By Dale Henry
Long before the Bitlicense was ever a reality in New York, a Rochester, New York, resident Richard Petix sold 37 bitcoin to an undercover federal agent.
That man has now been charged with operating an unlawful money transmission business.
This happened back in 2014 and the Justice Department claims that Petix illegally sold around $200,000 in bitcoin between August and December 2014, which at the time had no specific New York state law that prevented it. This is federal.
Had that happened this year, the charges would be more severe in that there would be additional Federal and State charges to go along with it since the "BitLicense" (23 NCRR 200) is now in full force.
What the Justice Department is referring to is 18 U.S. Code § 1960 which states that anyone who knowingly owns or directs part or all of a unlawful money transmitting business shall be in violation of federal law.
Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.
This is an easy fix, right? He can just say he didn't know the law. Wrong.
Federal Lines To Read Between
Whereas it does indeed state that the owner has to knowingly own the operation, looking further into the regulation shows us that it is only the ownership of the operation that must be directed or known about. However is that operation meets the definition of an unlawful money transmitting business, then that individual is then in violation.
(1) the term “unlicensed money transmitting business” means a money transmitting business which affects interstate or foreign commerce in any manner or degree and—
(A) is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable;
(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section; or
(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity;
Secondly, operating an "unlawful money transmitting business" also means failure to register as a money services business, and regardless of state law. This is federal as well. The Financial Crimes Enforcement Network (FinCEN) has been brutally clear on this topic. If you reside in the United States, then unless you are buying or selling infrequent small amounts, selling amounts to people of whom you know exactly where the funds are going and what the use is for and on your own behalf exclusively, or buying and selling on a United States regulated exchange, then you fall under the category a money service business.
The second problem is that whereas there was no clearly defined state law against any virtual currency business being required to obtain a money transmission license in New York in 2014, its nearly impossible for anyone to not have known they needed to find out if the licensing requirements included them or if they needed to federally register.
Due to the existing money transmission laws in New York that were present before the BitLicense came to be, Pelix needed permission to operate. That is a letter from the state specifically stating that a business model may operate without a money transmission license. Additionally under the model of which he operated it is apparent that it included activity that required federal registration.
Pelix didn't have either and due to some previous criminal charges, he was on probation preventing him from using the electronic devices he was, thus violating that probation. Had the operating action been granted (which it would have had he taken the time to properly ask for it) then he likely would not be facing charges this severe, if at all. However operating the digital devices that he was (laptop and smartphone) would have still been a probation violation.
The bitcoin that Pelix sold was inadvertently connected to other criminal activity that was being investigated by the Justice Department and that led a federal agent to a sale of bitcoin that Pelix conducted.
There's nothing indicating that Pelix meant to deliberately break the law other than the use of the electronic devices. Had he taken a few hours and few dollars to obtain the proper documentation required to operate, then he likely would not have been charged at all outside of his probation violation and even that may have been allowed with permission from his officer since it would be considered part of his job.
The point being that whereas this seems unnecessarily enforcing cloudy regulation on an individual for no solid reason, its still the law and plain stupidity is not a valid defense.
Article by Dale Henry
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