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Florida Bitcoin case tests reach of money laundering charges

MIAMI BEACH, Florida--Two police officers burst through a hotel room door with guns drawn, yelling “Police! Get Down!” just after an alleged money laundering transaction went down. But instead of briefcases stuffed with a drug dealer's cash, this exchange involved an undercover officer with supposedly stolen credit cards and the virtual currency Bitcoin.

The February arrests of Pascal Reid and Michell Espinoza marked the first time any state has brought money laundering charges involving Bitcoins, according to Miami-Dade State Attorney Katherine Fernandez Rundle. And it's likely to be a closely-watched test of whether criminal law can adapt to new digital forms of payment.

“These cybercriminals are way ahead of the rest of us in terms of trying to figure out ways they can launder dirty money,” Rundle said.

Investigators trolled through an online directory of Bitcoin traders to find the 29-year-old Reid and 30-year-old Espinoza, setting up separate meetings with each of the men at restaurants and coffee shops. They were arrested at the same Miami Beach hotel on the same day, at different times.

Defense attorneys said the men have no previous criminal records and were simply enthusiasts of the payment format that allows people to convert cash into digital money for online transactions.

Still, undercover officers with the U.S. Secret Service and Miami Beach police told both clearly that they wanted to buy Bitcoins with cash supposedly generated by the hacking of Target Corp. customer information. The undercover officers said during the secretly videotaped meetings that they planned to use the Bitcoins to acquire still more stolen credit cards.

Attorneys for Reid and Espinoza, both of whom have pleaded not guilty, say they will challenge the very legal foundations of the cases, which are being prosecuted separately. The arrest affidavits for both Reid and Espinoza refer to Bitcoins as “electronic currency with no central authority.”

“My client has never dealt in the area of stolen credit cards,” said Espinoza's attorney, Rene Palomino Jr. “My client was simply selling a piece of personal property, which is what a Bitcoin is. It has not been recognized as currency yet in the United States.”

The Internal Revenue Service issued guidance last month concluding that Bitcoins can only be taxed as property and are not legal tender. Federal law enforcement agencies are watching whether Bitcoins are used increasingly in criminal activity, such as the now-defunct Silk Road illegal drug marketplace.

“The idea that illicit actors might exploit the vulnerabilities of virtual currency to launder money is not merely theoretical,” said Jennifer Shasky Calvery, director of Treasury's Financial Crimes Enforcement Network, in a recent Florida speech to bankers.

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