State authorities in Florida on Thursday announced criminal charges targeting three men who allegedly ran illegal businesses moving large amounts of cash in and out of the Bitcoin virtual currency. Experts say this is likely the first case in which Bitcoin vendors have been prosecuted under state anti-money laundering laws, and that prosecutions like these could shut down one of the last remaining avenues for purchasing Bitcoins anonymously.
Working in conjunction with the Miami Beach Police Department and the Miami-Dade State Attorney’s office, undercover officers and agents from the U.S. Secret Service’s Miami Electronic Crimes Task Force contacted several individuals who were facilitating high-dollar transactions via localbitcoins.com, a site that helps match buyers and sellers of the virtual currency so that transactions can be completed face-to-face.
One of those contacted was a localbitcoins.com user nicknamed “Michelhack.” According to this user’s profile, Michelhack has at least 100 confirmed trades in the past six months involving more than 150 Bitcoins (more than $110,000 in today’s value), and a 99 percent positive “feedback” score on the marketplace. The undercover agent and Michelhack allegedly arranged a face-to-face meeting and exchanged a single Bitcoin for $1,000, a price that investigators say included an almost 17 percent conversion fee.
According to court documents, the agent told Michelhack that he wanted to use the Bitcoins to purchase stolen credit cards online. After that trust-building transaction, Michelhack allegedly agreed to handle a much larger deal: Converting $30,000 in cash into Bitcoins.
Investigators had little trouble tying that Michelhack identity to 30-year-old Michell Abner Espinoza of Miami Beach. Espinoza was arrested yesterday when he met with undercover investigators to finalize the transaction. Espinoza is charged with felony violations of Florida’s law against unlicensed money transmitters — which prohibits “currency or payment instruments exceeding $300 but less than $20,000 in any 12-month period” — and Florida’s anti-money laundering statutes, which prohibit the trade or business in currency of more than $10,000.
Police also conducted a search warrant on his residence with an order to seize computer systems and digital media. Also arrested Thursday and charged with violating both Florida laws is Pascal Reid, 29, a Canadian citizen who was living in Miramar, Fla. Allegedly operating as proy33 on localbitcoins.com, Reid was arrested while meeting with an undercover agent to finalize a deal to sell $30,000 worth of Bitcoins.
Documents obtained from the Florida state court system show that investigators believe Reid had 403 Bitcoins in his on-phone Bitcoin wallet alone — which at the time was the equivalent of approximately USD $316,000. Those same documents show that the undercover agent told Reid he wanted to use the Bitcoins to buy credit cards stolen in the Target breach.
Nicholas Weaver, a researcher at the International Computer Science Institute (ICSI) and at the University of California, Berkeley and keen follower of Bitcoin-related news, said he is unaware of another case in which state law has been used against a Bitcoin vendor. According to Weaver, the Florida case is significant because localbitcoins.com is among the last remaining places that Americans can use to purchase Bitcoins anonymously.
“The biggest problem that Bitcoin faces is actually self-imposed, because it’s always hard to buy Bitcoins,” Weaver said. “The reason is that Bitcoin transactions are irreversible, and therefore any purchase of Bitcoins must be made with something irreversible — namely cash. And that means you either have to wait several days for the wire transfer or bank transfer to go through, or if you want to buy them quickly you pay with cash through a site like localbitcoins.com.”
One very popular method of quickly purchasing Bitcoins — BitInstant — was shuttered last year. Last month, BitInstant CEO Charlie Shrem was arrested for money laundering, following allegations that he helped a man in Florida convert more than a million dollars in Bitcoins for use on the online drug bazaar Silk Road.
It’s still unclear how the defendants Espinoza and Reid were able to obtain so many Bitcoins for sale, although a review of Michelhack’s profile suggests little more than arbitrage — that is, buying Bitcoins for $700 apiece and selling them for a couple hundred dollars more.
Weaver said he anticipates that more states will soon seek to crack down on high-dollar Bitcoin sellers on localbitcoins.com. “I’d expect many more state cases like this one because it will act to strangle the lifeblood of the online dark markets,” such as Silk Road, Weaver said. “If you want a significant amount of anonymous Bitcoins, right now this community is about the only mechanism still available.”
News of the Florida actions comes on the heels of the arraignment of Ross Ulbricht — the alleged onetime owner of the Silk Road. Ulbricht was scheduled to be arraigned in New York today.
The court documents in this case also offer a great example of the traceability of Bitcoin transactions — a potential danger for both those seeking anonymous payments and for law enforcement officials posing as criminals as part of an undercover investigation. The ICSI’s Weaver noted that, by examining the times and transactions in the criminal complaint, it appears that this is the Bitcoin wallet associated with the undercover officer.