To quote Gene Hackman, the Government is either "incredibly smart, or incredibly stupid" when it comes to the case involving two Arizona bitcoin traders who traded on the Localbitcoins platform.

It's been clear since day one that this case was related to something other than actually trading bitcoin, in fact the arrests were the result of a probable cause warrant related to felony ammunition charges.

Thomas Costanzo (Loclbitcoins user MorpheusTitania and Peter Steinmetz were both arrested on multiple counts of which they shared a counts of operating an unlicensed money transmitting business and conspiracy to operate an unlicensed money transmitting business.

Steinmetz, who went by the username "Amedio" according to case filings, was charged only with the 2 counts related to money transmission.

Those two charges have been dismissed for both men. 

Incredibly Smart?

This might have been a trick on the governments behalf to simply overstate the offenses as a first line for the defense to deal with kind of like pawns in a game of chess.

This is a common practice where prosecutors will overload a defendant with charges so that in a plea bargain they can agree to dismiss the lessor charges to keep more serious charges in place. 

This is done knowing very well they likely won't stick. This is certain possible in this case, but under that pretense one has to question why Steinmetz was arrested at all?

Or...Incredibly Stupid?

In this case the two charges were:
  1. "Conspiracy to Operate an Unlicensed Money Transmitting Business" in violation of 18 U.S.C. § 371
  2. "Operating an Unlicensed Money Transmitting Business" in violation of 18 U.S.C. § 1960(b)(1)(a)
The second charge is dismissed because it relies on the first charge and the first charge was dismissed. 

Here's why the first charge was dismissed

The first charge is dismissed because it's a conspiracy charge under 18 U.S.C. § 371. As a conspiracy charge it must be proven to have been an overt act, which means they have to prove that the defendants intended to commit a crime.

In the indictment there was little to no evidence supporting either charge, much less any evidence of intention to commit a crime.

Secondly, 18 U.S.C. § 1960(b)(1) requires 1 of 3 things to be true in addition to the fact they were conducting the activity.
[alert title="Prohibition of Money Transmission 18 USC § 1960" icon="info-circle"]1. Must be in violation of a State money transmission law¹,
2. Must be in violation of federal registration requirements²; or,
3. Must have known the activity was involved with criminal activity, § 1960(b)(1)(c).
In this case the specify the defendants were in violation of 18 U.S.C. § 1960(b)(1)(a) which prohibits violating any states laws on money transmission. The problem with this is that Arizona has no law specifically including virtual currency in a manner that would violate any of it's money transmission laws and only in a couple specific scenarios would it actually be considered money transmission under Arizona regulations. 

Moreover the prosecution provided no evidence of such violation even if they did violate the law. 

If the prosecution wanted this charge to stick they should have gone with 18 U.S.C. § 1960(b)(1)(b) alone rather than § 1960(b)(1)(a)-(c) and § 371 combined.

Ultimately however, the charges were dismissed for FAILURE TO ALLEGE AN OVERT ACT, so it's a moot point.

Or... Incredibly Smart?

The ORDER TO DISMISS also gives Steinmetz a 90-day temporary custody of 8 assets: 
"Bill of Particulars which were seized from Dr. Steinmetz (items 2 ($103,033 in U.S. currency), 3 (assorted precious metals valued at $19,354.96), 6 (7.09232292 bitcoins), 7 ($500 Federal Reserve Note), 8 (152.87574 Ethereums), 10 (assorted firearms), 11 (3 Bitcoin accounts) and 13 (52.69448172 bitcoins))"- Footnote 2 of ORDER to dismiss
[warning]Note the governments use of the term "Ethereums" in reference to Ether tokens.[/warning]
However, before the party is thrown or the victory is declared, this isn't nearly as wonderful news as it may appear to be at first glance. The above, whereas true, is a dismissal of the charges as they were charged without prejudice

That's important because a dismissal without prejudice allow the same case to be filed again with the same charges.

In other words, they can just go back and file § 1960(b)(1)(a)-(c) if they wanted to and Steinmetz would have a legitimate problem on his hands. Furthermore, it actually gets worse. In the ORDER to dismiss the prosecution outlines it's intent to investigate Steinmetz for this very reason.

"The government intends to continue its investigation into Dr. Steinmetz’ Bitcoin activities following a dismissal of the pending charges, and will make a determination as to whether to refile after discussing the matter with counsel for Dr. Steinmetz." - 
ORDER to dismiss
Due to this statement and in addition to the assets being returned for a temporary 90-day period pending future charges (without prejudice), it doesn't appear as if Steinmetz is out of the woods just yet, unfortunately.

Worse case scenario, if the government finds no further evidence to support any additional charge, Steinmetz will be hit with a single count citing a violation of § 1960(b)(1)(b) which will likely involve a probationary period and a small fine. This is what he should have been charged with to begin with, if anything at all.

Which leads us back to the "incredibly smart" thing. Whereas they didn't have much to begin with, the government now not only has "probable cause" to conduct a thorough investigation of Steinmetz's trading that will likely result in a prescription for some sort of soothing ointment ...

...they now have an unobjected court order outlining this very intention.

[accordion] [item title="Author and Credits"] Article by dinbits
Image Credits:
Banner Image by staff
"Enemy of the State" image courtesy Touchstone Pictures.

[/item] [item title="Footnotes"]1. True regardless of the defendants knowledge that a state law requires a license, 18 U.S.C. § 1960(b)(1)(a)
2. true regardless of the defendants knowledge of the federal requirement, 18 U.S.C. § 1960(b)(1)(b)
[/item] [item title="References"]• 18 U.S.C. § 1960 - Prohibition of unlicensed money transmitting businesses • 18 U.S.C. § 371 - Conspiracy to commit offense or to defraud United States
• Federal case file - CR-17-00585-PHX-DJH (United States vs. Thomas Mario Costanzo and Peter Nathan Steinmetz)
• Federal case file - No. CR-17-585-PHX-JJT (United States vs. Thomas Mario Costanzo)
• Federal case file - CR-17-0585-02-PHX-JJT (United States vs. Peter Nathan Steinmetz)
• Federal case motion, ORDER TO DISMISS - CR-17-0585-02-PHX-JJT 
[/item] [item title="Disclaimer"]The opinions expressed by authors of articles linked, referenced, or published on do not necessarily express, nor are endorsed by, the opinions the of or its affiliates. Please review the Terms of Use for more information.
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