Harley S. Tropin (J. Albert Diaz)
Kozyak, Tropin & Throckmorton partner Harley Tropin said there is little doubt Bitcoin in its current incarnation can be used to defraud and to launder ill-gotten gains.
“While they are a legitimate business opportunity, the opportunity to cheat people is really there,” the Coral Gables attorney said. “People are interested in these new business opportunities, but the built-in protection that you have in the developed market isn’t there.”
The virtual currency exists within the matrix of the Internet. Users have virtual wallets and execute transactions through software on a personal computer or mobile device.
New Bitcoins can be obtained by computers performing complex algorithms to execute transactions in the high-tech financial world.
The value of one Bitcoin skyrocketed from $20 in early 2013 and has topped $1,000. These days it’s hovering around $600. Bitcoin use is booming in places like Hong Kong.
“Bitcoin is the shiny new ball that investors will look at in 2014. I don’t see Bitcoin as a bad thing,” Tropin said. “Just because it’s new and it’s not fully regulated you are seeing opportunities for abuse and money laundering until regulators get their arms fully around it.”
Eric Bustillo, regional director of the Securities and Exchange Commission in Miami, said regulators are working on it. He points out a civil complaint in July against Trenton T. Shavers in Texas for defrauding investors in his company, Bitcoin Savings & Trust.
The SEC said Shavers duped investors into handing over 700,000 Bitcoins valued at $4.5 million on the promise that his company would trade the currency online and provide weekly returns of 7 percent. It was really a pyramid scheme, the agency charged.
Bustillo noted the SEC has put out an investor alert on Bitcoin.
“It’s something new, and there’s not a lot of transparency,” he said. “Obviously, it’s digital, and it’s worldwide. I don’t think there is much of a regulatory scheme at this point.”
The Florida Office of Financial Regulation last week issued a consumer alert about potential risks associated with purchasing, investing in and exchanging Bitcoin and similar unregulated and uninsured payment mechanisms. The warning said virtual currency exchanges that offer to store the consumers’ funds in virtual wallets have been hacked.
As a payment mechanism, Bitcoin is seen as faster and cheaper than fee-laden money transfers and credit cards. Another attraction is transaction privacy.
The currency was a linchpin in the underground peer-to-peer online marketplace Silk Road. Prosecutors say the Bitcoin-based website was used for drug trafficking, murder solicitation and money laundering, among other crimes.
The FBI in October arrested Ross William Ulbricht, who is accused of being the mastermind of Silk Road, using the alias Dread Pirate Roberts, a character from the movie “Princess Bride.”
The most high-profile arrest was Charles Shrem, whose BitInstant operation was charged with laundering $1 million for a Florida man on Silk Road. Shrem was described by the Wall Street Journal as a “Bitcoin evangelist.”
Silk Road’s sales totaled about $1.2 billion on 9.5 million Bitcoins. About $3.6 million in the online currency were seized by the FBI.
Then in February, three South Florida men were arrested for allegedly trading Bitcoin wallet codes for cash to make the transactions untraceable.
The legitimacy of other websites trading in Bitcoin also has been questioned. Last month, Tokyo-based Mt. Gox, one of the largest Bitcoin exchanges, shut down after being victimized by computer hackers. It filed for bankruptcy in Japan on Feb. 27 and in the U.S. on March 10.
Some South Florida attorneys have made it their business to know Bitcoin. One such lawyer is Drew Hinkes, an associate at Berger Singerman in Fort Lauderdale.
Talk to him on the subject for 15 minutes, and you will get a thorough lesson on Bitcoin and the legal dilemma it poses.
“The evolution of cyptocurrencies like Bitcoin can be really confusing and problematic for governments,” he said.
Hinkes said there is a concern that Bitcoin can make it easier to fund terrorism because there is no requirement for the currency to adhere to registration requirements or anti-money laundering and anti-terrorism statutes.
Some critics have forewarned of a Bitcoin bubble.
“People are rushing to invest into it. It’s going to be fluctuating commodity,” Hinkes said.
Bitcoin is a good alternative, though, for people in countries where there is runaway inflation and the government is unable to modulate its currency, he said.
But Hinkes said most people are perplexed by Bitcoin.
“The public perception of Bitcoin and other cryptocurrencies reflects lack of understanding,” he said. “The common refrain is ‘Why is this worth something?’ ‘Why does this have any value?’ ”
But Hinkes predicted Bitcoin will be tamed by law, and concerns about it facilitating terrorism and other crimes will abate. He noted a guidance letter issued in December by the Treasury Department. New York state also last month unveiled consumer protections and anti-money laundering provisions targeting Bitcoin use.
“You will probably start seeing more regulation,” he said. “With Silk Road being taken down, the criminals viewing Bitcoin as some sort of safe haven may be on the way out.”