September 28, 2020

Volume X, Number 272

September 25, 2020

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Take the Money and Run - Bitcoin Transfers (even within the same state) Provide Basis for Federal Jurisdiction in Money Laundering Conviction

Earlier this month, the Ninth Circuit Court of Appeals affirmed the money laundering convictions of Thomas Costanzo, a bitcoin broker. According to Costanzo, the bitcoin transfers at issue, which originated from and were received by individuals physically located in Arizona, lacked the requisite effect on interstate commerce to support a conviction for money laundering. The Ninth Circuit rejected this argument, finding that bitcoin transfers, even those that originate and are received in the same state have a sufficient effect on interstate commerce. 

Costanzo, a resident of Arizona, made his living selling bitcoin through peer-to-peer transactions. To make a peer-to-peer transfer, users may use digital wallets on smartphones. A matrix barcode (QR Code) is used to scan the address needed to transfer bitcoin from the digital wallet on one phone to the digital wallet on another phone, and the recipient can then access the bitcoin using a private key. When a user transfers bitcoin to another user’s digital wallet, the recipient must “wait a certain amount of time while the Blockchain . . . confirm[s] all the coins in that . . . block.” The bitcoin blockchain uses a public ledger to record all transactions that have occurred on the bitcoin network. A peer-to-peer transfer generally incurs a “miner transaction fee” associated with this verification process, which may occur anywhere in the world.

To sustain the money laundering charges brought against Costanzo, the government was required to prove that Costanzo conducted or attempted to conduct a financial transaction with the intent to conceal or disguise the nature, location, source, ownership, or control of property believed to be the proceeds of specified unlawful activity. As relevant to Costanzo’s case, a financial transaction is a transaction which in any way or degree affects interstate or foreign commerce involving the movement of funds.

At trial, the jury heard that over a two-year period multiple undercover agents arranged and completed a series of peer-to-peer cash-for-bitcoin transactions with Costanzo. The undercover agents explicitly told Costanzo that they were involved in an illegal drug-dealing operation, including trafficking and sale of black tar heroin, and that the transactions were being done to conceal these illegal activities. On each occasion, Costanzo accepted the cash and transferred the bitcoin the undercover agent’s digital wallet.

The Ninth Circuit found sufficient evidence to find the minimal interstate commerce nexus required under the money laundering statute was satisfied. The Court pointed to the mechanics of Costanzo’s business operations. Specifically, Costanzo advertised his peer-to-peer services through—a website based outside of the United States.  Likewise, before conducting transactions with potential clients he required them to download applications from the Apple Store or other similar platforms to facilitate their communications and transactions. Most importantly, Costanzo transferred the bitcoin through a digital wallet, which requires use of the internet and “by its nature invokes a wide and international network." The Court relied on prior decisions, which found that the internet is an instrumentality of, and intimately related to interstate commerce. 

In effect, the Ninth Circuit’s decision in Constanzo does away with the requirement to show that bitcoin transfers affect interstate commerce, paving the way for easier prosecutions in the future. Click here to view the Ninth Circuit’s complete opinion in United States v. Costanzo.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 114


About this Author

Melissa S. Ho Shareholder Phoenix Antitrust, Antitrust - Health Care Compliance, Fraud and Abuse, Stark, Financial and Securities Litigation, Financial Technology, Regulation Government Investigations, Health Care Litigation

Melissa Ho is a trial attorney with a detailed understanding of government regulations and business litigation. A former prosecutor, she is sympathetic to the disruption and chaos a government inquiry and criminal investigation can cause. 

Melissa defends individual clients against a wide variety of criminal allegations, including health care fraud, qui tam, RICO violations, bank fraud, real estate fraud, mortgage fraud, foreign corrupt practices, securities fraud, water and air quality violations, government corruption, procurement and public fraud, professional misconduct, civil...

Andrew T. Fox Phoenix Polsinelli Government Investigations Labor and Employment Commercial Litigation Litigation and Dispute Resolution

As a member of Polsinelli’s Government Investigations practice, Andrew assists clients in all aspects of white collar criminal defense and internal corporate investigations. Working to understand each client’s unique situation, he helps guide clients through government inquiries and provides counsel that aligns to their business strategies. Andrew has experience drafting briefs, memoranda and responding to discovery requests.

Prior to joining Polsinelli, Andrew served as a law clerk to The Honorable Judge Douglas L. Rayes on the United States District Court for the District of Arizona.