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Silk Road Operator Sentenced to Life in Prison
On May 29, US District Judge Katherine Forrest sentenced Ross Ulbricht – operator of the online dark market known as Silk Road – to life in prison without the possibility of parole. As previously reported, Ulbricht was found guilty by a federal jury on February 4, 2015 for his alleged creation, ownership, and operation of a website where activities included narcotics distribution, computer hacking, and conspiracy. In addition to a life in prison sentence, Ulbricht has been ordered to pay over $180 million to the federal government. During the year and a half-long legal process of convicting and sentencing Ulbricht, the DOJ also charged two former federal agents with wire fraud and money laundering of digital currency, and held several government auctions to sell bitcoins seized during its investigation of Silk Road.
NYDFS Grants First Charter to New York-Based Virtual Currency Company
On May 7, NYDFS granted its first charter to a New York-based commercial Bitcoin exchange. In February, the company requested a charter under the NYDFS’s application process, which included a thorough review of the company’s anti-money laundering, capitalization, consumer protection, and cyber security standards. Under the New York Banking Law, the company can start its operations immediately, but is subject to continual supervision by the NYDFS. Indeed, Superintendent Lawsky noted, “regulation will ultimately be important to the long-term health and development of the virtual currency industry.”
DOJ Charges Former Federal Agents with Bitcoin Wire Fraud and Money Laundering
On March 30, the DOJ filed a criminal complaint against two former federal agents on charges of wire fraud and money laundering of digital currency stolen during the investigation of Silk Road. According to the DOJ, both agents were assigned to the Baltimore Silk Road Task Force – one a Special Agent with the Drug Enforcement Administration (DEA), the other with the U.S. Secret Service (USSS). The individual working with the DEA allegedly developed multiple online personas during his undercover investigation of Robert Ulbricht, the alleged operator of Silk Road, and “engaged in a broad range of illegal activities calculated to bring him personal financial gain.” Among other things, the complaint alleges that the DEA agent “sought to extort [Ulbricht] by seeking monetary payment, offering in exchange not to provide the government with certain information if [he] paid $250,000.” The DOJ is accusing the USSS agent of stealing a large amount of bitcoins from the Silk Road website, transferring the bitcoins into a Japanese-based digital currency exchange, and then completing wire transfers from the Japanese exchange into a newly created bank account. The USSS agent self-surrendered on March 30 and the DEA agent was arrested on Friday, March 27.
U.S. Marshals Announce Latest Bitcoin Auction Results
On March 5, the U.S. Marshals Service auctioned 50,000 bitcoins seized in relation to the case involving the black market website Silk Road. Three individuals – out of the 14 registered bidders – were the winning bidders. At this time, the bidders have not been officially identified, but reports indicate that one bidder received 27,000, another received 20,000, and a third received 3,000 bitcoins. This was the third auction by the U.S. Marshals Service and more are expected.
California Set to Consider Virtual Currency Guidelines
On February 27, California Assembly Member Matt Dababneh introduced AB 1326, which would provide guidelines for individuals or businesses who conduct business using virtual currency. The legislation would prohibit a person from engaging in any virtual currency business activity unless licensed by the Commissioner of Business Oversight or unless otherwise exempt. The application process would require applicants to provide detailed information and pay a $5,000 application fee to the Commissioner of Business Oversight. Licensees would be subject to capital requirements, with a certain amount of capital held in high-quality, investment-grade investments, and would be required to maintain consumer protections.
U.S. Marshals to Auction 50,000 Bitcoins Seized During Investigation of Silk Road Operator
On February 18, the U.S. Marshals Service announced that it will auction 50,000 bitcoins seized from wallet files found on computer hardware belonging to Ross Ulbricht, who was recently convicted in connection with his operation and ownership of Silk Road, a website that functioned as a criminal marketplace for illegal goods and services. The auction is scheduled for March 5. On February 4, a federal jury in the Southern District of New York found Ulbricht guilty on seven federal charges. In the court’s January 27, 2014 Stipulation and Order for Interlocutory Sale of Bitcoins, the Federal Government and Ulbricht agreed that “the Computer Hardware Bitcoins [were] to be liquidated or sold by the Government…”
New York DFS Revises BitLicense Framework for Virtual Currency Regulation
On February 4, New York DFS proposed revisions to its anticipated regulation of virtual currency companies. The DFS originally released a proposal on July 17, 2014, and on December 18, Superintendent Lawsky delivered remarks stating the DFS was revising its proposal to provide more flexibility to virtual currency startups. The revised proposal (i) gives DFS the option of renewing a conditional BitLicense if the virtual currency firm continues to meet operating criteria; and (ii) removes previous language stating that a firm operating a BitLicense is required to obtain addresses and transaction data for all parties to a virtual currency transaction. Regardless of the changes, virtual currency firms still must meet strict standards for consumer protection and anti-money laundering requirements.
Silk Road Operator Found Guilty
On February 4, a federal jury found Ross Ulbricht guilty on all seven federal charges brought against him in connection with his role in operating the Silk Road website, including narcotics and money laundering charges. According to the government, Mr. Ulbricht created, owned, and operated the website, which functioned as a criminal marketplace for illegal goods and services until the website was shut down in October 2013. This marketplace allowed individuals to sell controlled substances and illegal services, and included a Bitcoin-based payment system that allowed buyers and sellers to conceal their identities. According to Ulbricht’s attorneys, while Ulbricht did create the Silk Road, he turned over operation of the website to other individuals who eventually grew the site into the vast criminal marketplace. Ulbricht faces a sentence of 20 years to life in prison and is scheduled to be sentenced by Judge Forrest on May 15. Ulbricht’s attorney described the verdict as “very disappointing” and is planning to appeal. U.S. v. Ulbricht, No-14-cr-68 (S.D. NY. Feb. 3, 2014).
CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency
As previously reported in our January 8 Digital Commerce & Payments alert and in InfoBytes, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency on December 16, 2014. The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.
Special Alert: CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency
On December 16, 2014, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency. The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.
The Policy
As a result of its work to date, the Policy recommends that “activities involving third party control of virtual currency, including for the purposes of transmitting, exchanging, holding, or otherwise controlling virtual currency, should be subject to state licensure and supervision.” The Policy states that state regulators have determined certain activities involving virtual currency raise concerns in three areas: consumer protection, marketplace stability, and law enforcement.
The Task Force’s intentional technology-neutral approach targets “licensable activities” – activities performed by one party, in a position of trust, acting on behalf of another. It recommends that such licensable activities be regulated by amending current laws, or when necessary, enacting new legislation to cover the transmission, exchanging, and holding of value of currencies. The Policy recommends that those who service these transactions through mobile wallets, vaults, payment processors, and others should be appropriately licensed.
The Policy targets certain activities:
- Transmission
- Exchange (e.g., sovereign to virtual, virtual to sovereign, or virtual to virtual)
- Services that facilitate third-party exchange, storage, and/or transmission of virtual currency through any medium (e.g., wallets, vaults, kiosks, merchant-acquirers, and payment processors).
The Task Force notes that the Policy explicitly does not cover either merchants or consumers whose use of virtual currencies is solely to purchase goods or services; or for activities that utilize similar technologies, such as cryptography-based ledger systems, but are not financial in nature nor used for financial recordkeeping.
The Draft Model Regulatory Framework
The Draft Model Regulatory Framework proposes a system for state licensing and supervision of certain virtual currency activities. The Draft Model Regulatory Framework addresses the following areas of concern regarding businesses engaged in virtual currency activities: licensing requirements and systems, financial strength and stability, consumer protection issues, cybersecurity, compliance with Bank Secrecy Act and Anti-Money Laundering, recordkeeping, and regulatory supervision.
Request For Public Comment
The CSBS is looking for public comment on the Draft Model Regulatory Framework in two main areas:
- The Licensing Regime for the Virtual Currency Business. What should such a regime look like? How can states best streamline the process? How should laws that apply to regular money transmitters, such as escheatment or funds availability, be applied to the virtual currency business?
- Risk Management. What is an appropriate level of identification for customers? How should BSA/AML regulations change to address virtual currencies? What role should cyber risk insurance play? What sorts of consumer protections will be necessary?
The specific questions posed by the CSBS are found here. The creation of a new licensing regime, in addition to laws that will govern future litigation structure, will influence the direction states take in regulating virtual currencies.
Members of the industry have until February 16, 2015 to respond to the RFC.