United States: DOJ Again Charges Crypto "Mixer" Under The BSA And District Of Columbia's Money Transmitters Act

In Related Case, Federal Court Holds that Bitcoin-to-Bitcoin "Tumbler" Can Represent "Money Transmission"

On April 27, IRS CI and FBI Special Agents arrested Roman Sterlingov, a dual citizen of Russia and Sweden, for his alleged role as the founder and operator of Bitcoin Fog, a cryptocurrency "tumbler" or "mixer" aimed at concealing the source of funds. The criminal complaint and accompanying Statement of Facts, filed in the District of Columbia, alleges that over the course of 10 years, Bitcoin Fog moved more than 1.2 million bitcoin, valued (at the time of the transactions) at about $335 million. According to the government's press release, "[t]he bulk of this cryptocurrency came from darknet marketplaces and was tied to illegal narcotics, computer fraud and abuse activities, and identity theft."

Sterlingov allegedly founded the site while promoting it under the pseudonym Akemashite Omedetou, a Japanese phrase that means "Happy New Year." In a post on an online Bitcoin forum, Omedetou advertised that Bitcoin Fog "[mixes] up your bitcoins in our own pool with other users," and "can eliminate any chance of finding your payments and making it impossible to prove any connection between a deposit and a withdraw inside our service."

Ironically, Sterlingov was identified by investigators using the very same sort of tracing that Bitcoin Fog was meant to forestall. The Statement of Facts outlines in extensive detail how Sterlingov allegedly paid for Bitcoin Fog's domain using a now-defunct digital currency; it goes on to show a series of transactions recorded to the blockchain that identifies Sterlingov's purchase of that currency with bitcoin. Based on tracing those financial transactions, investigators were able to identify Sterlingov's home address and phone number, together with a Google account that hosts a document that describes how to obscure bitcoin payments – that document mirrors closely the methods Sterlingov allegedly employed to purchase the Bitcoin Fog domain.

In addition to thanking various domestic law enforcement agencies, the government's press release highlights the international nature of the investigation by also thanking Europol and Swedish and Romanian law enforcement agencies. The criminal complaint against Sterlingov is therefore another example of IRC-CI pursuing its simultaneous goals of fighting crypto-related crime and collaborating with foreign law enforcement officials in order to do so.

Notably, this is the second case brought by the Department of Justice, Criminal Division's Computer Crime and Intellectual Property Section, targeting virtual currency mixer operations. In United States v. Harmon, a case also being prosecuted in the District of Columbia, the defendant has similarly been charged for his alleged role in operating Helix, a bitcoin mixer that sent more than $300 million in bitcoin to designated recipients.

Both Harmon and Sterlingov have been charged with, among other offenses, (i) violating 18 U.S.C. § 1960(b)(1)(A), for operating a money transmitting business without an appropriate money transmitting license in the District of Columbia, (ii) 18 U.S.C. § 1960(b)(1)(B) for failing to comply with the money transmitting business registration requirements of the Bank Secrecy Act ("BSA"), and (iii) engaging, without a license, in the business of money transmission in violation of the District of Columbia's Money Transmitters Act ("MTA").

Harmon I

Recent decisions in the Harmon case regarding the applicability of those statutes to crypto-mixing operations strengthens significantly the government's case against Sterlingov. Last year, Harmon moved to dismiss the indictment against him, claiming that bitcoin is not "money" under the MTA and that Helix was similarly not a "money transmitting business" under the BSA. After considering, among other things, "the way bitcoin is used as "medium of exchange, method of payment, and store of value," the court held that the statutory term "money" includes bitcoin, and more specifically, that the MTA covers bitcoin-based money transmitter businesses such as Helix. As to Harman's challenge of the applicability of 18 U.S.C. § 1960(b)(1)(B), Harman argued that that offense requires the transmission of funds from one person or location to another person or location, and that the indictment failed to allege that Helix did anything other than return bitcoin to the user from whom it was initially sent. The court disagreed. Helix's business, according to the court, was receiving bitcoin to send to another location or person in order to mask the original source of those funds – under the relevant authorities, that qualified as money transmission.

Harmon II

More recently, Harmon moved once more to dismiss the charges against him for violating the BSA and MTA, arguing that these statutes are void-for-vagueness as applied against Helix's business operations. According to Harmon, he was under no notice that either the BSA or MTA were applicable to a bitcoin-to-bitcoin transaction that involved no fiat currency. Harmon argued that because of "purported 'overlapping regulation and confusion between the Commodity Futures Trading Commission, the Internal Revenue Service, the Securities and Exchange Commission and other government entities on how to classify and regulate' bitcoin tumblers, [the] 'regulations regarding bitcoin tumbling qualifying as money transmitting business[es] could not have been sufficiently clear between 2014 and 2017.'"

Here, too, the court disagreed. Notably, in rejecting Harmon's challenge to the BSA, the court referenced FinCEN guidance from 2013 that was "sufficiently broad to cover bitcoin tumbling operations like Helix." More specifically, the court cited to FIN-2013-G001 (Mar. 18, 2013), which declined to distinguish between virtual currency and fiat currency, and deemed the transfer of anything of value that substitutes for currency as "transmission" under the BSA. The court also observed that that guidance specifically states that "a person is an exchanger and a money transmitter if the person accepts . . . de-centralized convertible virtual currency from one person and transmits it to another person[.]"

In all, the prosecutions of Harmon and Sterlingov are a clear indication that the government will seek to hold crypto-to-crypto services accountable under the traditional money transmission laws, including the BSA and MTA. As for the prosecution against Sterlingov in particular, the case shows yet another example of how cryptocurrency, once widely considered to be a powerful instrument for anonymous, untraceable transactions, has often turned out to be the very opposite.

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