November 29, 2021
Bitcoin and Florida Law

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Florida lawmakers attempted to define what qualifies as virtual currency and to limit who qualifies as a money transmitter, but the bill failed in the Senate.

Alt Currency or Something Else

Bitcoin and Florida Law

Amy Keller | 8/31/2021

In 2014, the IRS issued a six-page notice on virtual currency that concluded that cryptocurrency is property, not legal tender, and would be treated as such under the country’s tax law. For those who buy and sell cryptocurrency, that means reporting each and every transaction to the IRS and potentially owing money to Uncle Sam. “Every cryptocurrency transaction has potential for capital gains or loss, and you’d have a tax obligation,” says Timothy Shields, a partner in the Fort Lauderdale office of law firm Kelley Kronenberg — meaning that if you buy a bitcoin for $100 and then sell it for $200, you’d have to pay tax on that $100 capital gain.

More recently, the IRS proposed regulations asking crypto exchanges to begin reporting transactions worth more than $10,000 to the federal government. “That $10,000 mark is what the U.S. Treasury requires banks to report for cash transactions, so I thought that was an interesting threshold. I’m thinking, ‘OK, is Treasury starting baby steps to consider crypto a currency?’ If they treat it as a currency, then some of these other regulations change, but right now it’s treated as property — and I think people who are actively buying and selling crypto are going to get quite a tax surprise at the end of the year.”

Alt Currency or Something Else?

Florida courts have differing views on whether cryptocurrency is money.

After learning about bitcoin through the U.S. Secret Service’s Miami Electronic Crimes Task Force approximately eight years ago, Ricardo Arias, a Miami Beach police detective, became “intrigued” and launched an investigation into cash-for-bitcoin sales in South Florida.

Perusing a website called localbitcoins. com, he came across Michelhack, a highvolume bitcoin trader selling bitcoins for cash in person. Posing as an interested buyer, Arias texted Michelhack and met up with him the next day at the Nespresso Café on Lincoln Road and gave Michelhack $500. He got 0.40322580 bitcoins (worth about $416.12) in return, and Michelhack, a website designer whose real name is Michell Abner Espinoza, earned a profit of $83.67.

About a month later, Arias and Espinoza met at an ice cream shop to trade more bitcoin. The detective said he needed the bitcoin to buy batches of stolen credit card numbers from Russians and asked Espinoza whether he’d be willing to trade bitcoin for stolen credit card numbers in the future. According to an arrest affidavit, Espinoza said he’d “think about it.” At a fourth meeting in a wired hotel room in Miami Beach in early 2014, the undercover detective flashed Espinoza a roll of counterfeit hundred-dollar bills — purportedly a $30,000 payment — that Arias said he needed to exchange for bitcoin to pay for a batch of credit card numbers that his Russian friends had poached in a data breach.

The exchange never happened. Instead, authorities swept in and arrested Espinoza, who was charged with money laundering and engaging in the business of being a money transmitter without possessing the proper licensing.

In 2020, Espinoza was found guilty on one count of unlawful use of a communications device but was not formally convicted of the charge and was placed on two years’ probation. As the Espinoza case wound its way through the Florida courts, one thing has become abundantly clear — not even judges can agree on what exactly bitcoin is.

In 2016, Teresa Mary Pooler, a Miami- Dade circuit judge, dismissed the criminal charges against Espinoza. “Nothing in our frame of references allows us to accurately define or describe bitcoin,” Pooler wrote. In her assessment, whatever bitcoin was, it wasn’t money — and because of that, Espinoza hadn’t broken any laws related to money laundering or needing a money transmitting license.

“Bitcoin may have some attributes in common with what we refer to as money but differs in many important aspects,” Pooler wrote. For one, it’s not commonly accepted as payment by merchants or service providers. Moreover, the value of bitcoin “fluctuates wildly,” limiting its ability to act as a “store of value.” Bitcoins “are not backed by anything” and “cannot be hidden under a mattress like cash and gold bars,” she wrote — and unless state lawmakers choose to adopt new laws regulating virtual currency, “attempting to fit the sale of bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg into a round hole.”

Florida’s 3rd District Court of Appeal had a different take. In 2019, it concluded that bitcoin may not meet the strict definition of currency but it does quality as a “payment instrument” and given “the nature of bitcoin and how it functions” that Espinoza was acting as both as money transmitter and a payment instrument seller. The decision rattled many in the industry. “Immediately after that court’s ruling, a lot of bitcoin ATMs actually shuttered their operations in fear of being in violation” of the state’s money transmitter laws, says Samuel Armes, president of the Florida Blockchain Business Association.

It remains murky territory today — and many in the industry are begging for clarity. The Florida Office of Finance Regulation has received 64 petitions over the past six years from bitcoin ATM operators and others wanting to know how virtual currency is regulated under state law.

Florida lawmakers attempted to solve the Espinoza problem earlier this year in legislation that would have defined virtual currency as a “medium of exchange in electronic or digital format” and limited a requirement for money transmitter licensing only to situations when a person or company acts as a third party or “intermediary transmitter.” Direct sales of bitcoin and other cryptocurrencies, however, would not require a license. The bill passed the Florida House unanimously but died in committee in the state Senate. Armes and others say they’ll be back again next session seeking reforms.

 

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