A Miami Beach man can be prosecuted for selling Bitcoin to an undercover detective, an appeals court ruled on Wednesday in a decision that makes it easier for Florida law enforcement to target people who buy and sell virtual currencies in unregulated deals.
The Third District Court of Appeal ruled that a Miami judge was wrong to dismiss felony charges against Michell Espinoza, a website designer who was charged with illegally transmitting and laundering $1,500 worth of bitcoins.
His defense team challenged the prosecution, arguing that Bitcoin is not actually money under Florida law. In 2016, a Miami-Dade circuit judge threw out the charges, agreeing with a defense expert that said bitcoins are nothing more than “poker chips that people are willing to buy from you.”
But the appeals court ruled that Espinoza, who made a profit from selling bitcoins to an undercover Miami Beach detective, was indeed engaged in unregulated “money transmitting” and should have registered with Florida’s Office of Financial Regulation.
“Espinoza’s bitcoins-for-cash business requires him to register as a payment instrument seller and money transmitter” under Florida law, the court ruled, adding he was “not merely selling his own personal bitcoins, he was marketing a business.”
The felony charges against Espinoza, 35, will now be reinstated. No trial date has been set.
The practical effect on the larger Bitcoin trade, however, may only be felt in the margins, where people buy the virtual currencies to avoid the banking system, regulators and the scrutiny of law enforcement.
“Most clients in the Bitcoin business, they’ve registered as money transmitters. That’s been the trend in Florida,” said John Londot, a Tallahassee lawyer who is part of the Digital Currency & Ledger Defense Coalition, which filed a brief on Espinoza’s behalf.
Charles Evans, a Barry University economics professor who served as a defense witness, disagrees with the decision but said it shows the “virtual currency industry is finally starting to grow up.”
“The Wild West days are over. The regulators and prosecutors are trying to bring order to all the chaos — and this is part of the process,” Evans said Wednesday.
Authorities across the United States have struggled to figure out how laws apply to Bitcoin and other crypto-currencies, which allow some users to spend money anonymously and can also be bought and sold on exchanges with U.S. dollars and other currencies. The demand for crypto-currencies, however, has plunged over the past year, with the value of Bitcoin falling over 80 percent from its peak in December 2017.
Digital currencies allow people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks, credit-card issuers or other third parties. Regulated services such as CoinBase, which operates similarly to PayPal, allow people to buy, sell and use bitcoins.
Bitcoin is used to buy legitimate goods and services through websites and even in brick-and-mortar shops and restaurants.
But law enforcement has raised concerns about the currency being bought and sold through private users and unregulated sites, and for illegal activities.
The currency has been used to traffic drugs, most notoriously through the Silk Road “dark web” online network. In one prominent example, a South Florida man was sentenced to 10 years in prison after using bitcoins to buy Chinese-made synthetic heroin. Bitcoins have also been used to facilitate prostitution on websites such as Backpage.
Espinoza was also charged with money laundering, and his case spurred Florida lawmakers in 2017 to add “virtual currency” to the Florida law that targets money laundering, or hiding funds earned through criminal activity, or furthering that activity. The Third DCA’s decision on Wednesday said that it is up to the jury to decide whether Espinoza was guilty of money laundering — the undercover detective told him that the bitcoins were going to be used to buy credit card numbers stolen by Russian hackers.
His other charge, however, deals with a violation of Florida law that mandates anyone in the “money services” business must register with the Florida Office of Financial Regulation. The best-known money services businesses include check-cashing companies and wire transfer companies such as Western Union.
Detectives in 2014 found Espinoza through a Bitcoin exchange site, LocalBitcoins.com. He was advertising the sale of bitcoins, asking for clients to meet him at a “starbucks, internet cafe, restaurant, mall or bank” and charging a fee.
In the first meeting, Miami Beach Detective Ricardo Arias — posing undercover — met him at a Lincoln Road coffee shop and paid him $500 cash for bitcoins worth $416.12. Espinoza earned $83.17 on the deal.
A second meeting took place at a South Beach ice-cream shop, where Arias paid him $1,000 for bitcoins, a deal that netted Espinoza a profit of $167.56. Two more transactions took place — in the last, police arrested Espinoza in the lobby of a Miami Beach hotel.
Espinoza was arrested along with another man, Pascal Reid, who pleaded guilty to acting as an unlicensed money broker and was sentenced to probation. Under his unusual plea deal, he agreed to teach law enforcement about Bitcoin.
Espinoza, however, asked a judge to dismiss the case before it went to a jury.
At a hearing in May 2016, his defense expert, Evans, testified that Bitcoin was not actually money. No central government or bank backs Bitcoin, like the United States does the dollar. Government regulation of Bitcoin remains a messy hodgepodge from state to state, country to country. The IRS considers Bitcoin deals no more than bartering, he said.
“Basically, it’s poker chips that people are willing to buy from you,” said Evans, a virtual-currency expert who was paid $3,000 in bitcoins for his testimony.
Months later, Circuit Judge Teresa Mary Pooler agreed, saying Bitcoin was not “tangible wealth” and “cannot be hidden under a mattress like cash and gold bars.”
“The court is not an expert in economics; however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is the equivalent of money,” Pooler wrote in an eight-page order.
The Third DCA disagreed. But Evans said ultimately Espinoza will get a chance to prove he is innocent at a trial.
“The anarcho-libertarians living in their mother’s basements are undoubtedly tearing their hair out tonight, but the reality is the appeals court has kicked this back to the jury,” Evans said. “The juries are the triers of the fact.”