Florida’s Money Transmission Rules after the Espinoza Opinion

Originally published on February 6, 2019

On January 30, 2019, the State of Florida appealed forcing Mr. Espinoza to relive the trial for his 2013 and 2014 localbitcoins.com sales to undercover cops. See http://www.3dca.flcourts.org/Opinions/3D16-1860.pdf.

The counts against Mr. Espinoza include: Count 1 — unlawfully engaged in the business of a money transmitter and/or a payment instrument seller without being registered with the State of Florida in violation of section 560.125, Florida Statutes (2013), and Counts 2 and 3 — money laundering in violation of section 896.101, Florida Statutes (2014). For the purpose of today’s review, we will only focus on Count I.

Case Facts

In 2013, Espinoza, username Michelhack, was selling his bitcoin on localbitcoins.com for cash. He was not registered as a money service business with the Florida Office of Financial Regulation (“OFR”) or the United States Treasury Financial Crimes Enforcement Network (“FinCEN”).

He did a few transactions with an undercover agent who alluded that the funds may be used for illegal activity. The first was on December 3, 2013 for roughly half a bitcoin, the next was January 10, 2014 for 1 Bitcoin worth $1,000 — the undercover agent said it was being used to buy stolen Russian credit cards. On January 30, 2014, they did another transaction worth $500.

On February 6, 2014 the undercover agent attempted to do a much larger transaction for $30,000. Espinoza met him in a wired hotel room, and expressed willingness to do the transaction, but never actually accepted the cash, asking for different denominations or a bank deposit because he (correctly) suspected the cash was counterfeit. He was arrested on the spot.

Trial Outcome and Appeal

Espinoza’s argument for Count 1 — the unregistered money transmission and/or payment instrument seller — centered on the notion that Bitcoin is not money under section 560.125, Florida Statutes (2013). There was a hearing, and then Espinoza entered a Motion to Dismiss the information (charging document) in its entirety. On Count 1, the trial court found that neither Bitcoin, nor Espinoza’s conduct required him to register with the State as a money services business.

The State of Florida appealed and lost, Judge Pooler said, “This court is unwilling to punish a man for selling his property to another,” she said during the verdict, “when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.” See Florida v. Espinoza, Case No. F14–2923 (Fla. 11th Cir. July 22, 2016).

Money Transmission Regulations: A Quick Primer

Money transmitter law falls under both state and federal law. According to the (federal) Bank Secrecy Act (“BSA”), revised through the post-911 Patriot Act, “financial institutions” — a broad category of businesses offering financial services — must collect and retain information about their customers and share information with FinCEN by registering as a Money Services Business (“MSB”).

In their guidance titled, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” FinCEN defined “Convertible Virtual Currency” as any virtual currency that “either has an equivalent value in real currency, or acts as a substitute for real currency.” Three categories were identified, (1) Users (2) Exchangers; and (3) Administrators, the latter two are required to register with FinCEN as a money transmitter.

A FinCEN “user” is: “a person that obtains virtual currency to purchase goods or services.” FinCEN has also said, “a user of virtual currency is not an MSB under FinCEN’s regulations and therefore not subject to MSB registration, reporting, and recordkeeping regulations.” Example: a Bitcoin Hodler.

A FinCEN “exchanger” is: “person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.” Example: Coinbase.

A FinCEN administrator is: “a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.” Example: a Token Creator.

The State law is far more nuanced, with each state developing its own set of complex rules in an attempt to deter money laundering.

Florida Rules Governing Money Transmission:

In Florida, a Money Transmitter license authorizes the holder “to transmit currency, monetary value, or payment instruments, either by wire, facsimile, electronic transfer, courier, the internet, or through bill payment services or other businesses that facilitate such transfer, within this country or to or from locations outside this country.” See https://www.flofr.com/StaticPages/MoneyTransmitters.htm.

A “money services business” is “any person . . . who acts as a payment instrument seller, foreign currency exchanger, check casher or money transmitter. See § 560.103(22), Fla. Stat. (2014).

A “payment instrument seller” is “a corporation, limited liability company, limited liability partnership, or foreign entity qualified to do business in this state which sells a payment instrument. See § 560.103(30).

A “payment instrument” is a “check, draft, warrant, money order, travelers check, electronic instrument, or other instrument, payment of money, or monetary value whether or not negotiable.” See § 560.103(29).

Monetary value” means “a medium of exchange, whether or not redeemable in currency.” See § 560.103(21).

A “money transmitter” is: A corporation, limited liability company, limited liability partnership, or foreign entity qualified to do business in this state which receives currency, monetary value, or payment instruments for the purpose of transmitting the same by any means, including transmission by wire, facsimile, electronic transfer, courier, the Internet, or through bill payment services or other businesses that facilitate such transfer within this country, or to or from this country. See § 560.103(23).

A “money services business” means “any person . . . who acts as a payment instrument seller . . .”

Count I: Espinoza’s Alleged Violation

The question of — whether Espinoza was acting as a payment instrument seller or engaging in the business of a money transmitter, either of which require registration as a money service business under Florida law. The relevant laws include the following:

(1) A person may not engage in the business of a money services business or deferred presentment provider in this state unless the person is licensed or exempted from licensure under this chapter.

. . .

(5) A person violates this section, if the violation involves:

(a) Currency or payment instruments exceeding $300 but less than $20,000 in any 12-month period, commits a felony of the third degree. See § 560.125, Fla. Stat. (2013).

The Court’s most recent opinion states they don’t need to look beyond the plain language of § 560.103 to conclude Espinoza acted as a “payment instrument seller” when he transferred bitcoin from one of his online bitcoin wallets to the undercover agent. Additionally, the OFR concluded in a separate case, “where a Coinbase user sends fiat currency to another Coinbase user to buy bitcoins” was subject to Florida money transmitter regulation. See In re Coinbase, Inc., Case №62670 (Fla. OFR November 13, 2015); see also § 560.105, Fla. Stat. (2014) (empowering the Office of Financial Regulation to regulate money services businesses). Like the Coinbase user in the 2015 case, here, the undercover agent paid cash to Espinoza to buy bitcoin. The recent Opinion concludes that Espinoza was required to register under chapter Chapter 560 as a Money Service Business.

Florida says no Third Party is Required for Money Transmission:

The initial defense put forth by Espinoza at the trial level was that “he did not qualify as a ‘money transmitter’ because he did not receive currency, monetary value, or payment instruments for the purpose of transmitting the same to a third party.” The trial court reasoned that a “money transmitter” would necessarily operate like a middleman in a financial transaction, much like how Western Union accepts money from person A, and then at the direction of person A, transmits it to person or entity B” See State v. Espinoza Opinion, Page 18. None of the relevant Florida statutes actually contain any language requiring this third party transmission, but the federal statute does. See 31 C.F.R. § 1010.100(ff)(5)(i)(A) (2014) (a “money transmitter” under federal law means a person engaged in the “acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means” (emphasis added)).

The removal of the third party notion creates a scenario where the State of Florida could criminalize the sale of one’s own property, exactly what Judge Pooler declined to do.

The Southern District of New York said Florida got it wrong in the case of Espinoza.

The Florida v. Espinoza Opinion also cited a New York case decided by Judge Nathan. SeeUnited States v. Murgio, 209 F. Supp. 3d 698, 704–05 (S.D.N.Y. 2016) (“given that Bitcoin’s raison d’être is to serve as a form of payment” and Bitcoin functions as a “medium of exchange, whether or not redeemable in currency,” Bitcoin falls within Florida’s express definition of “monetary value,” which makes Bitcoin also fit in the definition of “payment instruments”). While New York was deciding the Murgio case, they criticized the Espinoza opinion by stating that Florida limited its discussion to “currency” and “payment instruments” and “did not contemplate the possibility that bitcoin qualifies as “monetary value.”

Conclusion and Potential Implications

Under this analysis, it will be difficult for the trial court to conclude anything other than Bitcoin qualifies as monetary value, in which case, Mr. Espinoza is likely in violation of the state and federal registration requirements.

An Amicus brief was submitted on behalf of Mr. Espinoza, and it cautioned the State of Florida as follows:

The State is therefore misguided in its effort to force the square peg of bitcoin into the round hole of Florida’s former governing statutes regarding money laundering and transmitting. Wrestling bitcoin into the reach of the former statutory language (which governs this case) is to treat bitcoin as so dangerous that it should overtake the rule of law- and at the devastating expense of innovation. There is no need to pile on regulation as the field is already saturated with state and federal statutes unequivocally applicable to bitcoin. And, ironically, bitcoin is not particularly friendly to money laundering anyway.


How will this play out for the Sunshine State?

Florida’s financial regulations are cumbersome and disincentives crypto-business in the State. With these laws on the books, Florida is one of the few states that requires a company to obtain a separate and costly state license in addition to the FinCEN license in order to operate as a money service business. Florida could look to Texas’s Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act to see how some other states are handling the same issue. For example, Texas crafted a strong distinction between virtual currency and sovereign currency under the Texas Finance Code. Finance Code § 151.501(b)(1) (“Because neither centralized virtual currencies nor cryptocurrencies are coin and paper money issued by the government of a country, they cannot be considered currencies under the statute.”).

Additionally, Texas Finance Code § 151.301(b)(3) provides that “‘money’ or ‘monetary value’ means currency or a claim that can be converted into currency through a financial institution, electronic payments network, or other formal or informal payment system.” (“As already stated, a cryptocurrency is not currency as that word is defined in the Money Services Act. A unit of cryptocurrency is also not a claim.”).

Unfortunately, it a growing pain of this new technology is that each regulator seems to be working in its own silo. The IRS considers virtual currency Property, the SEC considers some virtual currencies as Securities, while the CFTC considers Bitcoin a commodity, and now Florida considers Bitcoin to be monetary value. Ultimately, Bitcoin, often compared to the feisty and resilient Honey Badger, can actually perform all the aforementioned functions, and more.

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