New Yorker Charged With Unlicensed Money Transmission of Bitcoins
The U.S. Attorney’s Office recently announced the indictment of a New York man for operating an unlicensed money transmitting business involving virtual currency. Richard Petix is accused of unlawfully operating a bitcoin-exchange business that sold approximately $200,000 in bitcoins between August 2014 and December 3, 2015.
Mr. Petix’s case is unique in that it appears the bitcoin exchange was discovered in connection with Mr. Petix lying to probation officers regarding his use of a personal computer, violating a requirement of his supervised release resulting from a 2009 federal child pornography conviction. However, the indictment highlights the increasing use of federal criminal statutes to prosecute the broad swath of “businesses” considered to be money transmitters under federal regulations. Such transmitters are required to register with FinCen under federal law and obtain licensure from the state.
The initial indictment filed in Mr. Petix’s case charged him solely with making a materially false statement to officers of the United States Probation Office after he filed with his probation officer a Computer/Internet Data Form stating that he did not use a computer. Probation officers later found Mr. Petix in possession of a laptop and a smartphone.
According to an affidavit provided to the court by a Special Agent of Homeland Security Investigations, “on the open screen of the laptop computer, in plain view, officers and agents saw an open Electrum Bitcoin wallet displaying a recently signed transaction indicating that Petrix had just used the laptop to transfer 37 bitcoins.” Although not discussed in the affidavit, Mr. Petix also allegedly conducted a bitcoin sale with an undercover federal agent. The government later filed a superseding indictment charging Mr. Petix with operating an unlicensed money transmitting business.
One interesting element of Mr. Petix’s indictment that is left unclear from the U.S. Attorney’s press release (and the indictment itself) is the nature of Mr. Petix’s bitcoin activity. The press release refers only to Mr. Petix selling bitcoins, but he is nonetheless accused of “unlawfully operating a bitcoin-exchange business.” FinCen’s rules define an “exchanger” as a “person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.” Because the U.S. Attorney’s press release does not clarify in what way Mr. Petix operated a business that transmitted bitcoins to third parties for money, it raises the specter that he was simply an individual in possession of bitcoins who sold them for hard currency. If this is the case, his indictment would represent a concerning expansion of the use of criminal tools to prosecute “unlicensed money transmitting businesses” from prior bitcoin-related indictments.
Indeed, Mr. Petix’s case is the latest in the growing number of indictments surrounding bitcoin transmittal in the United States. Although this case is the first of its kind brought in the Western District of New York, numerous people have been indicted for the unlicensed exchange of bitcoins. Bitcoin entrepreneur and former BitInstant CEO Charlie Shrem began serving his two-year sentence one year ago. Shrem was convicted of aiding and abetting the operation of an unlicensed money transmitting business in connection with BitInstant. In July of last year, the U.S. Attorney’s Office for the Southern District of New York charged two men with operating an underground bitcoin exchange.
As the volume and types of virtual currency grow, businesses involved in the world of virtual currency transmission need to stay cognizant of the increasing scrutiny of such transmittals by governmental authorities. While the underlying facts of Mr. Petix’s case may be idiosyncratic, as we’ve discussed before in this space, many legitimate businesses may not realize that failure to apply for a money transmitter license could result in arrest and imprisonment. Violation of the statute with which Mr. Petix was charged (18 U.S.C. § 1960) can result in 5 years’ imprisonment. Federal prosecutors are clearly growing more comfortable with using this statute as another weapon in their arsenal.
