristics. For one thing, a virtual currency has value only if it can be pegged to a legal-tender currency. A virtual currency can be used to purchase real-world goods and services only to the extent that sellers who accept the
Id., p. 8.
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virtual currency are confident that they can convert it to an acceptable sum in legal tender currency.22 Any seller who does not immediately convert virtual currency received into legal tender currency (or barter it for other goods or services) becomes a speculator.23 The same applies to any buyer who maintains accounts in virtual currency. Since not all sellers and buyers wish to be speculators, some entrepreneurs who do wish to be speculators have set up exchanges so that parties can do transactions in virtual currency to take advantage of the speed and low cost, immediately preceded (buyers) or followed (sellers) by legal tender currency conversion.24 Also, because virtual currencies are not issued by any central bank but operate with fixed money supplies, there is no entity to deal with issues of money supply, inflation, deflation, or interest rates. No new money can be created by governmental fiat or fractional reserve banking.
The economic significance of virtual currencies must be placed in perspective. Although there is much press coverage, the hype is much
22 “Products on the Bitcoin store [an online consumer electronics store] are priced in both bitcoins and US dollars. At the point of purchase, Bitpay, a Bitcoin payment processing company, determines the currency conversion rate and holds that price for 15 minutes.” Brito and Castillo, “Bitcoin: A Primer for Policymakers,” App. A to Brito, Testimony before Senate Committee on Homeland Security and Governmental Affairs, n.30 (Nov. 18, 2013). According to Bitpay, however, as of mid-March 2014, the hold time was down to one minute: “Rates are updated every 1 minute.” Bitpay, “Bitcoin Exchange Rates,” available at https://bitpay.com/bitcoin-exchange-rates (last visited March 14, 2014). 23 Willard, “Bitcoin Wild West: Gamblers, Investors and Merchants,” Market Watch, Wall Street Journal (Feb. 21, 2014), available at http://blogs.marketwatch.com/cody/2014/02/21/know-the-difference-between-bitcoin-gamblers-investors-and-merchants/ (last visited April 1, 2014). 24 Major Bitcoin exchanges have included BitPay (still in operation as of early 2014), Camp BX (still in operation), VirtEx (Canadian-based, in operation), TradeHill (closed down in 2012), Mt. Gox (collapsed in February 2014 when it was revealed that 744,000 bitcoins, valued at more than $450 million, had been stolen from it—see generally, http://en.wikipedia.org/wiki/Mt_Goxhttp://en.wikipedia.org/wiki/Mt_Gox (last visited April 1, 2014)), Bitomat (Poland-based; acquired by Mt. Gox, since closed down), Intersango (formerly BritCoin, not operating normally as of early 2014), ExchangeBitcoin.com (offline), Bitcoin7 (closed because of hacker attack and stolen funds according to https://en.bitcoin.it/wiki/Bitcoin7), and WM-Center (shut down and domain name seized by U.S. Global Illicit Financial Team pursuant to a warrant issued by the U.S. District Court for the Southern District of New York, according to www.wm-center.com (last visited March 14, 2014)).
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greater than the reality. Even if one accepts speculative25 valuations, the global supply of Bitcoin as of the end of 2013 was about $8 billion, compared to about $70 trillion of M2 money.26 In a comparatively recent twelve-month period, Bitcoin users processed $8 billion in transactions (including those buying and selling BTC itself), compared to $81 billion processed by Western Union, $145 billion by PayPal, $37 trillion by ACH, and $244 trillion by Bank of America.27 As of late 2013, the Bitcoin system had a processing limit of just seven BTC transactions per second as opposed to Visa’s limit of 20,000 transactions per second.28
Virtual currencies do offer a number of distinct advantages over traditional payment systems. For one thing, transactions are fast and cheap: Unlike checks, credit cards, or wire transfers, online virtual currency transfers are instantaneous,29 international transfers do not involve currency conversion, and processing fees are close to zero for any geographic location in the world.30 Also, because cryptocurrency
25 See, e.g., Salmon, “The Bitcoin Bubble and the Future of Currency,” Medium, (April 3, 2013), available at https://medium.com/money-banking/2b5ef79482cb (last visited March 13, 2014). 26 Gallippi, Statement before Senate Committee on Banking, Housing and Urban Affairs, Hearing on “The Present and Future Impact of Virtual Currency,” p. 8 (Nov. 19, 2013). 27 Calvery, Director, Financial Crimes Enforcement Network, U.S. Dept. of the Treasury, statement before Senate Committee on Homeland Security and Government Affairs, p. 7 (Nov. 18, 2013). 28 “Not seven thousand, but seven transactions per second. Today, the average rate on the bitcoin network is one transaction per second. [T]here are 50,000 times more transactions taking place on traditional networks than on the bitcoin network.” Gallippi, Bitpay CEO, “The Present and Future Impact of Virtual Currency,” Statement before the Senate Committee on Banking, Housing and Urban Affairs, p. 8 (Nov. 19, 2013). 29 “The current 1-3 day settlement times on many types of transactions can be reduced to 1-3 seconds.” Gallippi, id., p. 12. 30 “In 2012, immigrants to developed countries sent at least $401 billion in remittances back to relatives living in developing countries. The amount of remittances is projected to increase to $515 billion by 2015. Most of these remittances are sent using traditional brick-and-mortar wire services such as Western Union and MoneyGram, which charge steep fees for the service. . . . In the first quarter of 2013, the global average fee for sending remittances was 9.05 percent. In contrast, transaction fees on the Bitcoin network tend to be less than 0.0005 BTC, 35 or 1
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payments cannot be undone, customer charge-back fraud is not possible.31 Moreover, unlike credit cards, which use the same credit card number over and over for all purchases made by a particular cardholder, each virtual currency transaction uses a unique encrypted number, eliminating the possibility of stolen credit-card fraud and thus eliminating the need for massive security operations of the type used by credit card companies to counteract fraud.32 The same encryption features enable virtual currencies to offer completely anonymous or pseudonymous transactions.33
percent of the transaction.” Brito and Castillo, “Bitcoin: A Primer for Policymakers,” App. A to Brito, Statement before Senante Committee on Homeland Security and Government Affairs, p. 11 (Nov. 18, 2013) (citing further authority). Bitcoin “has also gained cachet among less conspicuously conservative adherents, like the founders of BitPesa, a start-up firm in Nairobi, Kenya, that plans to help Africans abroad send money to their families at home. According to the World Bank, $1.3 billion in remittances is sent each year to Kenya, a process that costs about $110 million in fees. By using Bitcoin’s peer-to-peer technology to avoid banks and wire-transfer companies like Western Union, BitPesa hopes to reduce these fees by a third, saving ordinary Africans $74 million annually.” Feuer, “The Bitcoin Ideology,” New York Times, SR12 (Dec. 14, 2013). 31 “Merchants have long been plagued by fraudulent ‘charge-backs,’ or consumer-initiated payment reversals based on a false claim that a product has not been delivered. Merchants therefore can lose the payment for the item and the item itself, and also have to pay a fee for the charge-back. As a nonreversible payment system, Bitcoin eliminates the “friendly fraud” wrought by the misuse of consumer charge-backs. This can be very important for small businesses.” Brito and Castillo, “Bitcoin: A Primer for Policymakers,” p. 10, App. A to Brito, Statement before Senate Committee on Homeland Security and Government Affairs (Nov. 18, 2013) (citing further authority): 32 “Credit cards are ‘pull’ transactions. The shopper provides their account number, and secret credentials that the business can use to pull money from their account. The problem is that the same credentials to pull money one time can be used to pull money many more times - by that same business, or by anyone who has these credentials. This is the fundamental design problem with credit cards, and it is the root cause of the identity theft and fraud that we see today. . . . Because of this design flaw, security around credit cards is massively expensive. . . . Visa alone spends $200 million a year on fraud prevention. They are throwing big money at the problem and it is not working, because every year fraud remains very high.” Gallippi, Bitpay CEO, “The Present and Future Impact of Virtual Currency,” Statement before the Senate Committee on Banking, Housing and Urban Affairs, p. 4 (Nov. 19, 2013). 33 “While the public keys for all transactions—also known as ‘Bitcoin addresses’—are recorded in the block chain, those public keys are not tied to anyone’s identity. Yet if a person’s identity were linked to a public key, one could look through the recorded transactions in the block chain and easily see all transactions associated with
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The advantages of virtual currencies, however, are offset by numerous, significant disadvantages. The first major disadvantage is instability. Because virtual currencies are a creation of the private sector, they are not backed by the full faith and credit of any government. There is no central bank to regulate the money supply as conditions warrant, and thus there is no lender of last resort, no fractional reserve banking, and no regulation of interest rates to deal with inflation. A money supply so constrained can never be used as a reliable store of value because, to the extent that demand for the currency increases as a result of increased use, increasing population, or any other reason, the price of the currency will rise (encouraging speculation in currency and thus hoarding, i.e., withdrawing money from circulation) but the price of goods in that currency will fall, resulting in deflation.34 That is indeed what has happened: virtual currencies are subject to rapid, precipitous fluctuations in value. There is a strong incentive to hoard,35 a characteristic that, according to a
that key. So, while Bitcoin is very similar to cash in that parties can transact without disclosing their identities to a third party or to each other, it is unlike cash in that all the transactions to and from a particular Bitcoin address can be traced. In this way Bitcoin is not anonymous, but pseudonymous.” Brito and Castillo, “Bitcoin: A Primer for Policymakers,” App. A to Brito, Testimony before Senate Committee on Homeland Security and Governmental Affairs (Nov. 18, 2013); and European Central Bank, “Virtual Currency Schemes,” pp. 8-9 (Oct. 2012). 34 “Part of the reason the Federal Reserve was created a century ago is that the dollar was at that time an inelastic currency, its supply was basically fixed based on how much gold banks had in their vaults. That meant that when harvest season came around in what was then a heavily agricultural nation, there was always a shortage of cash and a spike in interest rates, and in some years a banking panic. Bitcoin exacerbates that problem. Its supply is capped in the long run. That means that if it ever came under widespread use, demand for bitcoins would rise faster than supply . . . and the price [would] rise rapidly. That . . . means that prices of goods and services are plummeting. That’s deflation, which . . . is a situation in which everyone has every incentive to hoard money rather than spend it, leading the gears of commerce to grind to a halt.” Irwin, “Bitcoin is ludicrous, but it tells us something important about the nature of money,” Washington Post (April 12, 2013). 35 “True believers in Bitcoin’s usefulness prefer to deny that speculation is driving the action in bitcoins. But the evidence suggests otherwise. . . . The problem with having the Bitcoin economy dominated by speculators is that it gives people an incentive to hoard their bitcoins rather than spend them, which is the opposite of what you need people to do in order to make a currency successful.” Surowiecki, “Cryptocurrency,” MIT Technology Review (Aug. 23, 2011), available at http://www.technologyreview.com/review/425142/cryptocurrency/ (last visited March 13, 2014).
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number of leading economists, virtually guarantees massive deflation.36 Virtual currency prices for real-world goods and services are often valid only for minutes or less.37 As a store of value, virtual currency fails miserably.
A second major disadvantage is storage insecurity. Although virtual currencies offer excellent transactional security by virtue of encryption and shared public ledgers, they offer very little security otherwise. The vulnerability is not in the sending and receiving protocol itself, but in the end-user software that is required to use the protocol, that keeps track of how many bitcoins one owns, and that originates the “send funds” messages. There is no governmental entity to insure virtual currency accounts,38 and indeed the vulnerability of virtual currencies to complete loss as a result of malware,39 password loss (no organization to contact to request a password reset), theft,40
36 “[I]f you measure prices in bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation. And because of that, there has been an incentive to hoard the virtual currency rather than spending it.” Krugman, “Golden Cyberfetters” (Blog) New York Times (Sept. 7, 2011). 37 Brito and Castillo, “Bitcoin: A Primer for Policymakers,” App. A to Brito, Testimony before Senate Committee on Homeland Security and Governmental Affairs, n.30 (Nov. 18, 2013). As of mid-2014, exchange rates between bitcoin and hard currency quoted at one major trading site were valid for only one minute. Bitpay, “Bitcoin Exchange Rates,” available at https://bitpay.com/bitcoin-exchange-rates (last visited March 16, 2014). 38 See, e.g. Hals, “Mt. Gox files U.S. bankruptcy, opponents call it a ruse,” Reuters (March 10, 2014), available at http://www.reuters.com/article/2014/03/10/us-bitcoin-mtgox-bankruptcy-idUSBREA290WU20140310 (last visited March 14, 2014). 39 Doherty, “All your Bitcoins are ours . . . ,” Symantec Blog (Jan. 23, 2014), available at http://www.symantec.com/connect/blogs/all-your-bitcoins-are-ours (last visited April 1, 2014). 40 Khandelwal, “Largest Cryptocurrency Exchange Hacked ! Over $1 Million Worth of Bitcoin and Ether Stolen,” The Hacker News (July 4, 2017), http://thehackernews.com/2017/07/bitcoin-ethereum-cryptocurrency-exchange.html; Jamie, “Warning: Enigma Hacked; Over $470,000 in Ethereum Stolen So Far,” PC Proactive (Aug. 21, 2017), https://pcproactive.net/blog/2017/08/21/warning-enigma-hacked-over-470000-in-ethereum-stolen-so-far/ (both sites (last visited September 26, 2017). Researchers who conducted a 2013 survey reported that, “18 of 40 services they studied over three years closed ‘with customer account balances often wiped out.’” Peterson, “When bitcoins go bad: 4 stories of fraud, hacking, and digital currencies,” Washington Post (Nov. 26, 2013), available at http://www.washingtonpost.com/blogs/the-switch/wp/2013/11/26/when-bitcoins-go-
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fraud,41 or other failures has been widely noted. Once the currency is gone, it is gone. “Bitcoin’s irreversibility eradicates the possibility of recourse.”42
The third major disadvantage of virtual currency is its lack of legitimacy. Not only is virtual currency not legal tender (and thus it can never be used to pay taxes or for other official transactions), but it has been effectively banned, at least in the form of bitcoins, in several countries,43 and numerous other nations have issued warnings about its use.44 Apple initiallyprohibited from its app store any apps for
bad-4-stories-of-fraud-and-hacking/ (last visited April 1, 2014). Major Bitcoin exchange thefts include: Mt. Gox (744,000 bitcoins stolen, valued at more than $450 million, available at http://en.wikipedia.org/wiki/Mt_Goxhttp://en.wikipedia.org/wiki/Mt_Gox); Global Bond Limited (bitcoins worth $4.1 million stolen, available at http://www.businessinsider.com/bitcoin-exchange-gbl-holding-41-billion-vanishes-2013-11); inputs.io (bitcoins worth $1.2 million stolen, available at http://www.wired.com/wiredenterprise/2013/11/inputs/); Bitfloor (bitcoins worth $250,000 stolen, available at http://www.zdnet.com/bitfloor-exchange-robbed-of-us250000-all-trading-halted-7000003736/); Bitcoinica (lost 18,547 customer-owned bitcoins because of a cyberattack), available at http://www.finextra.com/News/Fullstory.aspx?newsitemid=23713; and Bitcoin7 (closed because of hacker attack and stolen funds according to https://en.bitcoin.it/wiki/Bitcoin7). (Sites last visited March 14, 2014.) 41 See, e.g.: Popper, “In the Murky World of Bitcoin, Fraud Is Quicker Than the Law,” New York Times, Dealbook (Dec. 5, 2013), available at http://dealbook.nytimes.com/2013/12/05/in-the-murky-world-of-bitcoin-fraud-is-quicker-than-the-law/?_php=true&_type=blogs&_r=0 (last visited April 1, 2014); “European Union Warns on Bitcoin,” New York Times, Dealbook (Dec. 13, 2013), available at http://dealbook.nytimes.com/2013/12/13/european-union-warns-on-bitcoin/ (last visited March 14, 2014). 42 E.g., bankruptcy. See Brito and Castillo, N. 37 supra, p. 15. 43 As of early 2014, Bitcoin trading has been banned in China (People’s Bank of China and Five Associated Ministries, “Notice: ‘Prevention of Risks Associated with Bitcoin’,” available at https://vip.btcchina.com/page/bocnotice2013 (Dec. 3, 2013)); Iceland (Reddit user saevarg, “Bitcoin Trading Illegal in Iceland According to Icelandic Central Bank,” available at www.reddit.com/r/Bitcoin/comments/1t8zf3/bitcoin_trading_illegal_in_iceland_according_to/ citing Dec. 19, 2013 Icelandic source material); Thailand (“Bitcoin banned in Thailand,” CNBC (July 30, 2013), available at http://www.cnbc.com/id/100923551), and Russia (“Russian authorities say Bitcoin illegal,” Ruters, (Feb. 9, 2014), available at http://www.reuters.com/assets/print?aid=USBREA1806620140209). (Sites last visited March 17, 2014.) 44 Prominent among them is the European Union. Hill, “Bitcoin’s Legality Around the World,” Forbes (Jan. 31, 2014), available at
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making virtual currency payments,45 but has now cautiously allowed them, at least in principle.1The very origins of Bitcoin are shrouded in mystery: It was created without any public debate or discussion, without the apparent involvement of any government, company, or organization, by an enigmatic person or persons who has/have never revealed his, her, or their identity, leading more than one commentator to conclude that the entire virtual currency edifice is a get-rich-quick scheme46 or a scam.47
The fourth major disadvantage of virtual currency is its association with criminality2 such as drug running,48 money laundering,49
http://www.forbes.com/sites/kashmirhill/2014/01/31/bitcoins-legality-around-the-world/ (last visited March 14, 2014). For a useful survey of the legality and regulation of Bitcoin around the world, see Law Library of Congress, “Regulation of Bitcoin in Selected Jurisdictions” (Jan. 2014), available at www.law.gov. BitLegal, www.bitlegal.net, also purports to keep track of the legal status of virtual currency around the world. (Sites last visited March 17, 2014.) 45 Hern, “Apple blocks bitcoin payments on secure messaging app Gliph,” The Guardian (Dec. 10, 2013), available at http://www.theguardian.com/technology/2013/dec/10/apple-blocks-bitcoin-payments-on-secure-messaging-app-gliph (last visited March 14, 2014). 1 App Store Guidelines, Par. 3.1.5: “Apps may facilitate transmission of approved virtual currencies (e.g. Bitcoin, DogeCoin) provided that they do so in compliance with all state and federal laws for the territories in which the app functions.” 46 “Since all transactions are public on the blockchain, we know that only a quarter of those bitcoins have ever changed hands, which means Satoshi [the pseudonymous creator of Bitcoin] is believed to be sitting on a stash of roughly one million bitcoins. [T]hat stash is worth about $1.1 billion.” Liu, “Bitcoin Mints Its First Billionaire: Its Invetor, Satoshi Nakamoto,” Motherboard (Nov. 29, 2013), available at http://motherboard.vice.com/blog/bitcoin-mints-its-first-billionaire-satoshi-nakamoto (last visited March 14, 2014). It is all going according to plan. Indeed, Satoshi designed Bitcoin so that its price would increase in tandem with users' adoption of the cryptocurrency. 47 See, e.g., Securities and Exchange Commission, “Ponzi schemes Using virtual Currencies,” Investor Alert (Aug. 2013). 2 See Dept. of the Treasury, Financial Crimes Enforcement Network (FinCEN), “FinCEN Fines BTC-e Virtual Currency Exchange $110 Million for Facilitating Ransomware, Dark Net Drug Sales,” Press release (July 26, 2017). 48 For more than two and a half years, a black-market website known as Silk Road used Bitcoin to sell illegal drugs and forged identity documents, with monthly sales averaging $1.2 million until it was shut down in October 2013. Christin, “Traveling the Silk Road: A measurement analysis of a large anonymous online marketplace,” Carnegie Mellon University, p. 3 (Nov. 28, 2012), available at http://www.cylab.cmu.edu/files/pdfs/tech_reports/CMUCyLab12018.pdf (last visited
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fraud,50 gunrunning,51 and child pornography.52 Because virtual currencies operate outside the national and international financial system, they “significantly complicate law enforcement efforts to follow the money.”53 The speed and low cost of anonymous virtual currency transactions, when contrasted with the slow pace of criminal cooperation and investigations and the high cost of resources needed for such investigations, makes it difficult to investigate crimes involving virtual currency.54 Another troubling aspect of virtual currencies in this context is that their decentralized administrative structure, requiring a lot of computing power and energy to run, attracts dishonest operators who, instead of making the necessary investment in computer equipment, use tactics such as botnets or malware to harness the computing power of unsuspecting Internet March 14, 2014). 49 United States v. Ulbricht, 858 F.3d 71, 82–83 (2d Cir. 2017) (life sentence upheld in “Silk Road” drug running scheme): “Silk Road was a massive, anonymous criminal marketplace that operated using the Tor Network. . . . Transactions on Silk Road exclusively used Bitcoins, an anonymous but traceable digital currency”; “Russian National And Bitcoin Exchange Charged In 21-Count Indictment For Operating Alleged International Money Laundering Scheme And Allegedly Laundering Funds From Hack Of Mt. Gox,” U.S. Attorney’s Office, N.D. Calif., press release (July 26, 2017), https://www.justice.gov/usao-ndca/pr/russian-national-and-bitcoin-exchange-charged-21-count-indictment-operating-alleged (last visited September 26, 2017).. 50 See, e.g. United States v. Murgio, 209 F. Supp. 3d 698 (S.D.N.Y. 2016) (criminal matter alleging that Coin.mx is illegal); Bitcoin Ponzi scheme: U.S. Securities and Exchange Commission v. Trendon T. Shavers, 4:13-cv-00416 (Complaint) (Aug. 6, 2013), available at https://www.sec.gov/litigation/complaints/2013/comp-pr2013-132.pdf (last visited March 14, 2014); Securities and Exchange Commission, “Ponzi schemes Using virtual Currencies,” Investor Alert (Aug. 2013). 51 Kimble, “Agent says alleged gunrunner used Granite State post office,” New Hampshire Union Leader (Feb. 27, 2014), available at http://www.unionleader.com/article/20140227/NEWS03/140229244 (last visited March 14, 2014). 52 “A leading law enforcement expert advised us that . . . the use of Tor and digital currencies for child pornography [is] ‘significant’ because those involved are the actual producers of the content.” Allen, President, International Centre for Missing & Exploited Children, Testimony before U.S. Senate Committee on Homeland Security and Governmental Affairs, p. 4 (Nov. 18, 2013). 53 Raman, Acting Asst. U.S. Attorney General, Criminal Division, U.S. Dept. of Justice, statement before the Senate Committee on Homeland Security and Governmental Affairs, p. 8 (Nov. 18, 2013). 54 Id., pp. 5-6.
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users. “So the greatest benefits accrue to the most ruthless criminals.”55
One final problematic aspect of virtual currencies, in particular Bitcoin, is that they appear to have been designed to promote an ideological agenda.56 Some analysts believe that Bitcoin’s suitability for money laundering and tax evasion may have been intended.57 As one commentator remarked, “BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks [and] to damage states’ ability to collect tax and monitor their citizens’ financial transactions.”58
55 “Bitcoin mining software is now being distributed as malware because using someone else’s computer to mine bitcoins is easier than buying a farm of your own mining hardware. Bitcoin [also] violates Greshan’s law: Stolen electricity will drive out honest mining.” Stross, “Why I want Bitcoin to die in a fire,” Charlie’s Diary (blog), available at http://www.antipope.org/charlie/blog-static/2013/12/why-i-want-bitcoin-to-die-in-a.html (last visited April 1, 2014), further discussed in Krugman, “Bitcoin Is Evil,” (New York Times blog), available at http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/ (last visited March 14, 2014). See also, Kujawa, “Potentially Unwanted Miners—Toolbar Peddlers Use Your System to Make BTC,” Malwarebytes blog (Nov. 29, 2013), available at http://blog.malwarebytes.org/fraud-scam/2013/11/potentially-unwanted-miners-toolbar-peddlers-use-your-system-to-make-btc/ (last visited March 10, 2014). 56 That agenda, it is generally agreed, is anti-government, libertarian, and to some extent anarchist. According to one analyst, “The ideas behind bitcoin can be traced to a 1988 tract called the Crypto Anarchist Manifesto, which loftily predicted a future where anonymity-protecting technology made state control of the market impossible. Everything would be for sale to anyone all the time, 100 percent tax-free. Many of bitcoin’s hard-core fans see the currency as a revolutionary step toward this anarchocapitalist wonderland.” Chen, “Much Ado About Bitcoin,” New York Times, A25 (Nov. 26, 2013). According to the European Central Bank, “the theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies. . . .” European Central Bank, “Virtual Currency Schemes,” 22 (Oct. 2012). Bitcoin “has attracted followers among libertarian and anarchist groups who [see] in bitcoin a means of removing the money supply from the grasping hands of government.” Feuer, “The Bitcoin Ideology,” New York Times, SR12 (Dec. 14, 2013). 57 “Specifically, an illicit actor may choose to use virtual currency because it . . . may have been created with the intent . . . to facilitate money laundering.” Calvery, Director, Financial Crimes Enforcement Network, U.S. Dept. of the Treasury, statement before Senate Committee on Homeland Security and Government Affairs, p. 8 (Nov. 18, 2013). 58 Stross, N. 55 supra.
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[4]—Legal and Regulatory Framework
In the U.S., only the federal government has the power to create legal tender.59 Although there is no “virtual currency law” in the U.S., many existing laws, regulations, and court decisions are relevant to the creation, transfer, and storage of virtual currency, as well as its conversion into legal tender currency.
Several federal statutes are directly relevant in the context of virtual currency: The Bank Secrecy Act60 (BSA) and regulations promulgated thereunder give the federal government broad powers to regulate all types of currency. The BSA empowers the government to track the origins and movement of currency and other monetary instruments. It authorizes the Treasury Department to regulate “financial institutions,” a term that is extremely broadly defined to include any person or business who engages in currency exchange, funds transmission, issues or redeems traveler’s checks, or engages in any similar or substitute activity.61 Pursuant to the BSA, the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Treasury Department, has issued regulations pertaining to “money services businesses” (MSBs).62
The Money Laundering Suppression Act63 requires each MSB to be registered and to maintain a list of businesses authorized to act as
59 Federal Reserve Act, 12 U.S.C. § 221. The federal government’s monopoly on issuance of legal tender currency has long been upheld by the courts. United States v. VanAuken, 96 U.S. (6 Otto) 366 (1877); Knox v. Lee and Parker v. Davis (Legal Tender Cases) 79 U.S. (12 Wall) 457 (1870); Veazie Bank v. Fermo, 75 U.S. (8 Wall) 533 (1869). 60 Codified at 12 U.S.C. § 1829b, 12 U.S.C. §§ 1951-1959, and 31 U.S.C. §§ 5311-5332. 61 31 U.S.C. §§ 5312(a)(2)(J), (K), (R), (V), and (Y). 62 Bank Secrecy Act Regulations—Definitions and Other Regulations Relating to Money Services Businesses, 76 Fed. Reg. 43585 (July 21, 2011); 31 C.F.R. § 1010.100(ff). 63 Codified at 31 U.S.C. § 5318 note.
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agents in connection with the financial services it offers; failing to register is a crime.63.1
The Money Laundering Control Act64 and its amendments65 make money laundering a crime, including structuring transactions by breaking them apart into small amounts to avoid reporting requirements, or attempting to disguise the source of illicit funds; it also requires identify verification and recordkeeping for wire transfers.
63.1 See, e.g. United States v. 50.44 Bitcoins, No. ELH-15-3692, 2016 WL 3049166 (D. Md. May 31, 2016) (civil forfeiture action arising out of criminal act of failing to register as a MSB). 64 18 U.S.C. §§ 1956-1957. 65 Title III of the USA PATRIOT Act, Pub. L. No. 107-56, 115 Stat. 272, the “International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001,” amended both the Bank Secrecy Act and the Money Laundering Control Act to increase record keeping and reporting requirements, increasing penalties, and criminalizing certain types of currency smuggling and counterfeiting.
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In the United States, the Treasury regulates those who are involved with virtual currencies, depending on their level of involvement: In 2013, FinCEN issued “interpretive guidance” on how the BSA and regulations promulgated thereunder apply “to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.66 According to FinCen, those who are mere users of virtual currency are not subject to regulation: “A user is a person that obtains virtual currency to purchase goods or services.” Such activity “is not an MSB under FinCEN's regulations. Such activity, in and of itself, does not fit within the definition of ‘money transmission services’ and therefore is not subject to FinCEN's registration, reporting, and recordkeeping regulations for MSBs.”67 On the other hand, anyone who puts e-currency into circulation is an “administrator,”68 and “an exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.”69 Thus, anyone who “creates units of convertible virtual currency and sells those units” or who “accepts such de-centralized convertible virtual currency from one person and transmits it to another” is an exchanger.”70 Both administrators and exchangers are subject to reporting and licensure requirements applicable to MSBs.71 All MSBs are subject to examination by the IRS for compliance.72
Although operating an unregistered MSB is a federal crime that can result in both civil and criminal penalties,73 as of the end of 2013 only a small percentage of virtual currency MSBs in the U.S. were compliant with the registration requirement.74 Noting the widespread non-compliance, FinCEN began mailing “industry outreach” letters to numerous businesses that deal in virtual currencies yet are unregistered, warning them of their obligation to comply.75
Lawmakers have only just begun to address the myriad of legal issues raised by virtual currencies; not just those discussed here, but also other issues such as whether virtual currencies are money, 66 FinCen, Application of FinCen’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001 (March 18, 2013). 67 Id., p. 2, citing 31 C.F.R. § 1010.100(ff)(1)-(7). (Emphasis in original.) This includes Bitcoin ledger administrators (“miners”) who acquire virtual currency as a result of their “mining.” See FinCen, “Application of FinCEN’s Regulations to Virtual Currency Mining Operations,” FIN-2014-R001, available at http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2014-R001.pdf (last visited April 1, 2014); summarized in FinCen press release, “FinCen Publishes Two Rulings on Virtual Currency Miners and Investors” (Jan. 30, 2014). 68 Id., p. 3: “An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN's regulations.” 69 Id., p. 1. 70 Id. The definition of “money service business” includes in its list “money transmitter,” which is defined at § 1010.00(ff)(5)(ii)(A) as follows: “A person that provides money transmission services. The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” 71 The registration form can be found at http://bsaefiling.fincen.treas.gov/main.html (last visited March 16, 2014). An MSB must renew its registration every two years. 31 C.F.R. § 1022.380(b)(2). 72 31 C.F.R. § 1010.810(b). 73 18 U.S.C. § 1960; 31 C.F.R. § 1022.380(e). 74 The actual total was 35 MSBs. Jeffires, “Dark money: only 35 Bitcoin dealers are compliant with US law,” TheVerge.com (Dec. 12, 2013), available at http://www.theverge.com/2013/12/12/5201636/without-legal-clarity-many-bitcoin-companies-go-unregistered (last visited March 16, 2014). 75 Numerous press reports; see, e.g., Wolf, “U.S. Treasury cautions Bitcoin businesses on legal duties,” Reuters (Dec. 18, 2013), available at http://mobile.reuters.com/article/idUSBRE9BG1DC20131218?irpc=932 (last visited March 16, 2014).
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commodities, or securities; how to deal with their worldwide ephemeral nature in terms of requirements to report foreign accounts “valued” at more than $50,000;76 how and whether they can be valued for purposes of income taxation, and how and whether virtual currencies can be regulated to avoid being associated with tax evaders and criminal enterprises.77 “The idea that Bitcoin could be an alternative to traditional money that would allow users to conduct transactions anonymously beyond the pale of intrusive government regulators has proved to be little more than a pipe dream.”78
76 I.R.C. §§ 6038D and 1298(f); Notice 2011-55, 2011-29 I.R.B. 53 (July 18, 2011); 31 C.F.R. § 1010.306(c). 77 “Legitimate businesses—those who want to comply with the rules and do not want to be associated with tax evaders or criminal enterprises—have urged the government to issue clear rules about the tax consequences of digital currency transactions.” Internal Revenue Service, National Taxpayer Advocate 2013 Annual Report to Congress, p. 8 (Dec. 31, 2013), available at www.taxpayeradvocate.irs.gov/2013-Annual-Report/ (last visited April 11, 2014). 78 Henning, “More Bitcoin Regulation is Inevitable,” Dealbook, New York Times (Feb. 3, 2014), available at http://dealbook.nytimes.com/2014/02/03/more-bitcoin-regulation-is-inevitable/?_php=true&_type=blogs&_r=0 (last visited March 16, 2014).