By: William Lawton
Bitcoin is a cryptocurrency created by an anonymous individual in 2009. It is the world’s first digitally scarce asset. Bitcoin is scarce because, in order to create it, it must be mined. “About once every 10 minutes, in what is best understood as a lottery, one lucky miner is rewarded with new bitcoin. At first, these were 50 coins every 10 minutes, but this number drops every four years, until around the year 2140, when the reward drops to zero.” By the time Bitcoins can no longer be mined in 2140 there will be 21 million of them in circulation.
The appeal of bitcoin revolves around the potential return on investment for individuals that mine or purchase it, along with its functional use a currency. Since there is a finite amount of Bitcoins there is a market for them. At their peak in December of 2017, a single Bitcoin was valued at nearly $20,000. Regardless of their fluctuating worth, many individuals use Bitcoin to make purchases on the web because of their unregulated nature. Purchases are typically anonymous, however, there are ways to link purchases paid with Bitcoin to the individuals who used the Bitcoin. Individuals can be identified when Bitcoins move addresses or are withdrawn from exchanges.
In an attempt to keep purchases with Bitcoin more secure and anonymous Bitcoin mixers developed. Bitcoin mixers are software or services that allow multiple owners of Bitcoin to mix their coins together. A centralized mixer accepts an individual’s Bitcoins for payment and then sends out other Bitcoins to make the actual transaction. There are various formats and methods of mixing, but the basic function of mixers is to break the chain of transactions to make it less likely to be able to identify the purchaser. Issues have been raised about the need for privacy protections and whether or not these mixers are just a way for individuals to have more anonymity while conducting illicit activities.
The U.S. Treasury Departments Financial Crime Enforcement Network (“FINCEN”) is responsible for upholding the laws of the Bank Secrecy Act (“BSA”). The BSA defines a money service business (“MSB”) as any person doing business in particular capacities. Two of those capacities happen to be currency dealing or exchanging and money transmitting. Any company that meets the requirements of an MSB is required to register with FINCEN.
The United States took its first stance against Bitcoin mixers by bringing criminal charges and issuing a $60 million fine against Larry Dean Harmon (“Harmon”). Harmon operated a Bitcoin mixer called Helix. The three-count indictment alleges that Harmon; (1) conspired to launder monetary instruments; (2) operated an unlicensed money transmitting business; and (3) engaged in money transmission without a license. In 2013, FINCEN issued guidance requiring “exchangers and administrators of convertible virtual currency to register as money services businesses and to adopt anti-money-laundering compliance programs.” FINCEN later clarified in 2019 that mixers and tumblers must also comply with these regulations.
It is likely Harmon will be found guilty of the first charge. He knowingly and willfully conspired with Alpha Bay and others to launder monetary instruments. Harmon did this by sending and receiving Bitcoins that were used in felonious activity. Alpha Bay was a dark web site where individuals could purchase items ranging from illegal narcotics to weapons. By mixing coins from Alpha Bay, Harmon concealed the origin and use of the coins which makes it harder to locate the individuals purchasing the illegal items.
Whether or not Harmon is convicted of the second offense depends on whether or not Harmon’s mixer was viewed as an “exchanger” of virtual currency. Harmon’s lawyers will argue that he was not an exchanger which is defined as, “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.” They will argue that the purpose of mixers is not to exchange virtual currency for other funds, but rather the funds just pass through the mixer to maintain privacy and no actual exchange occurs.
If Harmon’s business is not an “exchanger” then FINCEN’s 2013 guidance would not apply to Harmon because he would not have to register his company as an MSB. The Government will argue it is clear Harmon is an exchanger because his mixer exchanges an individual’s Bitcoins for other Bitcoins. Although this is not a typical type of exchange, it is an exchange nonetheless based on the plain meaning of the regulation. The Government will also attempt to point to FINCEN’s 2019 guidance stating that mixers are MSBs.
Lastly, Harmon will probably be found guilty of the third charge of money transmission without a license. FINCEN defines “money transmitter” as a person that provides money transmission services, or any other person engaged in the transfer of funds. Harmon’s service transferred funds from individuals to other individuals or sites. Therefore, if Harmon did so without proper licensing, he will be found guilty of this charge.
Moving forward it appears that the Government is going to try to create stronger regulations in the realm of cryptocurrency. The $60 million fine levied against Harmon and the recent frameworks proposed by the Department of Justice show that the Government is taking an issue with digital currency. The Government wants to crack down on illegal web purchases and to do so there mustn’t be ways to make online purchases more anonymous.
Student Bio: William Lawton is a second-year law student at Suffolk University Law School. He is a staffer on the Journal of High Technology Law. William received a Bachelor of Arts Degree in Political Science and Psychology from Providence College.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
