For the first time, the U.S. government attacked a foreign exchange on foreign soil. It closed down the Russian-based exchange BTC-e. (Russian-based refers to ownership, not location.) BTC-e reported, “On July 25…the FBI staff came to the data center…and seized all equipment, the servers contained databases and purses of our service.” BTC-e is charged with 21 violations of U.S. financial law; the Financial Crimes Enforcement Network also hit it with a $110,003,314 penalty. The move was stunning not only because BTC-e is one of the oldest and largest exchanges but also because many now locked accounts are owned by U.S. citizens, non-residents.
Also read: Fork Watch: Block 478558 Initiates ‘Bitcoin Cash’ Split
Russian Native Alexander Vinnik Indicted and Awaits Extradition
Then, on July 27, the Russian Alexander Vinnik was arrested on vacation in Greece and also charged with 21 counts of financial crime. He is allegedly an owner or operator of BTC-e, although BTC-e denies it. Assessed with a $12 million penalty, Vinnik’s arrest was prompted by a U.S. warrant and he awaits extradition.
Perspective is difficult to come by. News accounts are biased toward painting BTC-e as a criminal site designed to launder ‘dirty’ funds, yet discussion forums brim with panicked account owners who are clearly legitimate traders. And, then, there are gleeful trolls who plant fake stories. BTC-e’s twitter updates contradict government accounts. And no one seems to know key details like what exactly was on the seized equipment.
The secrecy surrounding BTC-e also causes confusion. A statement from the law site J.D. Supra captures it well. “The superseding indictment notes that BTC-e’s website stated that it was located in Bulgaria yet subject to the laws of Cypress [sic]; its managing shell company, Canton Business Corp., was based in the Seychelles but affiliated with a Russian phone number and had web domains registered to shell companies in countries including Singapore, the British Virgin Islands, France and New Zealand.”
One question has a clear answer, however. How can the U.S. claim jurisdiction on foreign soil and force a foreign company to close?
America’s Global Jurisdiction
The answer is two-pronged: domestic laws on financial transfers; and, international treaties.
Domestic Laws. U.S. law requires a foreign Money Service Business (MSB) doing business in America to be registered and to comply with a list of conditions. Because BTC-e “conducted at least 21,000 bitcoin transactions worth more than $296 million in the United States, with….some…funds being sent customer to customer,” it is deemed to operate in the U.S. even without a physical presence. Thus the first charge against BTC-e and Vinnik is being unregistered.
The remaining twenty charges are multiple violations of two statutes. 18 U.S.C. § 1956 governs money laundering and imposes a punishment of up to 20 years imprisonment. 18 U.S.C. § 1957 addresses money transfers that involve the proceeds of a crime and imposes a punishment of up to 10 years. Both allow for a $500,000 fine or twice the value of the property involved in the transaction (each count).
The U.S. is a mishmash of laws on whether cryptocurrency is money and, usually, ambiguity in the law favors the defense. Here, it would either favor the prosecution or it would not matter. The prosecution enjoys a strong political atmosphere and will to convict cyber ‘criminals’, such as drug dealers or terrorists. Besides which, most trades and accounts involve fiat currency at some point.
As long as BTC-e and Vinnik avoid the U.S., however, an indictment or a conviction in absentia would have little impact. At least, that was the case before a series of treaties changed law enforcement relationships around the world.
A Department of Justice press release accompanied the indictment and stated, “The arrest of Alexander Vinnik is the result of a multi-national effort and clearly displays the benefits of global cooperation among US and international law enforcement.”
There are so many international agreements to share financial information and law enforcement that it is simpler to list non-participants rather than signatories. An article entitled “International Law Enforcement Gathered to Share Concerns About Bitcoin and Money Laundering” described a January 2017 international conference of more than 400 cybercrime, cybersecurity, and money laundering investigators; they discussed the problem of digital currency. One solution: “international cooperation to investigate should be given to the ‘international exchange of suspicious Bitcoin addresses’.”
A signatory nation with the powerful U.S. is likely to respect a warrant based on U.S. law. If a targeted person travels to the signatory nation, then he is vulnerable.
Status and Significance
BTC-e has promised to refund its clients’ funds. It stated, “The next update will be information on what options are available to restore the service, as well as the procedure for obtaining funds, in the event that the service is not started….Then from September 1 we will start the process of refund. In the next 1-2 weeks, we will evaluate and publish information about how much money fell into the hands of the FBI and what amount of funds is available for return.”
Thus far, Vinnik has refused to assist the law enforcement investigation. His silence may slow the investigation but not halt it. Rooting out “bad actors,” including tax evaders, has a high priority for the U.S. government and others. A few weeks ago, the BBC announced, “Two of the largest dark web marketplaces have been shut down following a ‘landmark’ international law enforcement investigation. The AlphaBay and Hansa sites had been associated with the trade in illicit items such as drugs, weapons, malware and stolen data.” U.S. Attorney General Jeff Sessions held a prominent press conference at which he declared to cyber criminals, “You cannot hide. We will find you.”
Dave Lee, BBC’s North America technology reporter, explained that the significance of this statement would become “known over the coming year of more as authorities follow up the ‘many leads’ they…found as a result of infiltrating and shutting down these two enormous networks….What authorities really want to do is start putting significant numbers of people behind bars.” The problem is that the “huge coordinated action has only resulted in a handful of arrests.” They need a large network of criminals, and the data seized from BTC-e may provide it.
The grim determination with which the U.S. is pursuing BTC-e can be judged by the indictment’s which states, “The case is being investigated by the Internal Revenue Service…; Department of Homeland Security, Homeland Security Investigations; FBI; U.S. Secret Service Criminal Investigative Division; and Federal Deposit Insurance Corporation. ” The seizure notice on BTC-e included the U.S. Department of Justice, Computer Crime and Intellectual Property Section. The shutdown of BTC-e may well be a first of many attacks on unregulated exchanges and markets both inside and outside American borders.
What To Do If You Belong to an Unregulated Exchange
Prudence suggests at least three steps.
- Do not trade in or for fiat. Cryptocurrency is a gray area but fiat is clearly covered by anti-money laundering laws
- Keep coins on an exchange only for as long as trading takes
- Use a VPN, preferably not Tor
Innocence is not a defense. Most of BTC-e’s clients are clearly innocent, yet the indictment’s wording reflects the authorities’ view that all users are criminals. With a licensed exchange, law enforcement may need to link specific accounts to criminal activity. With an unlicensed one, they are under no such constraint and the incentives point to grabbing funds and making headlines.
Of course, Americans may not need to worry. More and more exchanges and services are going to decline American clients and this time enforce the ban.
What do you think about the U.S. seizing BTC-e? Let us know your thoughts in the comments below.
Images via Shutterstock, BTC-e, and the Associated Press.
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Source: News Bitcoin